Blend Labs (NYSE:BLND) CEO Nima Ghamsari joined the show to talk about how the company fits into the financial services ecosystem and why he thinks the usage-based software model is the future.
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This video was recorded on Oct. 1, 2021.
Dylan Lewis: It's Friday, October 1st, and we're following up on a company that recently went public. I'm your host, Dylan Lewis, and on today's episode we'll be airing an interview with Blend Labs CEO, Nima Ghamsari. Industry Focus listeners might remember the name from our July 23rd episode where we went through Blend's S1. The company provides software infrastructure for financial institutions. Fool contributors, Brian Feroldi and Brian Stoffel, recently spoke with Nima about the aha moment behind Blend Labs, how financial services can be a massive part of consumer mobility, and why the usage-based software model is the future. Enjoy.
Brian Stoffel: Today we're lucky enough to have with us Nima Ghamsari, he is the CEO and founder of Blend Labs, a recently IPO company. Nima, thank you so much for being with us today.
Nima Ghamsari: Thanks for having me.
Brian Stoffel: Before we start off, I always like to think about it this way. We have a lot of investors that come from a lot of different places in the world when they are looking at companies to invest in, and it's easy to just start getting into jargon and definitions and a lot of that can go over people's heads. My question to you is you walk into a classroom of kindergartners and you have to explain to them what Blend Labs does. What do you tell them?
Nima Ghamsari: Well, I will start with the underlying promise of the world is changing faster than ever. Ten years ago, watching movies involved going to a store and renting a DVD. It's crazy that sounds and now they open their iPad and they can watch any movie in the world, pretty much in a few taps. The same with transport. A kindergartner today won't ever have to experience hailing a cab in the old fashion way or calling a yellow cab number the old-fashioned way. It's just that world is completely changed. Everything is going digital. Actually, with COVID now that was working from home and as more remote, I should say things are changing faster than ever. But there are some things that haven't changed as fast because of a variety of reasons. One of which is buying a home or buying the car, which most kindergartners haven't done. But basically it involves first buying the home, but then getting the money for it. Getting the money for it is this super complicated process to walk into a bank branch, fill out a bunch of paperwork. A few weeks later, somebody gets back to you after a bunch of back-and-forth and says, you're approved or you're not. You can buy this home or you can't, you can buy this car or you can't. You can whatever you're trying to do, they'll tell you can't or can do in a few weeks. It's a very complicated process for consumers, but that's changing really quickly. Partially due to COVID, partially this is rise of FinTechs. I think a lot of kids nowadays will probably use Robinhood and I walk down the strand of [...] Robinhood. They're lots of people who are younger using Robinhood to trade, buy and sell stock. That world's changing fast partially because of FinTechs, partially because of COVID, partially because of few other things but there's more technological capabilities to make that a simpler and more streamlined process. Blend is powering a lot of that. We are the ones making this that when you buy that home or buy that car, open that bank account where the system that's helping power that financing power that change part of that account opening. We do that for FinTechs, we do that for banks, we do that for credit unions, to the best real estate companies, best home builders. We aim to make all of this so that you can do these parts of this process on your phone in a few taps, just like all the things I mentioned in the beginning, watching a DVD or hailing a cab. Eventually technology will help us get there and Blend is that financial service infrastructure that's powering that.
Brian Stoffel: As a former teacher, I would say, you know how when you ask your parents if you can go to Disney World may say I will get back to on that. That's buying a house is like. Now imagine if they could answer that question right on the spot. My daughter would love that. But I'm interested in how you arrived at that. I know you've talked about how your family had to save up for 10 years to buy the first house after you came to the United States. But I know that you were one of the first employees. I think you helped build the consumer division of Palantir, which is another software company. I'm curious what led you to leave Palantir to start Blend and maybe it's because I'm not as familiar with exactly what the consumer arm of Palantir does. But what did you see or how did you become aware of this need in the banking industry of all places, jumping from Palantir to there?
Nima Ghamsari: One of the other downsides of doing things the old fashioned way where there's a lot of paper and a lot of humans involved and a lot of back-and-forth is that it opens the door for more mistakes and possibly more fraud, which back in 2008 when I joined Palantir we were in the middle of a big financial crisis. We hadn't been thinking about financial services that much pounds and we're thinking about trading and how to help some of the more modern use-case on trading and hedge funds that were up and coming at the time. But then as the financial services collapse nearly happened because of the mortgage industry in 2008, there was a real push by our customers for us to help and see, can we help these millions of consumers who have mortgages stay in their homes? The short version is working with some of the biggest financial institutions in the world during the crisis opened my eyes to two things. One, how many millions of families were impacted by this, and positively when they got their home and negatively when they were potentially losing their home years after they bought it; the sheer scale of the problem or the impact of the solution if there was one. Then two the technology that was being used was extremely primitive. The software infrastructure. The infrastructure was built around paper. It made me realize that if there's $10 trillion just in mortgage debt or sale of something along those lines in mortgage debt and it's powered by paper, what would it look like if we could restart and start to build from the ground up. But it looks like you powered by data and make a digital process and a mobile process. Over the four years I was a Palantir, that was one of the things that I learned and ultimately started Blend in 2012 to do that. Specifically, we started out in the mortgage area to help lenders who wanted to become digital first and data-driven. We worked with with lenders of all kinds. Again, FinTechs, up and coming PropTechs, there's was huge revolution of company's that was just starting at that time. Then we extended overtime because our customers wanted to do more with their consumers. They wanted to do personal loans and credit cards. You see the lending clubs in the upstarts driving banks and other credit institutions into personal loans and making sure that they can all play a part in that. Now you're seeing a big wave of buy now pay later. As we became a core part of infrastructure for a lot of these companies and they want to expand into other areas, they came to us and said, "Hey, can you help us pull these other things that we're doing?" We've become this consumer center platform that helps the financial institution deliver those amazing experiences when opening these accounts.
Brian Stoffel: It's a good segue that you mentioned that the mortgage was where you started and then you saw all these other areas where you could focus. You mentioned a couple of them like personal loans, like buying a car. I'm just wondering, can you touch on which one of those are the biggest, what percentage of what Blend Labs does now is mortgage is? I know I'm assuming that it aims to become less of it, not because the mortgage business goes down but because the rest of them become more popular. What are some of the other areas that you're focused on and what percentage of what you do for banks is outside of mortgages right now?
Nima Ghamsari: Sure. We started in the first six, seven years of the company up until 2018, 2019, that was the only products we offered. It was this mortgage product. Then really two or three years ago we started offering this. It's become the fastest-growing part of our business. Again, not because mortgage is not growing well, there's a lot of digital transformation happened there, not just in the way that those are engaged by and experienced by consumers, but all the ancillary parts of the process. We did have a title insurance as a big, very complicated part of the process. Consumers are even aware of, but it's expensive and if we can make that better over time, it will drive a lot of efficiency and a lot of cost savings back to the consumer long term. There's more we're doing in the mortgage side of course, because there's a lot still to solve there. Most of the mortgage process even with all of our innovation is still a very analog process, there's still a lot of work to do there. But we did launch these products in the last two years to help expand across every product that financial services we may offer a consumer, personal loans, credit cards, deposit accounts, car loans from equity loans. Now actually when we talk to most customers, we talk about being in the finished services firms. We talked about having one platform across all these products for a consumer. Because the obvious thing is they want to be able to offer multiple products to their consumers. Because it's good for the consumer, they're not hunting for that next product. It's good for the bank, they are able to have better economics long-term with their customer, and it's good for Blend Labs for that system that does all of those things. Then also happens to be a lot of technology overlap. Meaning if I give you a loan, I want to make sure you can pay back that loan. That's the same data. The same information is required to understand whether I can give you a personal loan or a credit card and revolve on that or an autoloan or a home loan of any kind. That's the same information. I need to make sure that you are who you say you, they're not defrauding the bank. All of those capabilities, all those technologies are overlapping. Why have 10 of those instead of one piece of infrastructure that can do it? It's a smaller percentage of our business. It's the fastest-growing part of our business relative to mortgage, I should say it's a smaller percentage, but it's pretty sizable. Actually, we do all the personal loans for some of the largest financial services firms in the world right now. We're growing that business because we think that that's an important part of the transformation is going to come to how consumers use credit cards and things like that in the long run.
Brian Feroldi: Nima, one thing that really impressed me when I was researching your company for the first time was, some of the customers you've grabbed already. Wells Fargo, US Bank, M&T Bank, Opendoor, PennyMac, these are massive companies you would think huge budgets on tech. Why would they need to use your service versus doing this in-house?
Nima Ghamsari: Well, there are certain parts that I think they should do in-house. If you are a bank or a FinTech, and you are engaging with your customers every single day to check their balance, or to send them a new update, or whatever it is, that mobile app you should own, it should be your experience, everything that you do, and all the storefront if you will, I think should also be yours, that's not something that we care to do or want to do. But we helped them do, and it's actually, it's even more impressive in some ways that the Fintechs work with us, like so many of the ProTechs, work with us too, because they not only have tech resources, but they have some of the best tech resources, and tech is their differentiator. They still work with us because we do so many of the under the hood things, where the infrastructure helps you validate the income, helps you understand how much down-payment that person has, helps you understand the identity of the person, the fraud. All those components, that there is a best in class way to do those things, and those things are so complex. Think about income for a second, understanding the income of the gig economy worker, it's complicated, understanding the income of a W2 worker, it's in 50 different systems and usually it's done with pay stops, instead of with some modern digital way, which is what Blend does. Those things, just that one piece alone, which is a tiny part of our infrastructure, is extremely complicated, and so why go and rebuild those things? It doesn't matter if you're JPMorgan Chase, or your Bank of America or Wells Fargo or your City, or if you're a modern FinTech who wants to get started and offer these best in class experiences, you need those capabilities to offer to your customers so that they don't have a terrible experiences that are going through your flows. We become the system that's powering a lot of those thing, and we become a really an accelerator to their tech efforts, whether they are, again a FinTech or a bank or a credit union or a home builder.
Brian Stoffel: Nima, I am asking this question on behalf of our members. Would it be accurate to say though that you guys aren't making a loan risk assessment yourselves, what you're doing is you're aggregating all of the necessary data and making the aggregation of all that data as seamless as possible? Would that be a fair differentiation?
Nima Ghamsari: Yeah. I would say, we don't determine the credit risk models, we don't determine if you should get a loan, or not get a loan, but our system is the system that determines that using the bank or the credit union or Fintechs policy. They'll then input their policy in our system, and mortgage is actually mostly Freddie Mac's policy, which is done through our system, and those policies are executed by our system. If you are applying for a loan, whether it's a mortgage or a personal loan, you run through all that stuff, the process that's powered by our system. Again, getting that right information is actually fairly complex. Then we do the calculations in our system, and then we do the analysis of that decision, whether you're approved or not in our system, but it's not our policy and we're not the balance sheet. We're not the ones deciding who should get that next loan, because that's really what we want the finance services firms to figure out. We want the product innovation in the sense of what financial products should be out there and who should get those things to come from those firms, and we want to be the infrastructure that powers that.
Brian Feroldi: Nima, one of the things that we think about as investors is, long-term competitive positioning. Can this company grow at an average rate for a long period of time? One of the major categories that we looked at is moat. One of the things that I think you guys have in spades, is switching costs. Once a company gets using this technology, you get integrated, it's hard to switch away from you. However, in your investor presentation, one of the things that you call out is that you benefit from network effects. Can you explain that a little bit?
Nima Ghamsari: Sure. There are a couple of things that are really important to us, going back to the moat thing. Even though it's really hard to switch from us, we price our products in a way that's really easy to get started, and it's really easy to leave us if you wanted to, and yet we still have amazing retention of customers, both gross and net retention, and that's because we want to lean on our products. We want to make it so that we have the best products, there are no other firms that really do this, that service that layer infrastructure across all the consumer products with these financial services firms offer, in a unified way. There is not any, so we want to be able to lean on that as our moats long term, not something that's hard to change. It's a nice short-term thing, but it's not a great long-term, moat. I don't think. Maybe in some cases, it is but that's not where we want to lean on philosophically as a company, because I think it could be to us getting lazy, and that's not what we want to be perceived as. As far as the network effects, one of the beauties is that, because you work at this massive scale. I think we announced in our quarterly earnings that we did 520,000 transactions last quarter. Which, to give you a sense of the mortgage industry, this is the only one that we have a really good numbers for.
There's only on an average year 10 million of those, and so that's 2.5 million a quarter, so we're doing pretty good scale. But because we do such big scale, there are certain scale effects that we get, that we can offer better experiences than anybody else could offer, and better cost in some cases than anybody else could offer. Whether it's certain data providers, whether it's certain data ourselves that we gathered that we offer to the financial services firms to help them understand how to optimize their funnel essentially, how do you make sure that you convert the most customers you can? There are certain things that we get as the firm that has all this data on these millions of consumers, we don't use it for any marketing purpose ourselves, we just use it to drive a better experience for our customers as the lenders, and that's something that we know that nobody else can do because no one else even comes close to the scale that we do in this space.
Brian Stoffel: Nima, that's a good segue to my next question. Because you said there's really no one who does what you're doing. I'm curious because when I first heard about Blend, the first time I was like, "This is like Q2" and as I dug into those, I was like," No, this is nothing like Q2. " Then I was like, "Well maybe it's a little bit like Upstart, making lending decisions. " Now it's like," No, they're not really making, they're getting the data. Then the closest I could come was, this reminds me a little bit of Ellie Mae which used to be publicly traded, now I believe is part of Intercontinental Exchange. I heard you just say there's no one who really does exactly what you're doing. Who do you guys see as your closest competition then?
Nima Ghamsari: That goes back to the very first question that you said. We actually work with all of those companies interesting, or I can't remember every company you mentioned, but I think we work with all of those companies, and if not we're maybe in the process of doing it. The idea is, for a Q2, which is the digital banking apps that allows the banks to offer more modern day-to-day banking experience, our offers are those things to apply for a loan or embedded in their app. We want to be the industry that powers opening all these accounts, not necessarily the day-to-day thing. A lot of the bigger banks tend to build the day-to-day thing themselves, and I think I could see reasons why they should because it is something that is their storefronts, if you will. I think that we tend to work with all those guys, but our biggest competition going back to the very first thing that you guys asked me about was, why don't these people build the stuff themselves? I think there is this perception of Blend in some cases, and this is our primary competition, that we're somehow replacing things that the teams that these financial institutions would do, whether it's a FinTech or a bank, a big bank, small bank, whatever. Actually, we think of ourselves as just an accelerator, an augment of the capabilities that they already have, and I think fixing that perception is a huge challenge for us. That's something that we're spending a lot of time with the CEOs, and the Chief Digital Officers, and the CTO of these financial services firms to help them understand how much we can augment their efforts, and how much of the infrastructure we can provide out of the box, that they don't have to go to reinvest, and they can create those one tap offers that they want. They want to be able to have the You shop in their mobile app, or in Q2s mobile or whatever, and there's an offer that says, "You're buying power for a home whenever you're ready is $280,000. You don't have to do it now, we just want you to know." The amount of data that's used for that, the amount of decisioning and calculations that are required for that, the amount of compliance and regulatory things that are required for that specific, that one little pain is so much, but that's what they want to be able to do. The actual screen itself, I don't care about that screen. But I think sometimes people perceive us as trying to take over that and it's not, we're trying to be the infrastructure powering that. That is a big piece of what I think was our competition, but we've done a lot recently to help them understand how we help augment that, and power that, as opposed to be that for them.
Brian Feroldi: To my knowledge, you guys are primarily focused on United States, if not exclusively focused on United States. However, real estate banking, credit, these are global things. Does Blend Labs have international ambitions?
Nima Ghamsari: Well, I think our mission would require it, in the sense that if we're going to make financial services and financial wellness for the billions of consumers in the world more accessible and more commonly utilized in the world, we have to go international at some point. One of the things about my story you mentioned earlier was, my parents did get a mortgage. I moved to this country when I was less than one year old, my parents and my sister. For the first 10 years or so I was living here, we were renting, paying let's call it $1,000 a month, I don't remember the exact number. Then about 10 years in, they learned that they could get this mortgage to buy a home and for a few thousand dollars down, the financial services, which is mind-blowingly good in the United States, in a sense that for a few thousand dollars, they were able to buy a $100,000 home in Cincinnati where I grew up. In that few thousand dollars, then they added $1,000 a month in mortgage payments instead of rent, so the monthly payments didn't change much. Twenty years later, that $3,000 plus the $1,000 a month in rental payments they would have paid anyways, turned into $200,000. They got a 70x return in 20 years. By the way, they had this asset that they could live in and made their lives better too, this home. Financial services is probably negatively looked upon by the world in the sense that generally, I think people don't understand it and don't think that there's good actors there, but when utilized properly, banking is incredibly important for the advancement of society. It allows for people to be more financially well off in a growing global economy and eventually get the freedom like my parents had, to not have to worry about those monthly payments or those kind of things. The short answer to your question, it is absolutely a requirement for us to eventually go international. I don't know exactly when, we have a lot of work to do in the US, and we want to make sure we're doing a great job for our customers here first and continue to expand with them first before we go internationally.
Brian Feroldi: Can I just say, Brian's going to ask the next question, but you get 10 points from me for saying the word "our mission". [laughs] That really made me light up because I love it when CEOs are making decisions according to missions.
Brian Stoffel: That's a big thing that Brian and I harp on a lot. I love that answer too, by the way, but I want to dive back into the weeds for one second, which is that I know that you guys have a Blend, pun intended, between subscription and usage-based revenue. Can you explain the difference and specifically where that usage-based revenue comes from?
Nima Ghamsari: In some ways, all of our revenue is on a transaction basis, in the sense that when you open one of these accounts or get one of these loans at one of our financial services partners, one of the 300 or so that we have, we collect this very small fee from the financial services for power and infrastructure. Our thesis is, as we make the software layer for this better and better and better over time, and eventually these transactions become more available and more accessible to the many people who are not being paid attention to by financial service or don't know about financial services, the amount of transactions will continue to grow because people will take advantage of the system for their benefit in a good way. We want to charge per unit. The other thing that does that allows us to align with the success of our customers, which is, we don't want to charge them millions of dollars who happen to do on loans on our system because they couldn't figure it out. We charge per unit. Now, the reason we have "Subscription Revenue" is some of our customers are like, look, we're doing a ton of volume with you, can we guarantee you some of that volume so that then we get a slightly lower rate? Instead of $80, we get $70 a unit, and if we do $70 a unit, then we'll guarantee you 100,000 unit, whatever the number is. That's the reason it looks like we have some subscription revenue. We have some guaranteed minimums in the contracts based on our customer relationships.
Brian Stoffel: Really in essence, it would be fair to say that you guys are primarily a usage-based model?
Nima Ghamsari: I think the usage-based models, consumption-based, value-based models, success-based models, are the future of all software because as a CEO of a company who buys a lot of software, we buy a lot of software at Blend, I prefer software companies that let me pay-as-I-go based on usage or guarantees some usage, but then pay for that usage, than ones that charge me a huge upfront fee and a big commitment just to get started. In fact, many times I've told those companies, no, I would rather not. It's a competitive advantage to have these optimal pricing model. By the way, because of that, we actually get paid more by our customers because we're taking the risk off the table for them. It becomes better for all sides because by taking the risk out of the equation, can charge a little bit more, and that becomes a benefit to both sides.
Brian Feroldi: Love that. We only have time for one question left and I want to end by talking about Blend's corporate culture. Brian and I are huge believers, and the Motley Fool is a huge believer, is that culture is really what matters in the long term. What's distinctive about Blend?
Nima Ghamsari: Well, it goes back to what I said. I think that there are many hundreds of millions of, maybe in billions, actually, there are definitely billions of people worldwide who are not able to get the benefits of the financial services system that the people on this call are able to get. People who don't have access to bank accounts, don't have access to simple things that would make their lives a lot simpler and a lot better in the very long run. We start with that as our core mission, as the things that we care about we want to drive. We're a very consumer-focused company in that sense, even though we work through enterprises. We know that they are focused on the consumer and by us being focused on the consumer, we are completely aligned to what we want to deliver. I think it's good for the entire industry, it's good for our consumer, it's good for everyone. It's a win for everyone if we can make technology, make this more simple and more transparent to the billions of people in the world. But then I think one thing that's really unique about our culture, around that is that because we're in one industry and we have one set of customers in that industry, and it's a fairly small set of customers, some software companies have tens of thousands or hundreds of thousands of customers. We have 300, which to me that's a lot because there's not a million banks in the United States. But because we have such a concentrated customer base, we're the most customer-focused company that I've ever seen. We spend so much time with our customers. I just spent two weeks on the road. I was in 15 cities in a 10-day period with our customers because I know that they are the reason that we are here today. They trusted us to be that infrastructure to then serve their end-consumer. I also know that as we continue to build things to modernize the infrastructure of this industry, they are going to be the first ones to do more with us over time. We target our tension numbers being really good. The focus is not retention, the focus is on driving value for those customers, and that leads to all the good outcomes for us where we have high additions of customers who are working with us, do more with us and buy more products from us, and use that to serve more of their customers.
Brian Stoffel: Nima Ghamsari, this has been a really interesting half an hour. I've really enjoyed it. I really appreciate you taking the time to come here. Is there anything else you want to leave with our members about Blend Labs before we wrap up the interview?
Nima Ghamsari: No, I feel like we're one of these companies that we like being under the hood, we like being behind the scenes, and so it's really special to be able to share the story with a broader audience today.
Brian Stoffel: Awesome. Well, congratulations on coming public, and I would say good luck, but I don't think you guys need it. It seems like you are headed in the right direction. We really appreciate you taking the time to talk with us today.
Nima Ghamsari: Thanks Brian.
Dylan Lewis: Listeners, that does it for this episode of Industry Focus. If you have any questions or you want to reach out and say hey, shoot us an email at email@example.com or tweet us @MFIndustryFocus. If you are looking for more of our stuff, subscribe on iTunes or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned. Let's not buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind the glass today and thank you for listening. Until next time, Fool on!