We started Figure in 2018 to demonstrate the value of blockchain in financial services. To this end, Figure launched and spun out Provenance, the leading blockchain for financial services. Provenance combines the distributed, trustless and immutable characteristics of blockchain with a ledger, registry and exchange. Since its launch, billions of dollars of transactions have passed through Provenance. Using Provenance, Figure has accomplished and demonstrated value in a series of “firsts” on blockchain, from loan origination and securitization to digital fund services to private company cap table management.
We applied for an Office of the Comptroller of the Currency (OCC) national bank charter in November to expand on our blockchain applications. We believe blockchain can level the financial playing field for consumers (banked vs. underbanked), businesses (large vs. small) and financial institutions (large vs. small). The OCC charter provides a way for us to deliver sustainable, inclusive and impactful financial solutions on Provenance that is not possible through our current state licensing.
Costs and Consistency of Financial Solutions
Figure delivers a variety of financial products to consumers, from home equity lines of credit, to residential mortgage loans, to traditional and alternative asset management. Figure has over 100 state licenses to support these products. Inconsistencies across state licensing creates confusion for Figure applicants and members. For example, without a national bank charter, Figure might be able to offer loans to most applicants in Indiana, but only super prime borrowers in Illinois. A national bank charter creates uniformity of our products and services across the country.
In 2020, we began building an innovative banking and payments platform called Figure Pay. Set for launch in early 2021, Figure Pay is designed to bring an affordable, comprehensive banking solution to anyone who needs it - especially underbanked consumers. One of the key differentiators of Figure Pay is a small dollar loan offering available to every member, including thin file or previously credit-challenged consumers. This loan provides the ability for members to responsibly access credit while building their credit history.
We are using technology to reduce the costs of offering Figure Pay, allowing us to profitably and sustainably offer a solution that can drive significant financial inclusion. However, without the OCC bank charter, we’ll need over 200 state licenses in 2021 to support Figure Lending and Figure Pay. The compliance costs of these licenses essentially negates the technology cost improvements, jeopardizing our ability to offer Figure Pay to everyone.
In 2019, merchants incurred over $53.6 billion in Visa and Mastercard credit card interchange fees. These fees are implicitly paid by consumers through higher prices. While super prime consumers can offset these fees through rich credit card rewards programs, underbanked consumers bear the brunt of interchange fees, often through limited and expensive credit and prepaid debit products.
One of the underlying characteristics of blockchain is the ability for two parties to transact bilaterally using digital wallets and the blockchain registry. For example, institutions that trade Figure loans on Provenance do so without any intermediation. The loan buyer funds their digital wallet through a bank and on notification of a transaction, the blockchain registers the loans from seller to buyer, and the wallet balance from buyer to seller. What would normally take days (or even months) off blockchain happens instantly on Provenance with no counterparty or settlement risk.
Figure Pay uses the same Provenance digital wallet for payments between members. Consumer to Consumer, Consumer to Business or Business to Business - when two parties who have a Figure Pay account transact via mobile bluetooth or QR codes, the payment uses digital wallets and the blockchain registry to move money without incurring the cost of interchange. Merchants can pass on lower prices not only because of reduced fees, but by eliminating settlement time and chargebacks. Figure Pay will incorporate a Visa debit card for transactions with non-Figure Pay members, ensuring comprehensive coverage for members.
Figure Pay has the potential to significantly enhance the payment system, to the disproportionate benefit of underbanked consumers and merchants. However, to do so, the platform must be able to both fund digital wallets through fiat deposits and move value between digital wallets. Without the OCC charter, Figure Pay must rely on other banks to fund digital wallets. Banks are conflicted here, given their heavy reliance on interchange revenue. Further, Figure Pay needs to register as a money transmitter across 49 states, a cost that threatens the ability to support the product. The OCC charter allows Figure Bank to operate Figure Pay in a way that maximizes reach and value to both consumers and businesses.
Blockchain Banking and Custody
Figure has used Provenance to de-risk multiple blockchain applications in financial services. From loan origination and securitization to cap table management, Figure has shown tangible economic benefits using blockchain (for example, 117 bps of benefit in Figure’s first HELOC securitization). One of the most significant - but unproven - applications for blockchain is in custody and core banking.
The OCC charter allows Figure Bank to be both a qualified custodian of digital assets on blockchain. Safekeeping digital securities will reduce cost and risk and improve transparency. The charter allows Figure Bank to prove out these benefits.
Today, each bank has its own unique core banking ledger. Moving money or assets between ledgers requires multiple parties, systems, time and risk. Just as institutions leverage the bilateral transaction capability of Provenance today, Figure Bank will demonstrate how a bank ledger built on Provenance allows for the immediate and riskless movement of money and assets between counterparties. Multiple financial institutions using a Provenance ledger eliminates the need for transfer systems such as fed wire, ACH and ACATS, reducing risk, time and cost. Figure Bank will work with a small set of bank, credit union and fund partners to prove the value of Provenance here, then provide a roadmap to any bank - large or small - that wants to adopt a blockchain ledger.
While the banking lobby has recently opposed new charters from non-bank applicants, we believe there are strong reasons for supporting rather than opposing Figure Bank. The only novel aspect of our application is our blockchain ledger and that we are not applying for FDIC insurance, as we believe we are better served taking institutional deposits while offering insured deposits through our partner banks and credit unions. Second, the Figure Bank application will drive true financial inclusion. Banks and credit unions have struggled delivering solutions to marginalized demographics because of the high cost of legacy technology and antiquated systems, and we believe solutions like Figure Pay will level the financial products playing field. Finally, Figure Bank will de-risk - and provide the roadmap for other banks and credit unions to replicate - using blockchain to reduce costs and introduce new revenue opportunities within financial services.
We believe blockchain is the great leveler, and we are excited to work with the OCC to bring Figure Bank - built on Provenance - to market. As we have demonstrated to date, blockchain is a paradigm shift which squeezes inefficiencies from financial service products, which ultimately benefit consumers, especially those often considered too marginal to be served by the banking industry today. According to the Federal Reserve’s 2019 report, nearly a quarter of American adults are unbanked or underbanked. This constituency, plus all the merchants and service providers serving this constituency, is who will most benefit from Figure Bank. We understand the significant work involved to get to preliminary conditional and then final approval, but we believe the benefits to consumers, merchants and the banking industry more than justify the effort.