Can Blockchain Help Banking-as-a-Service Leap From Commodity to Capital Access On-Ramp?

In the bid to change financial services, to broaden financial inclusion, the promise of challenger banks was that they’d upend the way financial products could be designed and could come to market. But the challengers have some challenges of their own, as Mike Cagney, CEO of Figure Technologies, told Karen Webster.

Banking-as-a-service is becoming commoditized, where scores of FinTech players (and banks) around the globe have scrambled, en masse, to issue debit cards in digital wrappers or bring basic checking services to consumers.

But they’ll need to broaden their approach, he predicted. Cagney noted that at present, none of the digital upstarts have been able to demonstrate that they can drive profits off of interchange, which he called a breakeven pursuit at best.

The FinTechs that survive and thrive, he said, will be the ones that use their current operations (and, yes, interchange) as a “beachhead” to build lending and closed-loop payments business.

“The idea that interchange revenue is going to make you a lot of money — that’s not going to happen,” he said.

Setting Up the Lending Beachhead

Cagney knows whereof he speaks. Figure Technologies itself has built a presence in delivering core banking services — launching Figure Pay, a banking-as-a-service solution that includes a Visa debit card, along with embedded buy now, pay later (BNPL) and payday advance features. Those services are offered across one platform that is geared to FinTechs, non-banks and retailers through the company’s embedded issuer processing services (via its Banking in a Box approach).

Read more: Figure Teams With Visa to Improve Banking in a Box Platform

But beyond those core features, Cagney says that the Figure Pay platform provides FinTechs with a range of other credit solutions as a capital markets partners.

By way of example, he pointed to Figure’s backing of and partnership with Ready Life, a FinTech that leverages data — in this case, a would-be borrower’s track record of good rental payment history — to qualify buyers for home purchases. Specifically, said Cagney, the Ready Life platform, powered by the Provenance blockchain, allows consumers who pay their rent on time using the Ready Pay Visa Debit Card to qualify for mortgages without a credit score review.

“[The FinTech issuer] Ready Life,” said Cagney, in using credit as a cornerstone around which to build sticky banking relationships, “does not need a mortgage technology platform — they need a capital markets partner that can originate the loans.” Loans are underwritten using the data intelligence gleaned from the borrower’s use of the Ready Life debit card.

As he told Webster, the Ready Life/Figure Technologies relationship is an illustration of what’s to come: “The ultimate democratization of banking is going to be underpinned by blockchain — and the movement to a decentralized, rather than centralized, construct.”

Banks and Stablecoins – Their Own

Figure operates as one of the founding members of the USDF Consortium, a membership-based association of 11 FDIC-insured banks — which in turn is striving to introduce bank-minted tokenized deposits that use the Provenance blockchain and the bank network to settle in real-time without the frictions associated with traditional counterparty processes.

“The USDF is going to provide a 24/7/365 payment rail for the bank.”

In terms of mechanics, a private blockchain and a bank-issued deposit token can traverse across a permissioned private network of banks, enabling P2P and merchant transactions, allowing banks to offer real-time payment capabilities to their consumer and merchant customers. Cagney believes that this will shift the underwriting paradigm.

The tokenized deposits (through the stablecoins) and the blockchain, he said, can mirror some of the benefits and success — for community banks —  of the closed loop networks seen with offerings such as Block’s Cash App. (Block is the parent company of Square.) Square’s success with the app, he said, comes chiefly due to the fact that the app is being used as “a means to an end. The USDF vision is to have a  critical mass of consumers transacting and interacting in an ecosystem that has the community bank at the center of it all and is virtually free of intermediaries.

“What’s going to drive a huge change in banking,” Cagney said, “is going to be the advent of stablecoins.”