Figure Technology Solutions, Inc. ($FIGR)

Probably time to kick this off to keep this on schedule. What an honor it is today to welcome Todd Stevens, Chief Capital Officer of Figure. Todd, thank you so much for joining us today.

Thanks for having me.

It is, again, a great pleasure. Maybe it's a great place to start with having you kind of level set for everybody about Figure. Maybe just give us a brief overview of the business and how it's sort of evolved over the years?

Yes. So Figure, we're a blockchain marketplace. We tend to play in the lending space, but we're also playing in the equity space. We think blockchain -- like Larry Fink says, I mean, we think every asset will trade on a blockchain or at some point in the future, and we're building the marketplace for that. And so we're really excited about what we're doing, and we're excited about the growth. And why would somebody want to use a blockchain as a settlement rail? It's just a better settlement rail for a number of reasons. Transactionally, we do a lot of securitizations in the market. And given our automation and how we anchor the blockchain, we have a much lower percentage of third-party review that we have to do. So there's a ton of transactional efficiencies. There's a ton of liquidity efficiencies. So think about like how the world is changing in the sense that like old school kind of bond people, I mean, when you invested in something, you used to get like a kind of a service or remit report once a month. Now you can get that real time. That's what the blockchain offers you is the ability to get real-time information. That is going to increase liquidity. And then there's also transactional benefits. So a few people might be familiar with some of the misgivings of maybe the tricolors or the first brands or the MFS kind of double pledging stuff that's been going on. And with blockchain technology, you just can't do that. If you're on a system, you cannot double pledge your loans. And I'm happy to send out a white paper to anybody that wants that. We issued a white paper a couple of weeks ago on that. But think about the blockchain in this instance, like I don't think many people have like Life360, like my wife has that on our kids like all the time. Think about it as Life360 for your assets. You can track your assets. So think about putting on a lean registry like Goldman Sachs is a warehouse lender to us. Before they accept a loan, they look on our digital lean registry, which reads from the blockchain and says, is this loan secured or not? If it's secured already, there's a pad lock on it. They cannot take it as a pledge. If it's not, game on, they can finance it. So stuff like that, transactional liquidity and lending. And we could also cross collateral as this collateral. But -- so we're a blockchain marketplace company. There's a ton of benefits for people kind of hosting their assets in the blockchain, and we're just getting started.

Fantastic. I want to dig into the ecosystem and the products, but I want to ask you first about your recent launch of the Figure secondary offering of blockchain native common stock. Outline why the on-chain public equity network open matters, why issuers and shareholders would want to participate. What are the benefits of launching on-chain versus...

Yes. I think if we're given this talk a year ago, everybody would be like scratching their head. Now like even this morning, Kraken comes out with an announcement with the tie-up with NASDAQ on tokenized equity. So it's a reasonably kind of hot sector. But let me lay out kind of how -- what we do versus what the other groups of people in the market are doing. So our thesis is very blockchain-centric, very purist, very self-custodial. It is your equity, so you should be able to do with it what you want compared to what New York Stock Exchange, NASDAQ and all these other people are doing, which is a DTCC security, which they're issuing a digital twin and letting that trade anywhere or like maybe some of the other groups like Robinhood are doing with maybe synthetic derivative type representation. So think tracking error, I think maybe not full capabilities with New York Stock Exchange and NASDAQ are doing or think like full autonomy of your shares. So why would you do this as an issuer? As an issuer, you have a direct relationship now with your shareholders. Like we went public 6 months ago today. And we don't know who our shareholders are. Certainly, the retail, we can look at 13F filings to figure out who still has our stock. Blockchain just enables people to have a direct relationship. So imagine me being able to give everybody 50 basis points off their next loan that they have and just drop that as a reward to them directly. How about dividends? I mean, like we could just give a dividend out very quickly once it gets approved. So as an issuer, what you're trying to do is create a viral community. You're turning a static contract into an active kind of permissionable asset, which has a ton of utility. So that's the issuer benefits. But I think the bigger benefits are for the investors. The investors right now, they can take their equity and they could just lend it into a lending pool and sit there and -- because there's all kinds of borrower demand for stocks typically. Right now, prime brokerage pockets most of those economics and those rents. So we're enabling the rents to go to the investor. You could cross-collateralize it into a borrowing relationship. And then you can basically almost pay like I could say thank you for the spot today and give them a share figure provided your KYC. But tons of benefits for issuers, tons of benefits for investors. And we think ours is the purest version of this because you can hold it in a self-custody wallet. It is your equity.

I think that's a terrific point. And I think an underappreciated one that it isn't just the efficiency of issuing securities on chain. It's also the access to this kind of Cambrian explosion of innovation and composability and programmability with things like, I guess, DeFi is what we call it, even though that might be a misnomer in some cases. But I think that's a gravitational pull that's actually quite important. You guys are right at the center of that shift, I think that will eventually occur.

And we didn't even mentioned, I mean, the sensibility is really important because you can take the share and you can list -- it could be listed on a deck, a decentralized exchange. And then with the liquidity pull around it, you can offer a looping of this, and it might be speed a better way of getting leverage exposure to an equity. So absolutely. It's very extensible. When you have control of this asset, you can do a lot with it.

Any very high-level thoughts about the interest levels among different types of issuers of various types of securities in terms of them contacting you to talk about, hey, how could this work for us?

Yes. We've had a tremendous outreach to us. So I'd say there's 2 types of issuers are really engaged. And this one is the crypto crowd. They're very interested in kind of being able to have a relationship in the fintech crowd have a relationship with their investors. That's very important. DATs. I mean, DATs hav had a tough little run over the last kind of several months. And think about like what can they do to get their NAV back to par? If they had -- if they had all their shares issued on blockchain, they can just issue a dividend of the underlying kind of a crypto into a wallet and they don't give them a pool to par pretty quickly. So those are 2 of the big ones. We're really interested in people that are in the public filing process. So we're interested in people that are already public. And so with our equity, you do have filed an S1 or S3. It is a separate share class, which gives it the benefits of the composability and extensibility. But yes, so it's a lot of tech forward, a lot of DATs and then there's been some surprisingly large companies that kind of want to put the power back into their investors hands.

So I want to drill down a little bit into the individual products and the ecosystem, particularly Figure Connect and democratized Prime. So starting with Figure Connect. I think in Q4, more than half of your consumer loan marketplace volume transacted through Connect, which is a nice milestone. Talk about what does Figure Connect, what's the value proposition? Why has it resonated so much with originators and institutional buyers...

Yes, Figure Connect is really important to us because we never stood -- we never stood out to be the world's largest nonbank lender, that's not where we want to be. We want to be a blockchain marketplace. And in that marketplace, we want to bring sources and uses of capital together. There's a tremendous amount of demand for borrowing and tremendous amount of demand for assets. And really our marketplace, Figure Connect is where all that interaction happens. So why does somebody want to join Connect? A number of reasons. One, we make it very easy for originators to onboard to us. We instead of the originator, who normally had to go out and negotiate with individual investor, spend 4 months on a master loan purchase agreement, spend $300,000 with outside counsel to get one deal done, not such a great use of time. Join our marketplace, you have access to all the investors that are onboarded onto Figure Connect. So there's definitely efficiency there. And -- but more importantly, what our originators really like is we give them the ability to maximize their gain on sale. We collect an ecosystem fee. That's all we're in the game for, but we -- they can leverage our capital markets almost like an outsourced capital markets team, and we can help them get a better gain on sale and the whole loans, we can help them on securitization. We are an outsourced capital markets unit for these originators, and we make their life very simple. We also enable them to get warehouses. We probably have north of 10 banks that warehouse or collateral. So the collateral is fairly liquid. So we just set up our originators to succeed and allow them to do what they really do best, originate loans. And so -- and as we go into new products, they -- a lot of them want to outsource that capital market functionality to us, and that's what we do at Figure Connect. We'll just collect our ecosystem fees.

This is a bit of a tangent, but there's kind of growing concern in private credit markets. What are you guys hearing from your partners in the space?

Yes. So I really love the media and how they kind of talk about private credit. And yes, there's certain elements of private credit that there's a problem potentially. And when kind of 23% of the direct lending market is software and some companies have done a lot more. Some of them have 30%, 35% exposure. These are 8 to 10x levered companies. Bruce Richard had a great podcast with Bloomberg the other day. He said 3% of the high-yield market is software. 13% of the broadly syndicated market is software. 23% of the direct lending market is software. And so the kind of high-yield bond market does what it does. The broadly syndicated market tends to find an exposure finds its way into CLOs. And then and the direct lending market just sits on these private credit balance sheets. And they might lever them up and it was a nice cash flow. But when you're 8 or 10 or 12x levered, like you're not able to pivot that business to an AI kind of like issue. AI kind of like disruption that's going on. So that's private credit, and I get what's happening there. We live in the world of asset-based finance. I mean it is a market where instead of being 8 to 10x levered, you are over collateralized. Everything we do has some overcollateralization to the asset. So you have $100 an asset, you only have $80 of a security. So you're over collateralized by that $100 divided by $80. So we just operate in a very different space, and we haven't seen a whole lot of contagion there at all. I mean, like look last week, JPMorgan did a $5.7 billion securitization and it cleared the market at a very solid price. We did a $0.5 billion securitization last week, and it cleared the market. Fine, we might be at December kind of like where we executed in December, January was like a super risk on, but the market is super strong. And I think we really have to differentiate asset-based finance from broader private credit because broader private credit, you can pick a story out of it. And yes, certain people have overleveraged themselves and probably didn't risk and manage themselves so well, maybe with some of their software bits. But our borrowers are the consumers. We have 5,000 loans in kind of our deals, and there's a lot of over collateralization. So I think there will be a flight to quality and towards our side. And there's been already over $50 billion that's been raised in the private label kind of resi market this year. There'll be over $250 billion that's raised. And that's of the $1.8 trillion private credit market, where there's probably about $500 billion of dry powder. So I think money is just going to go to where safety is and we think we're safe.

Don't pit everything with the same brush, in other words...

Exactly.

Okay. Talk about democratized Prime. I think that's one of your kind of most innovative offerings launched last year, according to you guys scaling very nicely. Talk about some of the drivers of that growth. Actually first describe for the audience sort of what it is and then talk about some of the drivers of the growth?

So democratized Prime is it's our effort to democratize access to prime brokerage. Banks have a beautiful business. They make $20-plus billion a year top line, prime brokerage, great business. Why can't the man on the street get access to that. That's our goal and our ethos with Demo Prime is to give people access to what the banks are doing. So figure, we'll probably at any point in time, check our balance sheet, we have probably $500 million, $600 million -- $500 million of warehouse balances, probably any point in time. We turn over our collateral a lot. So -- and then of that, like we typically give that to JPMorgan, Goldman Sachs, the traditional warehouse banks. What we're doing now is we're -- we started democratized Prime to really enable DeFi liquidity to fund those warehouses. And we have -- you can check the Camino. We're in 1 blockchain -- layer 1 Solana, 1 application Camino and we have a $600 million market or $597 million market. That includes liquidity pools as well as what we got pledged up. But it's been tremendously successful. So there is a lot of liquidity in DeFi. And all we're doing is just offering people the ability to really compete with warehouse lending. So you have TradFi competing against DeFi liquidity. And that's, I think, where the market needs to go. It keeps everyone honest. And again, when you're trafficking in DeFi, these are just different -- it's a different world. I mean they -- like when you're ostensibly an a crypto winter, whatever that means, like funding rates go down. So if you can offer real-world assets at a higher yield than Bitcoin lending rates are less than 2%. Like if you can offer a real-world assets at a reasonable yield, you're going to get interest. So it's quite an interesting project that we're working on. We think this will be a multibillion-dollar tokenized warehouse lending marketplace. And our borrowers are quite interested in joining this. And the reason they want to join is, one, you don't have to spend 4 months and $300,000 outside counsel setting up -- maybe 6 months instead of a bank warehouse. It's very quickly -- very quick to onboard. And typically, they -- what they do in this they're trading off -- they can have a wider box so they can originate to a wider box. They can democratize access to the borrowers, wider box, but you have to offer hourly liquidity or instant liquidity. DeFi has no term structure. You have instant liquidity. So the borrowers have to get to wrap their head around that. So we think a great strategy for any borrower is to have a traditional finance warehouse and a Demo Prime warehouse. And we think that will be the model. And part of our marketplace, we offer services. We can do pledging as a service and handle that for the originators because again, we let the originators a la carte, take what they want. They can do the all you can eat or they can just pick and choose parts of our figure connecting marketplace. Demo Prime is a service in the marketplace. You can offer to use it or not or we found a lot of people leaning into that.

And how does the yield stablecoin fit into the model?

We think just as every asset will be tokenized in the future per Larry Fink, stablecoins are going to be the payment rail. I mean will you exchange an asset for a stablecoin. And so we use our yield stablecoin as a payment rail for our Ecosystem. We sell loans, we exchange -- we have our buyers exchange give us yields for that and then they trade out of it or keep into it or whatnot. But yes, so what's different about our yield product. And this is why we're slightly indifferent to what's going on in D.C. with the CLARITY Act because CLARITY Act is a big battle over yield. And can you pay yield on a stablecoin? Well, like are the banks going to win or crypto going to win? I don't know. But like we can always pay yield on our stablecoin because it's a security. We went through the S1 process. We've filed 10-Ks, we filed 10-Qs. It kind of looks like a tokenized money market fund, but it can trade peer to peer. And so we think we have a pretty interesting product. We think there'll be a lot of copycats to that product, but stablecoins are just the path of the future. I mean, there's a ton of pain points that it solves, not the least of which is cross-border payments.

Is it a simple minded yet probably accurate thing to say that as you have on chain assets that move in real time, you're also going to need a settlement tool that moves kind of in real time, and that's the gravitational pull for stablecoins on the capital market side of the things?

Yes. 100% because think about what happens today, like I sell you loans, I give you a loan tape with the rights and you give me a wire, that's kind of asynchronous. And like with stablecoins, you can put the rights on a smart contract, but the stablecoin in a smart contract and they can click and then it goes out to each other. So there's no more asynchronous kind of like trust me type stuff. I mean the reason some of the banks got burned on this double pledging warehouse stuff is because it was a trust me game. Like I don't need an assignment of mortgage. We need an assignment mortgage later and some people got burned on that. So I think when you have atomic settlement when you have that click, everything goes -- both sides come in to the smart contract and it clicks and then the rights and the payment rail goes to the right people.

It's interesting how much of the entire back-end and infrastructure capital markets is really predicated on ensuring settlement occurs. And once you have real-time settlement, you have to wonder whether a lot of these ancient building blocks on the back end might have to modify or go away.

I mean, Banks don't want it to go. I mean...

That's always the case...

So like T+2 is somebody is making money.

I wanted to touch on some of the other kind of product expansion news that we've heard out of you guys. One of them is Agora. So it's a strategic partnership with Agora data to bring auto finance asset onto the Figure Connect marketplace and democratized Prime. Talk us through that, the dynamics of the partnership and sort of what it is?

Yes. Agora is really important to us, and it's also the beginning. I mean it's the first third-party borrower that's coming on to our Connect marketplace. There'll be more coming. Stay tuned. But Agora, when we sit across the table for them, they look just like figure. I mean they're in the auto space. They -- over 90% of their loans are automated, originated. They have a nice kind of alignment of interest with their dealers that they -- that are kind of originators of their loans. So -- and the they want to lean in. They want to leverage a Demo Prime, they will leverage Figure Connect. They're a classic group of solid originators. 20 plus years of experience in the auto sector, but they have a part-time capital markets outfit. That's a perfect client for us. We could be their capital markets, outsource capital markets, we'll handle their securitizations. We'll handle their whole loan sales. We'll enable them through Demo Prime, they're going to do what they do best, originate solid loans. This market needs solid origination because I mentioned that $500 billion of dry powder, we trying to find a home for that with the solid originated loans.

And so I'm just trying to think through other potential loan categories that might be interesting for you guys to kind of delve into. I'm sure you're having plenty of conversations out there, but is auto something you can lean into with other partners? Are there other categories that you see expanding into?

So we like going into markets have large addressable markets. So the mortgage marketplace is about a $2 trillion addressable market. Auto is $1.5 trillion. So we're going in places, and we're not fighting for pieces of the pie, the pie is really large. And so Auto is going to be great for us. There's a lot of other really interesting short-dated assets, maybe like receivables financing that will be -- that could be leveraged here. It could be small SMB loans because there's a need for the borrowers to get solid financing. So yes, there's a lot of potential there. And we really had a -- after the Agora announcement, which was great. We've had just a ton of inbounds on that side. So we're just kind of sifting through and kind of drinking from the fire hose on the Demo Prime side.

And what about first liens? I think that's increasingly a larger part of your mix? I have it here in my notes, loans growing to 19% of originations in Q4, up from 12% a year ago. What are some considerations there as that becomes a larger part of your mix? Is that...

Yes. I mean, that's just another asset class that we're originating. We think we have a right to win because our process is fully automated. I mean we can get to a yes in minutes, we could be funding in 5 days. Our average funnel is around 9 business days. I think we said that in our S1. So we're very quick and we're very efficient. We -- it costs us less than $1,000 to create a loan, much less than $1,000 to create a loan where traditional market for first lien especially, is $12,000, I think, on average. So like if you're spending $12,000 to originate a loan, you're not going to be able to do small balance loans. You just can't do them profitably. We can't. So think about there's 40-odd percent of the U.S. market doesn't have a mortgage. That a $15 trillion TAM. That's an easy market for us to take a ton of market share for us. So we make it easy to get a kind of a cash out on your property. So you don't have to knock on the door of a consumer unsecured lender and pay a higher rate. We can do something very quick for you, rapid lien around it and get you your money added more cost-effective price point. So we're super excited about first liens. We think there's a tremendous opportunity for us to really grow that. But again, it's a function of when you're automated and you do stuff quick and you have a tight credit box like the world is your oyster on when you find use cases like the first lien use case for us.

So -- where is the friction in the system still? Where are the challenges in terms of this flood gate, which seems to be opening, kind of opening further? Is it regulatory certainty? Is it just you -- mentioned banks, there's an intrinsic friction in terms of changing these large platforms because they're making money on the old inefficient ways. Like where are you seeing the hurdles that need to be overcome?

So I think there's a TradFi friction and then there's a DeFi friction. The DeFi friction, regulatory clarity, evangelism, kind of education, getting people to come to DeFi. I think the winners are when TradFi comes to the middle and DeFi comes to the middle. And then I think you'll see an explosion of growth. I mean every bank has got a digital asset team, every bank of any size as a digital asset team, and they're all ready to get tapped from the shoulder and say, go and most of them are going right now. So that's good. So DeFi, it's literally evangelism, it's education and it's regulatory clarity. TradFi, we just live in this funny TradFi world where there's a ton of borrower demand, and there's a ton of kind of like capital and then there's just like small thin little looking glass where only the cool kids get to go through and play the capital market game. And so -- and that's because of there's banks and the rating agencies as well as the could be the lawyers, but we're trying to just expand that out. So that's our marketplace. We're trying to just democratize access to the sources and uses of capital. So that's a friction kind of getting people there. I think the banks are getting close. Federal regulations really close. We still need states to follow certain states like the one we're in is going to be a big bar to kind of get over for people, but no, I think there's optimism. I mean, everything is moving very, very quick. And I argue the best thing that ever happened to blockchain was AI. Because Blockchain in 2017, 2018 was supposed to be the next platform. You had mobile, you had social, you had cloud and everybody is like blockchain. Blockchain wasn't ready for the prime time at that point. And then AI comes along and AI is doing a great job taking that mantle. And blockchain is just doing a lot of work. And they're getting everything right. They're getting custody, they're getting piping. And so we think this will be the future capital markets is going to be built on a blockchain rail. And that's largely our North Star.

So you mentioned AI, and I feel like a lot of these panels wouldn't be complete without some AI questions. And I know you mentioned it in the context of it sort of taking -- it's sort of become the shiny new thing and given blockchain maybe room to actually just execute quietly and methodically such that when the tide turns in its direction, we will be sort of more ready maybe than it was last cycle. That's what I took away from your last answer. Is there any AI overlay in the business in terms of agentic -- are you guys thinking about or deploying AI in any way in terms of agentic commerce, agentic originations or however you want to look at that?

Absolutely. We're working with our -- some originators that it doesn't take long to spin up an AI loan officer. And then people are testing them and then kind of giving them context. And then in one case that we were out with a client probably a month ago, they're probably 3 months into their journey, maybe made 2 months of training and 2 months of launching, and their AI loan officer was like 2x as efficient kind of getting stuff through the funnel. Like because AI, they don't miss calls. They don't -- they always get callbacks and they know the speel. And our process is fully automated. I mean we do not have underwriters. It's a feature, not a bug of what we do. But because of that, it's very rules-based and deterministic. It's perfect for AI. So we can be -- these AI agents are so good at what they do. And in this one case, I think I'll get this right, but 80% of the time, the borrower on the phone wasn't aware that they were talking to AI. And then the 20% when they found out, only half of that, they said, "Give me a human." The rest of it, they just chuckled and went along their way. So yes, so we're all about funnel conversion, removing friction, efficiency. There's definitely a role for AI to play in that.

Fantastic. We only have a minute left, so I'll ask you in a possibly long question. What about -- what does the environment look like? What does Figure look like when you go forward a few years? I mean what is the vision? What will success look like for a Figure a few years?

So I think we're going to stick to our knittings of we want to -- right now, we have a digital asset marketplace and consumer loan marketplace. Those are overlap. We'll have multiple different products. We'll have tons of volumes flowing through the system. We won't have to do as much education. People will come to us, will be the go-to place. So there'll be a lot of diversity in our product mix. There will be a lot more asset classes, and we're going to have a lot of fun doing it.

Awesome. What a great pleasure. Thank you so much.

Thank you.

Super insightful. Appreciate it. Thanks.