Long-time mortgage tech player Blend Labs (NYSE: BLND) went public on Friday, opening 11% over its IPO price of $18 – the high end of the range. Blend Labs set out to raise $360 million against a roughly $4 billion valuation. To date, there’s been no shortage of negative commentary from market participants – investors, traders – as the company, founded in 2012, has never turned a profit. The company states in its S-1 that profitability may be a long way off: “We expect our costs will increase over time and our expenses to continue as we expect to invest significant additional funds towards growing our business and operating as a public company.” And yet, the IPO still generated a bevy of headlines because Blend Labs is a fintech and a pure-play open banking asset.
But how does Blend Labs stack up to some of 2021’s other high-profile, fintech IPOs, like those of Marqeta, Affirm, Coinbase, and eToro? The aforementioned companies have all come to the market with unique, arguably disruptive, technologies and/or, in most cases, first-mover advantages. Does Blend Labs belong to this elite group of newly minted, publicly traded fintechs? I don’t think so, and here’s why…
Moat
Is Blend Labs’ technology so unique, and its platform so ubiquitous, that it has created an economic moat precluding competitors from capturing market share? Hardly.
Blend Labs, by its own admission, is primarily a consumer lending technology platform with a historical focus on mortgages and home equity lines. The basic technology automates the loan application process and leverages an open banking – consumer data sharing – architecture to expedite underwriting and shorten closing times. There’s absolutely no question that Blend’ technology does this effectively as evidenced by the following data points:
- 1.4 million transactions completed in 2020, up 190% over 2019
- 291 FI’s and private lenders white labeling Blend’s platform
- $1.4T in loan volume processed in 2020, more than double 2019
- Client roster: Wells Fargo, BMO Harris, US Bank, M&T Bank and Truist
But Blend’s technology isn’t ostensibly any different from a host of other mortgage techs in the market that solve for the same issue – BeSmartee, Roostify, and Cloudvirga, to name a few. As such, Blend Labs’ core technology isn’t sufficiently differentiated from its mortgage tech peers, and by extension, has no economic moat to protect it from competitive forces.
Network Effects
Much has been made about Blend Labs’s ecosystem of technology and data partners, and the unique network effect that arises, to its economic benefit. No one has been a greater exponent for the network effect value proposition than Blend Labs itself, which claims that, “as consumers use our software platform to apply for financial services products, they can shop for realtors, insurance carriers, and other services providers through integrated marketplaces that are introduced at the precise moment these third parties are needed. As more consumers use our software platform, we are able to attract a broader range of ecosystem partners, which allows us to deliver more value to and attract more financial services firms as customers. This creates a powerful network effect and differentiator for our business.”
One of Blend’s most esteemed and high-profile investors, Tiger Global Management, doubled down on this value proposition in a press release subsequent to its Series G, $300M co-investment. John Curtius, Partner at Tiger Global Management, said “Today’s consumers expect Amazon-like experiences across the board, and Blend is well-positioned to help financial institutions achieve that.” The allusion to Amazon is telling – it’s a technology platform in the truest sense, and the perfect example of a company on the receiving end of a powerful network effect.
But Blend Labs isn’t Amazon. And while it’s likely that Blend Labs will benefit from a network effect, it won’t be a “powerful” one.
The concept of the network effect has evolved. It’s no longer the case that by virtue of additional users on a platform, greater value is automatically created: e.g. Amazon, Facebook, Uber. Moreover, the assumption that the value created increases exponentially is not a given. I’d refer readers to an insightful piece written by D’Arcy Coolican and Li Jin at Andreesen Horowitz to learn why. In the case of Blend Labs, I would argue that the upside of the highly touted network effect is limited by virtue of its “commoditized supply”: realtors and insurance companies are viewed by the consumer as interchangeable (but for price perhaps), and as such, the value contribution to the network is limited. The most powerful network effect, and therefore the most valuable one, is an emergent attribute of a network where the service providers are varied, differentiated, and curated by the platform. The platform must match the most specific wants and needs of the consumer, and that’s simply not the network effect characteristic of Blend Labs.
In sum, Blend Labs just doesn’t have the technology, platform, and clearly, first mover advantage, to be considered a peer to the rest of 2021’s other high-flying, elite fintechs or their respective IPOs.
But the story isn’t all bad. Blend Labs and its IPO have a lot going for themselves. The difference being that positive drivers have less to do with Blend’s innate technology capabilities, and much more to do with its operational savvy and timing.
Blend Labs has done an excellent job of packaging its traditional, core offerings – automated mortgage application processing and data aggregation – with additional, digital only, consumer finance products and services. This in turn amplifies Blend’s value proposition to its customers, many of which are banks, credit unions and other financial institutions (“FI”)s: the packaging-up of digital offerings, or “bundling”, creates greater value to the FIs’ end-users: consumers. By providing auto loans, personal loans, home equity loans, credit card issuance, and demand deposit accounts, Blend Labs offers “one stop shopping” to legacy FIs, and smaller institutions which can’t afford to build or acquire the same, necessary technology for a comprehensive, consumer digital banking experience. This provides a tremendous amount of value to FIs which need to keep up with their customers’ demand for more open, efficient, and cost-effective banking. And this dovetails into perhaps what is the most significant positive driver of Blend Labs immediate future: timing.
The pandemic has been catastrophic for some industries and a boon to others. In Blend Labs’ case, it’s the latter. In terms of scope and speed, the breathtaking movement of consumer conducted commerce from the physical world to the virtual is historic. The movement also appears to be permanent. Coinciding with this phenomenon is the spread of open banking usage and investment. Put them together and Blend Labs is ideally positioned to avail itself of a perfect storm of more widely used and enhanced digital experiences, and financial data sharing. Put simply, Blend Labs has considerable runway for growth. Though it’s hard to parse out the exact contributions of these qualitative factors, there’s no way to properly interpret Blend’s 2019/2020 YOY numbers (see above) without conceding that these pandemic-induced trends catalyzed Blend’s business, starting in 2020 and continuing today.
For the products and services that Blend does offer, the timing couldn’t be better.
So, does Blend Labs deserve a seat at the table with the other aforementioned, 2021 fintech high-flyers?
Certainly not. But despite lacking its cohorts in disruptive technologies, economic moats, first mover advantages, and optimal network effects, the suite of products and services Blend Labs does offer allows for legacy, and smaller FIs, scrambling to catch up to consumer demand for more user-friendly, open, and cost-efficient digital banking experiences, to catch up.
Blend Labs is extremely well positioned for high-quality, short to mid-term growth.
– Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC
