How Figure and Method closed the loop on debt consolidation and cut delinquency in half

Speaker A: Foreign.

Speaker B: Welcome M to the Tearsheet podcast where we explore financial services together with an eye on technology, innovation, emerging models and changing expectations. I'm Tearsheet Editor in Chief Zach Miller. Debt consolidation is rested on a promise lenders couldn't always verify. A borrower takes out a heloc, says they'll pay off their credit cards and the lender hands over the cash in hopes for the best credit bureau. Data lags by 30 days and there's not always a mechanism to confirm the debt actually got retired. So a significant share of consolidation borrowers end up reaccumulating balances, leaving lenders with paper that performs worse than expected and borrowers potentially worse off than before. Figure and Method set out to close that loop. Figure is the largest non bank HELOC originator in America, a public company on NASDAQ running a two sided capital marketplace on um, blockchain Rails and Method is a financial connectivity API that gives lenders real time access to a borrower's full liability picture and the ability to pay those liabilities off directly at the moment of funding. And together they've rolled out what they're calling verified debt consolidation, a closed loop system where the lender doesn't hope the debt gets paid. They know it. Today I'm joined by Mitch Shah, co founder and COO of Method and Rod Albuya who holds who leads AI at Figure and is something of a boomerang. He was at figure from 2020 to 2022, left and returned in January to a company that had transformed around him. We talk about what the data actually shows, what happens when this capability travels across figures, hundreds of white label partners and whether verified debt consolidation is a premium feature or the future of the category.

Speaker C: Thanks for joining us.

Speaker B: Here's the show. So mit, who are you and what do you do?

Speaker A: Perfect. Thanks for hosting Zach. I'm Mitch, uh, one of the co founders and CEO here at Method. Uh, and I oversee go to market and operations uh, here at Method.

Speaker B: Welcome to the Teresheet podcast. Rod.

Speaker C: Who are you and what do you do?

Speaker D: Uh, I am um, elite AI figure, sort of a boomerang this year 2020-2022 and I returned again in January and the company has evolved quite a bit so it's been an exciting re onboarding.

Speaker C: Welcome to tiershe podcast. I'm interested to hear about the company, uh, about the Boomerang itself and how the company has evolved in the interim. But before we get into what you guys have built together, I'd like to start like setting Context. Can you describe what the debt consolidation lending problem actually looked like before this? And what were lenders flying blind on?

Speaker A: Sounds good, Rod. Do you want to take it or. I'm happy to, sure.

Speaker D: I mean this preceded my uh, return, but I can speak in a generic sense, which is there was no real automation. Like you would apply for funds and you would get, people would get funded and then they would have to consolidate themselves manually, which means wait for funds to be dispersed, receive the funds. If you have, let's say five different lenders that you want to pay off, you go, I mean, have the experience of going to the lender's site and figuring out how do I pay off with this lender? Do they have like a system for it or do I have to send them a check? In some cases it's very clunky and painful and in the process you have the fund sitting in your bank account and then you start using that fund for something else. In some cases, like all sorts of things can happen. So that is the prior state, which I think is the case for not just figure, but for any lender altogether.

Speaker A: Yeah. And just going off of what Rod said, I think, uh, and giving a little macro overlook, um, cards are becoming one of the most proliferated products in the country. There are about 600 million credit card accounts outstanding out there and debt in general is at an all time high. A US consumer has uh, debts at multiple financial institutions. And I think one of the problems uh, that we were looking to solve as we were kind of building out method was connecting to this uh, financial account infrastructure in the back end. All the banks, credit unions, lenders, uh, across all different loan types, mortgages, auto loans, student loans, is I think what we pull together. So in the debt consolidation industry, one of the main goals for a consumer is to kind of consolidate debt at a lower apr, so they're able to pay off higher APR debts elsewhere. And it's been traditionally hard for a consumer to connect their accounts at other financial institutions into that m, which makes

Speaker C: it hard for the lender to verify whether they actually have paid down that debt.

Speaker A: Right, correct. And then just identifying, paying down that debt, having that account connectivity in a seamless fashion is what we kind of pull together. Paying down the debt is one of them. But also, hey, where is my account at? Is it the Capital One account? What is the balance on that account? Is it a verified, Is it as of today? Is it as of today or is it as of a month ago? Right. And I think getting all those details in Place from multiple financial institutions into one place is uh, critical. And I think once you go through the flow you're able to pay those off. And getting that verified payment confirmation back to the lender is also very valuable from the standpoint of uh, borrower health and borrower credit worthiness.

Speaker C: Awesome. So let's walk through what actually happens at the moment of origination. Now um, can you talk about what method does that was impossible before?

Speaker A: Yeah, so a few things. So at the time of application what method M kind of allows lenders uh, such as figure to do is uh, pull together uh, consumer, where they have all their debts in real time and kind of show them what's payable using current uh, networks that sit out there from, with respect to card networks, biller networks, ach, proprietary Rails and kind of make it available to figure out the time of uh, presenting an offer to the end user and kind of helping them uh, get access to offers that are personalized uh, for them at that point in time for the balances that they're carrying for the interest rate savings that they can see. So it helps bring all this information to the user at the time when they see an offer. And I think that's what method comes in and helps solve.

Speaker C: I'd love to talk about some of the recent research that I saw, I guess you guys published um, that in this collaboration between figure and Method there was a 50% lower 60 day delinquency rate, 2x funded conversion for Optum borrowers, a 21 point average FICO lift in 30 days and $500 per month in interest savings per borrower. That's, that's pretty significant. Um, I'm, I'm kind of curious Rob, we could start with you. Like how confident are you that it's the product driving that versus like maybe you guys are just attracting better borrowers with this type of integration with method. I mean or maybe it does have to be binary.

Speaker D: Yeah, um, to me the bottom line is that we're, we're approving people that we couldn't otherwise approve. So there's like you're recalculating DTI on the fly. So you're, you're moving your credit boxes based on actual ground truth that is getting supplied through methods like that. That's a big benefit is people who wouldn't see that $500 decrease on, on of course aggregating but there are people who are seeing a uh, material monthly benefit that otherwise would have been denied. Um, that's a huge gain that is you know, otherwise non Existent.

Speaker C: And, and does this change how you price risk at the origination? Are you offering different terms to borrowers who opt in to direct payoff versus those who don't?

Speaker D: Yes, I mean that is the fundamental. At least as I understand it which, which I, I'm not on the underwriting team but that is the main benefit is like you're able to uh, adjust your underwriting criteria based on the dti. DTI is one of the inputs into an underwriting system.

Speaker A: And just going off of what Rod said, I mean there are two key black boxes that have uh, occurred. Part about that and a number of lenders I've tried to solve is the account connectivity infrastructure that is just so opaque and it's so deep and broad in the back end. The two main areas where I think it really the point hits the home is like able to see if you have cards at these four financial institutions and personal at these two financial institutions whether they are payable at the time of loan origination. Uh is very valuable to help compute the DTI that Rod was just discussing. And second is to the ability to see the real time balances. So say if you racked up your card debt in the last 10 days, 20 days and being able to see that exactly at that point in time from a verified source helps figure put a better offer. They would otherwise give you say a $10,000 offer and see you are actually 20 or $25,000 which you may have racked up over time uh in the more recent history. And then that uh. That would kind of be available very seamlessly to figure at the time of uh, kind uh, of offer. Loan offer generation.

Speaker D: Yeah and, and the whole concept of seamless is becoming more through and through. So if you consider like seamless debt payoff to a more seamless helocs origination uh process and the full lifecycle of uh servicing, you know the whole process becomes less noticeable to the person at the point of origination.

Speaker C: Yeah, we all want sort of invisible payments and, and lack of seams. Um M. I just want before we go on, this is something you're working on with Figure. Is this something you also offer other lenders?

Speaker A: We do. We offer this kind of in a variety of uh loan products as well. So figure is kind of the marquee and champion in kind of the HELOC space where they've been uh growing tremendously and have built uh an amazing kind of uh user flow and offer flow as well. But we work with personal loan lenders uh in the space such as SoFi Bestech and also work in kind of the credit card space, uh, and a little bit in student loan space as well.

Speaker C: Got it. And are you seeing at least directionally other numbers similar to the lift that figure is seeing?

Speaker A: So we see a variety of benefits and depending on what the use case tends to be. But yes, I think in terms of uh, asset backed loans here it's uh, home equity backed. There's also uh, uh, auto backed loans. We are seeing increased uh, offer generation more users being qualified uh for a loan as a result of these rails. Uh, that absolutely tracks. And uh, in terms of delinquency and loan performance with personal loan lenders and kind of other loan products, we have seen market uh, improvements in terms of how the loans are performing 6, 9 months uh down the road from uh, the time.

Speaker D: By the way, if I may dovetail on that like this, this benefit group method like we have, we're embedded into 380 partners like credit Karma, Loan Depot and so on. So uh, this benefit is not just for figure direct to consumer originations, but also also for our white label partners as well. So there's like a broad spread of benefits uh through this engagement.

Speaker A: Absolutely. And that's just. Yeah improves our reach and kind of the number of kind of end users and applicants that we're reaching is pretty massive. And the impact that we're having through the FIGURE team is uh, pretty sizable.

Speaker C: I wanted to come back to part of the data that you guys released. It also looked like there was a follow on lending number like a 50% increase in borrowers returning. And if that's the case, that's not just a risk story, that's like a customer lifetime value story. So I'm kind of curious how you're thinking about that.

Speaker A: I'm happy to kick it off Rod, maybe you can jump in. But uh, yeah, I was gonna say

Speaker D: Zach, you may have information uh I don't have yet. So I would love to hear about it if you haven't met.

Speaker C: Okay, well let's Mick can share it with us.

Speaker A: Yeah. So uh, specific to, I mean uh, 50% are tied to figure. But what we, we've seen more importantly the users coming back from the standpoint of when they become an existing user, if we see real time balance or if they are uh, putting on more liabilities or kind of bills in their ecosystem over time they're able to draw down upon their existing uh, credit lines as well or are eligible for line increases over time with other loan products as well. So we've seen this behavior across a uh, number of loan products. But uh, yes, I think the 50% number specific to figure that's probably news to me as well.

Speaker C: Okay, I hope I didn't get that one wrong, but we'll check afterwards. Um, coming back to you Rod, um, you mentioned all these hundreds of white label partners and that they get access to the same level of method capability. Um, I'm kind of curious what kind of implications you feel that has on sort of the entire marketplace.

Speaker D: Well, I mean I think I sort of, we summarized it at a high level. So like when we talk about the um, reduction of payment and the lift and the FICO score, that, that applies to all of our partners. We're aggregating across all institutions that we have, which is something like, I don't know, over 70% of our originations come through our white level partners. So uh, that's an aggregate number that we're presenting here.

Speaker A: And maybe to put in perspective, you may have some context like what's the loan origination volume increase been over the past couple of years or how do you kind of see yourselves in the market in the HELOC space? All the innovation figures brought to market.

Speaker D: Sure. So we, we've been growing like year over year. Kind of crazy number at least for, for me having been around at other kind of bigger, slower plotting companies like 92% growth year over year and our, our loan volume right now is at over 8 billion. Um, so you know this is, this is just a growing vector which I'm still getting a grip on, uh, what the implications are again. But uh, it is a benefit that comes through to our partners in this engagement and then you know, our full life cycle of servicing and so on. When we talk about securitizing assets, that means that the, or potentially I would be speculating that like maybe the weighted average coupon would be lower or so on. So some of these assets become more appealing to our partners on the uh, investment side as well.

Speaker C: Yeah, I was going to ask about that because it's a dual sided marketplace. If this does have an impact on pricing on the securitization side, I mean

Speaker D: it must, but uh, I'm not an expert on that domain to speak to it, but I would say yes, it does affect our population of uh, assets within our portfolio.

Speaker C: And so when your partners come and sign on to the network, do they automatically get access to this level of um, the methods, capabilities, the full lifestyle?

Speaker D: Like they get our entire uh, white label platform which is our origination system. And like we really Started that for ourselves. We were uh, dog fooding it so to speak. And then when we start bringing on partners they're leveraging our entire platform which includes Method. It's like Method the blockchain and tokenization of assets and so on and securitization of systems like so the full life cycle Method is a part of this and they get the entire, the entire kit and caboodle with that.

Speaker C: Awesome. Mick M kicking it back to you. Uh, I'm curious about the competitive landscape. Who else in industry is doing this? And if there are other people doing it, how far behind are they from you guys? Um, is this basically a trend in the industry? I guess I'm trying to understand how deeply this runs.

Speaker A: Yeah, I mean direct pay as a concept has been around in the industry uh for a while and I think um lenders uh have seen improved performance with just with the user's intent to pay their debt at the time of origination rather than taking that debt in the form of cash to kind of go spend more uh in the market. So that concept has been around, it's been well tested, it's been well hypothesized and I think the results have been pretty strong. Uh the way it's been built in the uh industry has been a lot of it has been in house with operations team collecting manual statements from the end user at the time of application, verifying those payoffs, uh, either making phone calls to the financial institution on behalf of the end user, actually paying them on their behalf, or cutting them checks and sending it to the user for them to forward it to the financial institutions. And this generally adds a lot of time in kind of their application uh flow. It adds about 15 to 20 days just to get the loan processed and booked and uh originated for the end user. And that's where we've kind of innovated to bring a lot of this digitally connected. Fewer uh, uh manual inputs, fewer uh errors and just speeding this up by a factor of 10 to 20x. So in terms of uh, who are competitors, a lot of the internal payment operations team have kind of built this out and I think there have been a lot of inefficiencies that we've been able to uh, improving the market. But there are a number of uh payment rail providers that are out there that do kind of point solutions uh to give you either certain uh payment rails to be able to pay these uh, liabilities off through uh, card network rails or through certain banking rails. And I think uh, they continue to kind of offer these Products back to the lenders themselves who build these solutions in house, which uh, have been uh, kind of dated and method kind of helps them modernize and bridge that uh, to the 21st century experience.

Speaker C: So do you envision, you know, a few years from now that every debt consolidation loan, well not every or close to every is verified origination or is this just still a premium feature for sophisticated lenders?

Speaker A: No, I mean we see this becoming more commoditized and being part of the uh, industry in general. I think a stat that I heard not specific to HELOC, but in lending in general, about 70% to 80% of the loan applications uh, for debt consolidation that come in are tied to uh, debt consolidation. And I think what tends to happen is due to the unavailability of these rails. It's still a very archaic process but I think there is clearly a market need, a market appetite. And that's why I think lenders have gone out of their way to build some of these solutions in house as well to be able to serve them. But with a technology like this it's easier. Adoption could go further uh, into the market with uh, credit unions who want to serve a member directly, uh, kind of at their local credit union as well. So I think this has the potential uh, to help uh, drive uh, adoption into the markets that had previously unable to been able to uh, build these capabilities in house.

Speaker C: Rod, I want to kick it back to you. You mentioned the boomerang that you had started at. Figure you went somewhere else and you came back. I'm curious what that experience has been like. What kind of organization did you find on your way back? How has it evolved? How have you been challenged in that sense?

Speaker D: Sure, I mean uh, frankly very challenged. It's essentially a different company coming back.

Speaker C: So I'm after how many years?

Speaker D: Uh, so I was with a company between 2020 and 2022 and at that time we were. At least the way I framed it was we're an originator that tokenizes its assets and making it faster and cheaper to run the life cycle of origination. So like what I didn't realize at the time was that that was a proof of concept for our white labeling service which really began. It started in 2021 and um, now coming back we're, we're a two sided marketplace as you imagine, which is like loans are originated and not just necessarily HELOCs, but we have other offerings in uh, DSDR, uh, and other things I think on the pipeline. But uh, we're originating assets ourselves and through our white label partners. And that's uh, the full life cycle. And then on the other side we have the capital markets partners. I believe we have about 12 large institutions that we work with. And they're, the transactions are originating on our Rails and they're getting bundled and securitized and sold and owned on our Rails as well, which is through the blockchain. So, you know, all of this, the concept of ownership and lean perfection is happening via the blockchain, which is really exciting because it's less, uh, less buzzwordy. There's an actual practical application here that is materially being used and coming. And then as far as my own onboarding, I used to work on the marketing and all side and kind of getting this direct in front of the customers. And now coming back, I'm on sort of touching many sides, including Figure Connect, which I'm, um, actually getting some grip on. Okay, here's how we are handling the tokenization of assets and the blockchain. And now we're expanding to different asset types and allowing originators to bring on their own assets. So we've expanded into auto and small business to say, look, you can originate things on your own Rails, you can still use our platform for securing assets and getting them off your balance sheet. And we support that as well. So it is a pretty, it's become, I mean, it was a very slick system and I'm watching its evolution in real time right now where we're using some AI plugins to kind of facilitate expanding into new assets. So frankly, it's been a very exciting six months beginning in January. And I was excited coming back just because I love the culture of Figure. It's a great company to work out with a lot of smart and uh, scrappy people. But it's, uh, been fun kind of seeing how the company has evolved as well.

Speaker C: That's awesome. And it's that, that move from like direct originator to platform and we, that's. That has been, uh. I've been in this business for a long time, you know, before I had this beard and gray hair. But um, we saw, we've seen that a lot over time, uh, moving from, you know, D2C into, into sort of a B2B business. Um, and I guess I'd like to end the conversation with you, Mitt. Are you working with other blockchain companies? Is this, is this a new sort of muscle, you know, flexing for you guys?

Speaker A: Yeah, I mean, blockchain I think is being adopted in a variety of ways. I think Figure's done a phenomenal job of kind of helping bridge up the marketplace uh providers as well and we work with companies that are adopting uh technology in a similar format but where we are seeing kind of uh us heading in kind of this next phase uh as well we entered the open banking space with a whole different way of kind of helping consumers connect their accounts uh and kind of bringing it to life with lenders such as figure where we also bring is real time connectivity for their accounts and able to help them and serve them at the point with the uh lender that they love uh to work with or kind of the financial institution that they love to work with and being able to kind of give the consumer and the financial institution the visibility to the end user's ah state at other FIs and kind of helping them get the right lending products at the right point in time is where we are headed uh kind of as a business and a company.

Speaker C: I wish you guys the best of luck. Rod Mitt, thanks for joining us on the Tearsheet podcast today.

Speaker A: Appreciate it. Thanks, thanks. Thanks Rod.