Blockchain and a bank charter might do much to boost financial inclusion.
While many digital-first companies springboard from payments into lending, Figure Technologies, a FinTech focused on home improvement, debt consolidation and retirement products that leverage blockchain protocols, is branching out from lending into payments.
Mike Cagney, Figure co-founder and CEO, told Karen Webster that at a high level, obtaining a national charter from the Office of the Comptroller of the Currency will let the firm reduce its operating complexities, freeing up assets (and time) to develop new financial products, including blockchain-based Figure Pay, centered on four-period-payment installment loans.
Enter Figure Pay – And The Barbell Effect
Figure Pay, he said, with the ability to scan QR codes at checkout, is predicated on the concept of using a blockchain payment rail in lieu of interchange as the network is built out — and across a swath of merchants as large as Walmart and small as localized farmers’ markets (in a type of “barbell” approach) upon initial launch early next year.
Figure Pay, he said, is not built on traditional banking structures but “is a blockchain rail and a digital wallet that we think is infinitely more cost-efficient.”
He stated that the Figure Pay account will be interoperable with other accounts and payment methods (bypassing some of the vagaries of “closed” systems like MCX, now long-defunct). He added that, even in the absence of interchange (where several parties get a piece of the fee), blockchain-based transactions exist only between two parties.
The blockchain can charge some expense to transact, though it would conceivably be less than what a merchant pays on existing interchange levies — and where that expense, for companies like Walmart, can run into the billions of dollars.
“You’re not dealing with two-day settlement,” he stated, adding that interoperability also has the ability to foster sticky relationships between merchants and consumers, especially consumers who want perks and high reward cards or coupons.
“What we think should happen — and where we need to get a little more active with the merchants — is that they should really integrate this into their overall rewards programs,” he added.
He pointed to brands and merchants like Dunkin and Dollar General, marked by underserved populations that could benefit by better economics than has been seen with prepaid cards or payday lending.
Figure Pay, he said, debuts in January in Missoula, Montana, and then will see a broader rollout through the quarter.
Looking Toward The Blockchain
As for easing the path toward financial innovation, there’d always been some consideration of seeking a national banking charter, noted Cagney, especially as the company began building blockchain and blockchain applications over the past few years.
“As we’d been progressing and looking at applications like using blockchain for payment rails versus interchange, for example, it just began to become very obvious to us that we needed a bank license to do this,” he said, especially in de-risking efforts around digital assets and custodial roles.
The stage will be set, then, for Figure to actually act as an “asset originator” via Figure Pay accounts for smaller banks that he said are “liability rich” (in the form of deposits). Smaller banks, he said, have been struggling with developing sustainable offerings that can be delivered to the underbanked.
As Cagney explained, underbanked consumers tend to have relatively thin credit files or lack credit histories entirely. But within the confines of traditional financial services, that leads to what Cagney termed a “chicken and egg problem.” In other words, banks won’t extend credit to those who don’t have credit profiles, short-circuiting their ability to build those credit profiles.
“What we’re doing is looking at things like transaction history and geolocation, and other factors that will give us some confidence to underwrite credit into that demographic and help them build a history,” maintained Cagney.
Figure, he added, will enable FIs to originate more loans to consumers amid a generally tightening credit environment, which in turn will foster financial inclusion. And new point-of-sale and payment offerings such as Figure Pay will leverage blockchain to make transactions cheaper for merchants. Those initiatives would complement existing Figure Technologies channels that span mortgage refinancing and home equity lines for consumers and a lending marketplace based on the Provenance blockchain.
The Charter Advantage
In terms of mechanics, he explained, having a national bank charter in hand from the OCC means Figure will not have to obtain licenses to provide financial services on a state-by-state basis, but instead will be enabled to deliver its offerings on a nationwide basis while tailoring its compliance to the mandates of the OCC as sole regulator.
To get a sense of the challenges in place under the current, non-charted model: As Cagney told Webster, “we’re going to have more than 200 state licenses next year for mortgage origination, non-secured consumer loans, servicing money, and transmitter licenses.”
And herein lies the great irony in financial services. As Cagney noted, firms such as Figure leverage technology to reduce the cost of delivering new innovations to consumers. But they also offset some of those savings due to the regulatory costs and overhead that comes with compliance burdens.
There’s also the matter of product consistency. Figure, said Cagney, can offer some of its products in New Yok — but not in, say, Illinois. But a national charter would allow for a uniformity of presence and market scope.
Drilling down into the charter itself, Cagney told Webster that “this is a full national charter — not a FinTech charter, but one where we are not directly collecting FDIC insured deposits or partnering with a bank to do that.” Figure will be collecting institutional deposits that in turn will be loaned to consumers through Figure Pay, he said — and institutions have been supportive of Figure’s move to gain a national charter.
“They understand that we have a whole bunch of loan buyers out there,” said Cagney.
Cagney said he expected the process to be relatively streamlined in obtaining the charter (with conditional and then final approval from regulators); because Figure does not exist as a deposit taking bank, the balance sheet and risk capital aspects are relatively straightforward. Thus, the company, and its platform, could be nationally chartered as soon as next year, he told Webster.