Blend Labs - $BLND - Deep Dive - Part 1
Blend is an innovative consumer fintech empowering financial products through simple and transparent consumer experiences with significant barriers to entry and a long runway for growth
Disclaimer: The information provided is not financial, investment, tax or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or any other financial instruments. For more information read the disclaimer.
Welcome to the Modern Growth Investing newsletter! If you’re new subscribe below so you don’t miss my weekly updates on growth businesses and investing!
Before you start reading, you might want to click this link to read this article on the website if it doesn’t fit in full in your email.
This is the first of two articles that I will publish on Blend. This time, I decided to break the deep dive into two parts because of its extensive length. Topics will be divided between both articles as follows:
Part 1 (the article you are reading right now)
What is Blend’s Mission?
What is the current process for getting products in Blend’s Industry?
What are the current trends/expectations in Blend’s Industry?
How do the current Industry Incumbents Lack Innovation and what are their Limitations?
What does Blend do?
What are Blend’s Products?
How does Blend make money?
How did Blend evolve its platform and products in its current state?
What is Blend’s Market Opportunity?
Part 2
What is Blend’s Growth Strategy to capture this market opportunity?
What is Blend’s Competitive Advantage and why is it a durable long-term investment?
What are Blend’s People and Culture like?
Who are Blend’s Customers?
What is Blend’s customer value proposition?
What are some successful Customer Case Studies?
What does Blend’s Management and Board look like now?
How are the executives being paid currently?
What is Blend’s current Insider Ownership for Executives and the Board?
What do Blend’s current Financials look like?
What are my final thoughts on Blend AKA TL;DR;?
What is Blend’s Mission?
Our vision is to bring simplicity and transparency to financial services
Blend wants to empower customers by making complex financial services like mortgages simple and easily accessible to everyone. They also want to remove untrustworthy practices from financial products making them easy to access and simple to use for everyone. From this mission, we can see that Blend genuinely cares about their customers
What is the current process for getting products in Blend’s Industry?
Blend’s core business is a part of the mortgage industry and banking software. They enable banks, credit unions, etc. to easily give mortgages and other services in an awesome customer experience.
Both mortgage industry and banking software industries have been historically dominated by businesses with poor customer experience and outcomes. Due to this the current process for getting mortgages and interacting with banks is riddled with a process that is complex, inefficient, and highly stressful.
From the above image we can see that the current process involves manual work, redundant paper information, complex and messy approval system, manually work on all the documents, use many systems to very things manually and stress about a lot of things at the last minute.
What are the current trends/expectations in Blend’s Industry?
The pains associated with the mortgage and banking industry that we discussed above have led to a few trends that Blend is capitalizing on.
Consumer expectations for digital experiences are rising - Consumers increasingly expect their banks to provide data-driven, personalized, digital experiences. The COVID-19 pandemic has accelerated a shift in consumer behavior away from traditional branches and toward digital channels for banking services, resulting in a 30% increase in the use of mobile banking worldwide.
Consumers increasingly want one-stop shopping experiences for financial services - Consumers prefer simplicity and convenience when it comes to shopping for financial services. Fifty-three percent of consumers would like to be offered bundled products, such as real estate services with a home loan or car deals with a pre-approved auto loan. To retain consumers and drive incremental revenue, financial services firms need to provide end-to-end consumer journeys that include these elements.
Competition among financial services firms is becoming more intense - Fintechs, neobanks, and other innovators are launching digital-first offerings that draw consumers away from traditional financial services firms. Forty-two percent of U.S. consumers use at least one fintech provider. In addition, consumers are switching financial services providers at a faster rate than in previous years. Traditional financial services firms must invest in seamless, technology-driven, and consumer-friendly offerings that lead to higher consumer satisfaction in order to preserve and grow their market share.
The pace of change is accelerating - Financial services firms are increasingly seeking partners to help them manage consumer experiences with more agility as they wrestle with changes caused by fluctuating rate environments, government stimulus programs, and evolving regulatory requirements. In an effort to remain competitive, 48% of banks and 42% of credit unions have partnered with fintech startups over the past three years to address specific technology needs. Among banks planning to partner with fintechs, 86% cite that improving the consumer experience is the top priority, followed by 42% and 38% for reducing operating expenses and reducing fraud, respectively.
Low-code development tools are shortening product development cycles - The advent of no-code and low-code development tools is enabling product teams to build, deploy, and modify new products and deliver superior consumer experiences with greater speed and flexibility. Adoption of these tools will be essential for financial services firms to innovate rapidly in the face of changing consumer expectations and fluctuating market conditions.
Better access to data is powering higher levels of automation - As banking becomes more open, financial services firms are seeking to leverage the best data in the market to improve verification of consumer assets, income, employment, identity, and credit history. The aggregate potential cost savings for financial services firms from automated workflows is estimated to be at $447 billion by 2030, with back-office credit underwriting accounting for $31 billion of that total. By leveraging data and software to make more informed decisions automatically, financial services firms will be able to provide a frictionless consumer experience, reduce time to close and reduce fraud.
How do the current Industry Incumbents Lack Innovation and what are their Limitations?
Lack of Innovation
Financial services firms have been shifting for years to a digital-first approach to acquiring customers and deepening existing relationships.
Few financial services firms can afford to build best-in-class digital consumer journeys on their own, and those that can typically prefer to accelerate time to market by working with partners that provide flexible, off-the-shelf components.
In addition, few financial services firms have built their own captive insurance agencies or developed their own service provider marketplaces to streamline the consumer journey due to the cost and complexity of managing these initiatives.
Limitations
Many financial services firms are unable to offer consumers personalized product offerings, offers for third-party services, multi-product shopping experiences, or even the opportunity to continue applying for a single product across more than one channel.
Many financial services firms find it difficult to use the customer data they have already collected to pre-populate an application form or cross-sell a product.
Due to the above, digital transformation has never been more imperative for financial services firms. However, these efforts are often hampered by aging infrastructure.
Financial services firms typically use separate technology stacks for mortgages, consumer lending products, and deposit accounts, making it difficult to drive rapid improvements. This architecture is inflexible, costly to maintain, and produces data silos that result in poor consumer experiences.
What does Blend do?
Blend’s vision is to bring simplicity and transparency to financial services, so everyone can gain access to the capital they need to lead better lives. To realize this vision, Blend has built a market-leading cloud-based software platform for financial services firms that is designed to power the end-to-end consumer journey for any banking product. From the moment a consumer starts an application for a loan or a deposit account to the moment they digitally sign the final documents, Blend’s software platform streamlines the process, so financial services firms can deliver superior consumer experiences, drive growth, and increase operational efficiency.
Consumers expect modern banking experiences to be as simple as other online shopping experiences. However, financial services firms may not have the resources and in-house software expertise to fulfill consumer demands for intuitive, digital, and easy-to-use products. In addition, most financial services firms are burdened by antiquated, inflexible systems and use separate technology stacks for different product lines, making it difficult to drive rapid improvements. Consequently, a broad range of financial services firms including banks, credit unions, fintechs, and non-bank lenders have turned to Blend to help them accelerate their digital transformation initiatives and position themselves for future growth.
Blend’s software platform powers the mission-critical interface between financial services firms and consumers. Blend’s growing suite of out-of-the-box, white-label products currently powers digital-first consumer journeys for mortgages, home equity loans and lines of credit, vehicle loans, personal loans, credit cards, and deposit accounts. Each out-of-the-box product is built from an extensive library of modular components assembled into consumer journeys that typically include data collection, verification checks, product selection, pricing, pre-approvals, disclosures, addressing stipulations, and signing closing documents. Through low-code, drag-and-drop design tools, Blend also enables the creation and deployment of new product offerings. Blend currently offers products for consumer banking but plans to extend its software platform over time to add support for commercial banking products.
In 2020, Blend’s software platform helped financial services firms process nearly $1.4 trillion in loan applications.
Blend has an extensive ecosystem of more than 2,200 currently active technology, data, and service providers through their software platform, enabling financial services firms to collaborate with third parties to provide best-in-class experiences to consumers.
As consumers use Blend software platform to apply for financial services products, they can shop for realtors, insurance carriers, and other service providers through integrated marketplaces that are introduced at the precise moment these third parties are needed. As more consumers use Blend software platform, Blend is able to attract a broader range of ecosystem partners, which allows them to deliver more value to consumers and attract more financial services firms as customers. This creates a powerful network effect and differentiator for their business. As of March 31, 2021, the number of participants in Blend’s ecosystem has grown by more than 1,300% year-over-year.
Blend has established itself as a critical and long-term strategic partner to customers by powering essential revenue-generating experiences, integrating software into back-office systems, and staffing teams chartered with increasing the value delivered over time. Customers typically complete an initial deployment for one or two products and then add more products over time, building toward a unified consumer experience that supports multi-product shopping journeys. Blend’s dollar-based net retention rate was 162% as of December 31, 2020.
Blend’s success-based business model is designed to align growth with the interests of customers. Blend offers its products through software-as-a-service agreements, where fees are assessed based on completed transactions, such as a funded loan, new account opening, or closing transaction. Blend does not charge for abandoned or rejected applications, even though they cause Blend to incur costs. Completed transaction fees are determined by the number and type of software platform components that are needed to support each product offering. Blend has generated an immaterial amount of revenue through commissions or service fees when consumers use Blend’s marketplaces to select a real estate agent, property and casualty insurance carrier, or title and settlement services entity in 2020, Blend expects this will become a significant part of the business in the future. In 2020, financial services firms used Blend software platform to process 1.4 million completed banking transactions, a 190% year-over-year increase relative to the 0.48 million completed banking transactions in 2019.
To accelerate the adoption of innovations in their mortgage and home equity products, on March 12, 2021, Blend signed a definitive agreement to acquire Title365, a leading title insurance agency, from Mr. Cooper Group Inc. Title365 will be integrated with Blend’s software platform, which enables financial services firms to automate title commitments and streamline communication with consumers and settlement teams. Together Blend will enable customers to accelerate the title, settlement, and closing process at scale for mortgages, home equity lines of credit, and home equity loans.
What are Blend’s Products?
Blend has created a flexible cloud-based software platform for financial services firms that is designed to power the end-to-end consumer journey for any banking product. From the moment a consumer starts an application to the moment they close a loan or open a deposit account, Blend’s software platform streamlines the process, so financial services firms can deliver superior consumer experiences, drive growth, and increase operational efficiency.
Blend is well-positioned to benefit from the acceleration in digital transformation investment taking place across the financial services sector. Their software simplifies complex origination processes that can include hundreds of tasks and require interactions with dozens of external technology, data, and services providers. By automating these tasks and developing pre-built integrations, Blend helps customers potentially avoid years of expensive in-house software development and free up resources for other initiatives.
Blend’s cloud-based software platform powers the mission-critical interface between financial services firms and consumers. Financial services firms can rapidly deploy their growing number of out-of-the-box, white-labeled products for:
Mortgage - provides an end-to-end digital mortgage experience from application to close that puts financial services firms at the center of the broader homeownership journey.
Home Equity - modernizes home equity line of credit and home equity loan origination experiences, delivering higher application submission rates and faster closings.
Vehicle Loan - enables rapid financing that helps consumers get into their car, boat, RV, or powersport vehicle faster.
Credit Card - increases application conversions through a configurable product selection experience, streamlined data collection, and instant approvals.
Personal Loan - drives faster pre-approvals for unsecured and secured personal loans, lines of credit, and overdraft protection lines.
Deposit Account - increases application conversion rates and reduces fraud risk with features that support financial services firms’ Bank Secrecy Act and anti-money laundering policies.
In addition, they have developed a product called Blend Close that streamlines traditional, hybrid, and fully digital closing experiences for mortgages, home equity lines of credit, and home equity loans.
Journey Builder
Each of Blend’s products is built from an extensive library of modular components that typically include data collection, verification checks, product selection, pricing, pre-approvals, disclosures, addressing stipulations, and signing closing documents. Blend’s customers can rapidly create new product offerings by assembling modular components into workflows using Journey Builder, which includes tools for experience design, process orchestration, and persona-based workspaces.
The modular components that make up their products generally fall under the categories of verification, decisioning, workflow intelligence, and marketplaces.
Verification Components
Verification components automate confirmation tasks that are needed to underwrite a loan or approve the opening of a new deposit account. Blend has pre-built integrations with providers of technology and services to address requirements for identity verification, asset verification, income, and employment verification, and credit.
Decisioning Components
Decisioning components reduce the need for human intervention by automatically applying business rules throughout an application workflow configured by a financial services firm. Examples include pre-approvals, cross-selling, and adverse actions.
Workflow Intelligence Components
Workflow intelligence components manage data collection and automate tasks throughout the origination process. Blend creates applications with branching logic to streamline initial data collection. Wherever possible, Blend eliminates the need for document uploads by integrating with authoritative data sources. They also automate key processing tasks so consumers can begin to address stipulations immediately after a loan application is submitted.
Marketplace Components
Blend’s curated marketplace components enable consumers to shop for products and services presented at the precise moment of need during an application for a loan or a deposit account. They currently offer marketplaces that enable consumers to find real estate agents, insurance carriers, and automobiles for sale online. These marketplaces help consumers quickly locate service providers with competitive rates and enable financial services firms to increase operational efficiency by providing a one-stop shopping experience. Their acquisition of Title365, once closed, will enable them to integrate the title, settlement, and escrow process further into their platform and develop a marketplace that provides consumers and financial services firms with the flexibility to choose title insurance partners that provide services at competitive rates.
APIs and Integrations
Through Blend’s open APIs they are able to seamlessly integrate the capabilities of technology, data, and service providers into their software platform. As they develop integrations with new partners, customers can quickly experience the benefits across their product suite. In addition, financial services firms can use their APIs to develop integrations with the back-office systems in their tech stack, creating a unified, agile architecture for powering superior consumer journeys.
The Blend Ecosystem
Blend brings together an extensive partner ecosystem through their software platform, consisting of more than 2,200 currently active technology, data, and service providers that have grown by more than 1,300% year-over-year as of March 31, 2021. They provide the central hub through which these partners collaborate to deliver best-in-class consumer journeys in highly efficient ways. In addition, they provide their ecosystem partners with a critical distribution channel to reach consumers at the precise moment they are looking for products and services through the financial services firms Blend serves.
By providing the software that powers consumer journeys at financial services firms across digital, contact center, and branch channels, they are able to benefit from a substantial volume of high-intent consumer traffic with no incremental acquisition costs. As more financial services firms become Blend customers or deploy additional products through their software platform, the number of consumers using their software platform grows, which attracts more service providers to their ecosystem to serve those consumers. As a result, consumers benefit from more opportunities to save time and money, financial services firms benefit from increased operational efficiency, their partners benefit from increased distribution, and Blend generates additional revenue. This win-win-win-win model creates a powerful network effect that will continue to expand their serviceable addressable market over time.
Key elements of Blend’s partner ecosystem include (i) more than 45 technology partners, (ii) 29 data partners, (iii) more than 1,200 marketplace partners, and (iv) more than 900 settlement services partners.
To provide consumers with optimal end-to-end journeys through their software platform, they have created their own property and casualty insurance agency and their own title insurance agency. Consistent with this strategy, on March 12, 2021, they signed a definitive agreement to acquire Title365, a leading title insurance agency, from Mr. Cooper Group Inc. Title365 will be integrated with their platform, which enables financial services firms to automate title commitments and streamline communication with consumers and settlement teams. Title365 will also expand its partner ecosystem through its network of more than 7,000 notaries.
How does Blend make money?
Blend offers products through software-as-a-service agreements where fees are assessed based on completed transactions, such as a funded loan, new account opening, or closing transaction. Blend does not charge for abandoned applications or rejected applications, even though they cause them to incur costs related to these applications. Completed transaction fees are determined by the number and type of software platform components that are needed to support each product offering. Completed transaction fees are not impacted by the dollar size of transactions; however, Blend provides volume-based discounts to customers as they complete a higher volume of transactions on their software platform. Customers also have the opportunity to secure discounts by agreeing to contractual minimums. Blend is focused on driving revenue growth by enabling customers to more efficiently process and complete transactions.
Blend focuses on customer success to drive transaction volumes and opportunities for follow-on sales. Their products are sold through a direct sales force that continues to manage customer relationships on an ongoing basis post-sale. Customers often complete an initial deployment for one or two products and then add more products over time. The length of the sales cycle for Blend’s products generally declines for the second and subsequent products they sell to a financial services firm, highlighting their high customer satisfaction.
Customer Cohort Analysis
Blend’s success depends on increasing the volume of transactions that take place on their software platform. This occurs as they add new customers and complete more transactions with existing customers, including when their existing customers adopt additional products. As highlighted below, the aggregate revenue associated with customers acquired in any year has expanded since they first began using Blend.
These customer cohorts reflect the success of Blend’s “land and expand” approach to growing customer relationships.
Blend’s business model KPI’s
The following tables set forth their key business metrics for each of the five quarters in the period ended March 31, 2021:
Dollar-based net retention rate is used as a measure of customer churn, retention, and expansion of Blend’s products and services. As we can see from the above image this metric has grown at a rapid pace recently and is a reflection that their land and expand approach is working.
Total banking transactions are the completed transactions on their platform. As we can see from the above image, this metric is also growing at a rapid rate indicating that customers are using the platform more incrementally.
Ability to Increase Transaction Volume
Blend’s success-based business model results in their revenue growth as they increase transaction volume. They increase transaction volume by attracting new customers and growing their relationships with existing customers. They need to address the evolving needs of customers and increase their usage of Blend. Under Blend’s “Customer First” model, they focus on building successful long-term relationships and aligning revenue growth with value delivery. They invest in customers’ success, beginning with an initial onboarding and rollout plan for each customer. They also monitor utilization rates by customers on their software platform to manage expanded use over time. Their proven ability to grow transaction volume has been a function of product depth, technological excellence, and the ability of their sales and marketing teams to match their solutions with the strategic objectives of their customers.
How did Blend evolve its platform and products in its current state?
From the above image, we can see how Blend initially started out by building out products for the mortgage industry, then added products for consumer banking and homeownership. Later in 2020, they converted the entire product line into a platform that would enable them to build more products faster. While doing this they were able to achieve a simultaneous increase in the number of banking transactions powered by their platform. The image below gives an overview of this burst in banking transaction volume.
What is Blend’s Market Opportunity?
Blend competes in several large markets, including IT spend for banking software and commissions for home insurance policies, title insurance policies, and real estate transactions. Blend’s software platform can address a significant share of the massive total addressable market that these opportunities represent:
Gartner estimates that global enterprise IT spending for software within the banking industry was approximately $72.4 billion in 2020, which is expected to grow annually at approximately 13% through 2025.
The American Land Title Association estimates that, in the United States, more than $19.2 billion was spent on title insurance premiums in 2020.
IBISWorld estimates that, in the United States, more than $105.7 billion was spent on home insurance premiums in 2020.
Blend estimates that, in the United States, a total of $123.5 billion was spent on realtor commissions in 2020 based on data from the National Association of Realtors, EffectiveAgents.com, and the St. Louis Federal Reserve. According to the National Association of Realtors, the number of total existing-home sales in the United States for 2020 was 5.64 million and the average home sale price in 2020 was approximately $387,000, according to the St. Louis Federal Reserve. The average realtor commission rate for 2020, according to EffectiveAgents.com, was 5.656%. Blend’s estimate of realtor commission spend for 2020 was calculated by multiplying the number of total existing-home sales by the average home sale price and then multiplying that product by the average realtor commission rate.
Blend currently estimates the serviceable addressable market for Blend to be greater than $33 billion, based on the number of home financing and consumer banking transactions in the United States in 2020 multiplied by Blend’s average revenue per transaction in each respective subsector in which they are currently active. These subsectors include (i) core mortgage products, such as mortgage funded loans and digital closings, (ii) homebuying ecosystem products, such as home insurance, realty, title and settlement, and notarization, and (iii) consumer banking products, such as credit cards, vehicle loans, personal loans, and deposit accounts. Blend first estimated the size of each market subsector in which they are currently active by compiling a comprehensive set of market size data and identifying a low and high estimate for the number of transactions per subsector. They then multiplied the revenue per transaction for each of their currently available products by the low estimate number of transactions for the applicable subsector. They then added each of these subsector estimates together to arrive at an estimated serviceable addressable market figure of greater than $33 billion. Blend believes the serviceable addressable market for their offerings will continue to grow over time as they add more products to their software platform, grow their partner ecosystem, and expand internationally. They believe that their software platform is well-positioned to address the critical requirements of and capture a meaningful portion of these markets.
Note: A lot of information in this article is compiled from Blend’s website, SEC filings, and recent presentations/conferences.
We are at the end of Part 1 of the two parts that I have planned for the deep dive. By now you should have a good understanding of Blend’s Mission, Industry, Current Trends, Blends History, Products and services, How they make money, and Market Opportunity.
I am planning on finishing up Part 2 and posting it by next week.
If you love this article and my work, I urge you to subscribe and share.
Thanks, take care.
Modern Growth Investing