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spk04: Good day, and welcome to Pagaya's Q3 2022 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the call over to Jen C. John, Head of Investor Relations. Please go ahead.
spk03: Thank you, and good afternoon. Welcome to Pagaya's third quarter 2022 Earnings Conference Call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya, and Michael Kurlander, Chief Financial Officer. You can find the presentation that accompanies our prepared remarks, our earnings release, and a replay of today's webcast on the investor relations section of our website at investor.pagaya.com. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantages and strategy, macroeconomic conditions and outlook, future products and services, and future business and financial performance. Our actual results may differ from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and in our most recent Form 6K, as filed with the U.S. Securities and Exchange Commission, as well as our subsequent filings made with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. Additionally, non-GAAP financial measures will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and in the appendix to the earnings presentation, which are posted on our investor relations website. With that, let me turn the call over to Gal.
spk06: Thank you, Jensi. And thank you for all of you for joining us today to discuss our Sales Quotas 2022 results. So today's agenda, I will discuss financial and operational highlights from the third quarter and provide an update on how we continue to expand our network and financial infrastructure, before handing it over to our CFO, Mike Kullender, to discuss our financial results and 2022 outlook in more detail. We will then take your questions. In Q3, we continue to progress on our three key strategic objectives. expanding our network, raising capital, and strengthening our financial infrastructure. Starting with growing our network, we continue to scale existing partners while onboarding new partners and driving product expansion. Existing partners' monthly application flow grew by approximately 20% from January to September. This is a reflection of the values Pagaya Network can provide. In tough macro cycles, partners can continue to grow their businesses with limited incremental risk or capital requirements. Within our POS product, we are excited to announce that we have recently onboarded a top-tier point-of-sale provider to our network. This partnership is an important milestone in our continued expansion across the U.S. financial ecosystem. In a few minutes, we will share more details about expansion of our autoload products. Our dealership penetration through our auto partners now cover over 70% of all US franchise dealerships. Our ability to consistently raise capital allowed us to continue powering our network partners. Despite challenging market conditions, we raised over $2 billion in funding in the third quarter, a reflection of the strength of our funding model and investor relationships in both public and private capital markets. We continue to strengthen our infrastructure, Growing application flows through our network is improving our decision feedback loop. We have evaluated over 77 million applications since 2019 and 41 million applications in the first nine months of 2022, representing 120% growth versus the same period last year. We are pleased with our result this quarter. We delivered a $1.9 billion in network volume, which grew 26% versus the third quarter of 2021, Our total revenue and other income grew by 49%, reaching a record of $204 million. This continues our track record of delivering top-line growth every quarter since inception, reflecting ongoing expansion of existing partnerships and accelerated growth in our newer product, particularly credit card and auto. Our adjusted EBITDA in the third quarter was negative $5.2 million. reflecting lower margin in our newer program, financial market volatility, and ongoing investment in our future business. Mike will discuss our financial and outlook in more detail in a few minutes. Our company was founded with a mission to improve lives by partnering with financial services providers to make financial opportunity more accessible, leveraging our data-rich proprietary technology. Our business model is a B2B2C platform, sitting in the middle between partners and institutional investors. As a reminder, Pagaya is not a lender or a servicer. We enable our partners to provide enhanced access to financial products and services and facilitate the deployment of capital on behalf of investors. You can see how our network works in practice on slide seven. Partners join our network because of the power of our infrastructure. which converts partners' funnel more efficiently and effectively, thereby enabling them to improve access to financial products for their customers. Onboarding a partner to our network typically takes six to nine months. We spend hundreds of hours working with employees at all levels of the partners' organizations to ensure we are delivering the right level of service, seamless integration, and customized capabilities to meet the unique needs of each partner. This enables us to build significant trust and a deep knowledge of our partners' current and future priorities. As a reflection of this trust and value we can deliver since inception, no partner has left our network, demonstrating the stickiness of our network connectivity once established. After our network is integrated into our partner system, our proprietary technology, seamless customer experience, and flexible solution help partners achieve more satisfied customers. This, in turn, drives incremental revenue and reduced customer acquisition costs. At the same time, partners see higher brand affinity, which leads to increased lifetime value. Through our network connectivity to institutional investors on the other side, partners can grow their businesses with limited incremental capital, resulting in a higher return on investments. Today, our network serves 25-plus partners across more than 50 channels in five different products. Personal loan, auto, credit card, point of sale, and real estate. Our infrastructure is informed by over 16 million training data sets, analyzed by over 250 data scientists, and processes nearly $600 billion of application volume that flows through our network annually. As you see on the right side of the slide, our network has been growing exponentially with a total 77 million applications evaluated since 2019. At the root of our network is the infrastructure we are building to power the real economy, helping U.S. financial institutions grow their businesses. in turn enabling them to better serve their customers. Our network currently spends dozens of partners across multiple products across the country. This breadth of connectivity is critical to the power of our network, giving us enhanced insights on changing economy, demographic, and consumer behavior trends across the U.S. Every new partner we onboard, new channel we open, and existing partner we scale further add to this data set. making our models smarter and allowing us to better serve all partners and investors on our network. This is the essence of the Pagaya Flywheel and all comes back to our key asset, the network RAIS, which we have created that connect the partners, investors and consumers through our ecosystem. It is truly one of a kind since inception, nearly trillion dollars of application volume has been processed through our network. Supporting this infrastructure is a sophisticated, differentiated data engine that plugs into the lending origination systems of financial institutions across the U.S. Connecting the Pagaya infrastructure to each partner's own network, including dealerships, merchants, and consumers. Pagaya has more than 2,000 partners that sell customers in different regions, across products, and with different BOR profiles. These partners also offer their customers a range of services, including marketing origination, servicing and collections. Our decision layer is continuously collecting information from applications across partners' network, amounting to nearly $1 trillion in application volume process since our inception. That information, covering nearly 300 million unique customer consumer data points, feeds into our data layer, which engineers the data to continuously train our AI. In addition, our enrichment layer brings in real-time information from other sources, such as CRA, Census Bureau, and other public and private sources. This combination of high volume, velocity, and variety of data gives us a unique vantage point and trains our AI to be more proactive and accurate, as well as to rapidly adjust to evolving market conditions. Those insights are also helping optimize our partners' businesses in ways that will be difficult for them to achieve on their own. For example, our network can detect fraudulent activity quicker than any single partner. We can track instances of similar characteristics or behaviors across the flow of multiple channels. In fact, in 2021, we identified similar anomalies in application requests across platforms. While other non-network originators were impacted, we were able to notify those on our network, allowing them to act quickly. Institutional investors also benefit from joining our platform. Unlike other market players, we provide a one-stop shop for access to multiple financial originators, providing diverse exposure to consumer assets. Our network infrastructure enables us to help grow our partner business even in significant market dislocations. Last quarter, we showed you a case study of the partnership during and immediately after the COVID-19 pandemic. We grew from a 2% to a 33% of the partners' origination in the environment of shrinking credit boxes and tight liquidity, and continuing to grow to 37% in 2021, reflecting the stickiness of our value proposition. We are seeing the same trend among our partners today. we are now seeing accelerated demand from our partners in the current market dislocation as they tighten their own credit boxes. As you can see on the right-hand side of slide 14, we enabled a seven-point uplift to a partner's origination from the first quarter to the third quarter this year, further strengthening our network connectivity to our partner. The structure of our business model and our advanced AI capabilities enable us to efficiently navigate macroeconomical cycles and deliver consistent growth for both partners and investors. As a completely complementary solution to our partners, it is not surprising that application flow grows over time and even faster in tight credit markets as lenders tighten their credit boxes. Our partners rely on Pagaya even more to continue growing their businesses in these days. In the first nine months of 2022, we have seen application flow accelerate, growing at 120% versus the same period in 2021. At the same time, we are constantly adjusting our model real-time to optimize the risk-return balance on behalf of our investors. This ability to dynamically adapt production through cycle is only possible because of the infrastructure we have built. In the current environment, we are reacting quickly by lowering our conversion rate by 45% in September 2022 versus September 2021. As we shift to more resilient Bower profiles to optimize investor returns, we remain focused on standing by our partners, helping them grow their customer base and generate new revenue streams, and by our investors, consistently offering them unique opportunities for investment through cycles. Now, let me pivot to discuss the next stage of the expansion of our networks, auto and POS. Bagaya Auto Business was created in 2019. With the idea that the network rails we connected in the personal loan market could be replicated to help transform the auto financing market. As with our personal loan partners, we offer auto origination a fully complementary solution to enhance their ability to better serve dealerships. Over the last few years, we have been focused on onboarding and signing new auto partners across the country to the Pagaya network. Exclusively through our 10 plus auto partners, we have built our distribution into over 12,000 franchise dealerships, representing nearly 70% of all US franchise dealerships. However, while we have greatly expanded our presence, we are just beginning to capture the potential volume opportunity. We evaluated approximately $25 billion in auto loan applications in the third quarter, growing over 300% since the fourth quarter of 2020. Since we launched Auto in 2019, we have evaluated nearly $140 billion in net worth volume. The large auto lender we onboarded in the second quarter of this year has helped step change our auto growth. allowing us to penetrate thousands of dealerships across 29 states. Capital deployed monthly to purchase auto loans has doubled from January to September, and application flow through our network has accelerated. We remain focused on our strategy to scale our network, partner by partner, unlocking unique distribution channels, in this case dealerships, through our embedded technology. This is the framework of how we think about scaling all of our product offerings. Our network connectivity enables us to replicate the value we provide to investors in our personal loan products across other products too. On slide 19, you can see the performance of Pagaya auto production versus a market level benchmark. The chart details 30 plus day pass due delinquent rate over time for loans at 10 months on book. Our AI infrastructure enables lower volatility with better relative performance versus traditional underwriting methods. even as we have rapidly scaled the product. Leveraging our experience in personal loan and auto, we are now expanding into point-of-sale markets with a similar go-to-market strategy. Our goal is to partner with leading POS payments providers to help them increase conversion rates at the point of sale, helping grow the retail partners' businesses. We are in the early days of scaling our point-of-sale penetration, but believe our network infrastructure and connectivity can support even faster role of these products. It is estimated that there are over $50 billion of point-of-sale sales in the U.S. annually, with rapid expected growth as the digitalization of payment continues to accelerate. Leveraging our installment loan experience, we can provide value to our partners across numerous in-market offerings and penetrate new merchants' relationships through our partners. We are excited to have onboarded a top-tier point-of-sale platform. This represents a key milestone to accelerate our point-of-sale product, powering a national merchant community. This lender has a fast-growing U.S. presence. serving approximately 30 million U.S. consumers across 10,000 U.S. retails. This represents a meaningful step change in our pace of growth. Onboarding a leading lender as one of our first partners in point of sale is a clear example of how the power of our infrastructures grow over time. We are excited to work closely with this partner to expand their U.S. businesses while helping them to build a new stream of services and performance data to further enhance their lending capabilities. Let me now hand it over to Mike, who will discuss our financials and 2022 outlook in more detail. Mike?
spk01: Thank you, Gal. The growth in our network is driving our momentum, resulting in a record quarter of total revenue. Network volume and revenue in the first nine months of the year have now surpassed the full year 2021 levels. This growth has predominantly come from existing partners, and we expect medium-term growth to be further enhanced by new partners and programs that are in our pipeline. As we've mentioned, our funding model is unique in that we raise cash upfront from investors prior to facilitating the acquisition of assets from our partners. This creates two distinct advantages over the traditional approach. First, by securing capital, we have an ability to continue operating through very near-term market dislocations. And second, we are locking in the cost of funding, which helps us price risk efficiently and optimize investor returns. We appreciate the trust our investors have had in us, which has allowed us to raise capital through market cycles, with over $13 billion raised over the last three years. Of course, we are sensitive to the uncertain world around us and are continuously focused on growing and further growing our investor base. Going into more detail of 3Q, we raised funding across both ABS markets and our privately managed funds. Within ABS, we raised approximately $1.7 billion this quarter despite an increasingly challenging market environment, executing four benchmark deals across our top three products, including our first ever rated SFR transaction, which received a AAA rating from both Moody's and DBRS. Our investors get the benefit not only of yield and short duration, but specific to Pagaya deals, investors gain exposure to assets originated by multiple lending platforms, providing diversification all in one transaction. In the fourth quarter, we just recently closed on another benchmark deal of $700 million in this very difficult market environment. Turning to our balance sheet and liquidity. Due to the pre-funded vehicles, we do not currently utilize our balance sheet for loans, and we hold over a third of our balance sheet in cash with no corporate debt, all backstopped by an undrawn revolving credit facility. Outside of cash, our largest asset on the balance sheet is investments in loans and securities, almost entirely related to regulatory risk retention security interests in the ABS transactions that we sponsor. Our net economic exposure after accounting for third-party interests is less than $220 million and only a small fraction of the network volume that we generate, demonstrating the efficiency of our business model. I'd also note that over 50% of this exposure is in debt securities. Now let me discuss third quarter results and our 2022 outlook. This quarter, we grew network volume by 26% and revenue from fees by 45% over the third quarter of 2021, primarily due to continued expansion of existing partnerships and faster growth in our newer products, particularly auto and credit card. Our take rate was at the higher end of our historic range at 9.6%, driven by better economics on personal loans, our most mature product. Production costs rose from 5.4% of network volume in the third quarter of 2021 to 6.7% in the third quarter of 2022, primarily due to newer partner programs and growth in our newer products, particularly auto, as we expand our dealership footprint through our partners. We reported adjusted EBITDA of negative $5 million, reflecting continued investment in our platform and a weaker macro environment. Finally, I'd like to give some context on our updated 2022 outlook. We are maintaining the guidance ranges we provided in our second quarter results on network volume, total revenue, and adjusted EBITDA. In light of the ongoing uncertainty in the macroeconomic environment, we are guiding to the low end of the respective range for both network volume and adjusted EBITDA. This is a reflection of three key factors. First, Our business and network continue to grow at a rapid pace. At the same time, the pace at which macro conditions are evolving has changed significantly in the past few months. Remember, our network volume is a function of both application flow and the conversion rate that we apply to this flow. While application flow continues to grow in line with our expectations, we have been intentionally lowering our conversion rate to shift to a more resilient borrower demographic, thereby impacting total network volume. I would also note that the two partners we recently onboarded will take time to ramp and will be more meaningful to our network volume in 2023. Secondly, and unsurprisingly, the current dislocation in the financial markets impacts the level to which Pagaya can monetize application flow from our partners, affecting our profitability in the short term. We continue to see significant volatility in financial markets, but over time, we expect asset pricing will stabilize with cost of capital certainty. Lastly, our operating expenses remain elevated, reflecting continued discretionary investments in our infrastructure, technology, and people. After a large growth in overhead necessary to become bank and public company ready, the pace of growth slowed in the third quarter as we begin to reach scalability and prioritize our investments against our long-term strategic ambitions, especially in light of the current operating environment.
spk00: With that, let me hand it back to the operator for Q&A, after which Gal will make a few brief closing remarks.
spk04: Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. And if you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star 1 now if you have a question. And your first question will be from Eugene Sumini at Moffett Nathanson. Please go ahead.
spk05: All right. Well, thank you very much, Guy. Good to connect with you. I wanted to start maybe with a question on the credit quality of the loans that have been originated through your platform, obviously not on your balance sheet, but with your with your asset investors. So helpful to see the chart again on the auto loan showing that you're ahead of the benchmark, but can you comment a bit on the other asset classes? Last time you shared kind of similar chart on the personal loans, but would be helpful to hear some comments on the quality of the credit book across the portfolio.
spk07: Sure, Eugene. Thank you for your question. It's got him.
spk06: So to your question, as we share the auto loans part, in the other asset class we see the same trend. We are seeing stabilizing parts that are coming in line with what we expect, and credit is very much stabilizing as we expect. We saw a function change in June, where liquidity was really much driven outside of the market, and drove the ability for players like us to provide a much better outcome for our partners, but at the same time, provide much better return for our investors. Internally, we look at ourselves from a relative value perspective, and we see that our ability to outperform what we think is the benchmark is substantial, continued, and coming as a few hundred basis points over a long period of time. Now, all of that is being driven by the 45% reduction that we did in our conversion rates. That's the way we moderate and we control the investor return and making sure we are being able to deliver what is the expectation given the higher financial volatility in the market.
spk05: Got it. Got it. Okay. That's helpful. Thank you. Then maybe another question is on the more strategic level about your growth of your network. It was very helpful to hear comments on the expansion of the auto business and the new relationships with point of sale players. There was not as much mentioned this time of your big bank initiative with large bank initiative, which you talked about a lot last time. So I'm just curious on the progress of that, or is that part of the kind of auto loan expansion? I mean, big banks are the ones you are, you know, are your auto loan partners. Can you update us on that?
spk06: So, Eugene, you are correct. The auto loan is definitely driven by the addition of the bank, and we see much more pipeline behind that. So as you can imagine, while onboarding a major auto loan partner, there are many others that are looking at that and starting to become realization of that. In the third quarter, we were focusing a lot on onboarding and expanding what we did with a big bank on auto, which is a step function change for us. And as we, while we speak, we are continuing to onboard more and more states out of that through the partner and many dealerships to them. And as I said, from a pipeline perspective, we are in a discussion with, I would say, almost all of the top 25 banks in different stages. and we are in different type of integration or discussion to integration with many of them. So the focus remains very much on top of that. Banks in the U.S. or major banks in the U.S., I should have said, are the main focus of the team, and we feel from a pipeline perspective that we have all what is needed to execute on that in different levels.
spk05: Got it. Okay. Okay. Well, thank you. I'll leave it there.
spk04: Thank you. Next question will be from Joseph Raffi at Canaccord. Please go ahead.
spk02: Hi, good afternoon, and thanks for taking my questions. I know, Michael, I heard you say that you've already closed another funding vehicle here in Q4, but I just thought I'd just check in on real-time appetite on the investor side beyond closing that deal. you know, relative to the macro.
spk07: And then I'll have a follow-up. Hey, thanks so much for the question.
spk01: You're right. We did just price a deal earlier this week for $700 million. That brought our year-to-date, or excuse me, quarter-to-date of funding raised to $1 billion. So what we're seeing is Clearly, cost of funding has gone up, but the market is open. And I think what we're seeing now is a differentiation as investors look for issuers to come to market with products that those investors are looking for. And it really helps to have a pre-funded model, which, again, really provides a benefit for us. of not only certainty of funding, but for the investor side, they're getting one-stop shopping of multiple platforms in one deal. And so we've seen a really positive reception for that even in today's market. The other thing that you're finding is we have a number of strategic capital partners. And so in the real-time market, that is really playing out favorably for us in the sense that across sovereign wealth funds, pension funds, and large asset managers, We've built that track record where those investors know what they're getting and they've continued to participate. And so as we sit here today, we're very pleased in the fact that we were able to do those two deals even in this market environment.
spk02: Got it. And then I'm just a little curious why take rates higher in personal. I know you mentioned it's your most mature line of business. Is it just more operating leverage because you have a cost structure there that's different, or is there something else going on as to why the take rate there is higher than some of the other loan classes?
spk01: Yeah, Joe, as it relates to take rates, just thinking about our revenue side, you're right in that personal loans are our most mature product. The partners that we have been engaged with have been partners of ours now for multiple years. And one of the things that you saw in the presentation is, over the recent time period as credit boxes have tightened up, given the dislocation in the macro, we've been able to provide more value to those partners. We've been able to take more of the volume that they provide. And in doing that, we've been able to generate better economics as those partners have grown. And so that's really more apparent in the personal loan space because the volume in that side is bigger, given that we've had the partner relationships for longer.
spk02: I see. Got it. So would it be fair to say that if some of your other verticals kind of mature a little bit more, there's a possibility of that same phenomenon to occur there too, or is it more related to the macro and where we are right now?
spk01: You hit it, Joe. That's exactly the way that we envision the business, and it's 100% the way that we think this will play out. Got it.
spk02: And then maybe I'll just sneak one more in on auto. Just wondering, I mean, it's a great distribution channel that you've got there. Just wondering, at that dealership level, are they going to be running various loan platforms where you may potentially be still competing with others, or how is that going to kind of kind of unfold at the dealer level on a loan application. Thanks a lot, guys.
spk06: Hi, Joe. It's Gal here. So just a quick reminder, when we are thinking about the auto and the dealerships, we're actually partnering up with an auto lenders. So in any case, it will not be a Pagaya per se, and it will not be something that they will see or we will be with others. We are mainly an enabler. So, think about it that the world is not changing from a consumer perspective, from a dealership perspective. Most probably, they don't even know it's Pagaya behind, but we connected the API through the different lenders, and the distribution of that auto lenders has a distribution of dealerships, and we're embedded through them, through their brand, through their name, and actually taking these takeaways. So from a consumer and a dealership, nothing is changing, and we are riding with them and helping them to get to the scale that you see on the presentation, which is rather impressive.
spk02: Makes sense. Thanks, Kyle.
spk04: Thank you. Next question will be from David Scharf at JMP Securities. Please go ahead.
spk09: Good afternoon. Thanks for taking my questions as well. You know, I also wanted to dig in a little bit more into the newer asset classes and network expansion. You know, starting with auto, you know, the list of lenders you're working with, you know, that are included in your securitizations, you know, is a very healthy kind of who's who of some leading subprime lenders, you know, the Westlakes and CPS and Flagship. I'm wondering, as we think about the pipeline Are there any OEM captives that you've been in discussions with and or some of the larger bank subprime lenders like a Santander or Wells Chase?
spk07: Hi, David.
spk06: I will take this one. So thank you for the nice comments. And we definitely feel that our present in the auto space is healthy and good. As we're thinking about the pipeline and the next steps, we are putting our efforts more towards the big banks. There are certain big banks that are holding major part of the U.S. of the U.S. distribution, and we are very natural for us, given all the things that we build and a lot of the investments that we have done, to be focusing on these things. So not to say that OEMs are not relevant or not an opportunity. We're definitely going to go after them, but from a short-term perspective or from a pipeline perspective, we are more advanced and focused on the big banks in the U.S.
spk09: Got it, got it. You know, and just referencing, just so I'm clear, based on the answer to the prior question on the transaction flow, I assume an auto application still, you know, gets sent by a dealer over dealer track or route one to the lender who happens to be your client, and you're just doing the underwriting on the back end. It's completely invisible even to the dealer as well, correct?
spk06: 100% correct. You got it right.
spk09: Got it, got it. Hey, shifting to point of sale, once again, in this case, just trying to get a better understanding of what type of loan you're actually underwriting. You use the term platform when describing the new partner in the U.S., you know, are we talking about a traditional second look point of sale lender? Or are you, or by the use of the term platform, are you referencing, for example, a large, you know, buy now, pay later provider or a network like a charge after?
spk06: Yeah, sure. So let me start with connecting the dots here first, and then I will comment on your second half of the question. So when we think about the underwriting, the funding, and all the things that we do here in Pagaya, we are thinking from where is the problem that we are solving and what is the situation at the end that the consumer is facing that we are trying to support. And we are going to that through the partner that has the most amount of access to that. So as you said, with the dealerships, that's very clear that the auto lenders are our clients and that's who we partner with and we work with and no one else knows about us. And the same thing is happening on actually the POS, where there is a merchant at the end, but actually behind that there is what we refer here to a major BNPL player that has a very wide range of presence in the U.S., and a lot of merchants that they are working with. So we are coming, again, behind the POS provider, behind the big BNPL player, and we are helping them provide that type of credit for their consumers. So, again, think about us as an enabler in these both cases. And the credit we are providing, we are connecting to one very big BNPL partner, and we have an exposure to, you know, millions of U.S. customers, and thousands of U.S. retails through that.
spk09: Got it. Understood. And I only ask because the POS financing market ever since BNPL became such a visible product, the lines blur between traditional POS lenders and BNPL, and obviously there's an awful lot of runway ahead of you with other lenders as well. Hey, lastly, sort of connecting all of those dots about who your actual partners are on auto and POS, maybe just an overarching strategic question. Clearly, all the dislocations in the capital markets lately have kind of shown a light on the importance of having stable partners and access to capital and certainly so-called fintechs have had maybe a more volatile experience accessing the capital markets than were traditional financial institutions. If you had to guess what your mix of loan volume will look like in three years with respect to how much of it would be generated by what we would think of as traditional banks, financial institutions, versus how much would be generated by the bulk of your current client base, which you deem to be fintechs. When does that kind of mix ultimately transition to where it's closer to 50-50, do you think? And it would seem like auto gets you there quickly as well.
spk06: So I think from the strategic question, it's an evolving and an interesting one. First of all, when you think about it, let's lay out the asset class or the markets we're actually working, right? So we have like a personal loan, POS, credit cards, and auto loans. Let's put this far aside. When you're thinking about that, we are trying to be as much as possible nimble and relevant to the market we are operating in. So when we started on the personal loan, the personal loan is really driven mostly by the more, I would say, tech-enabled type of partners, right? So if you think about it, I don't have exactly the numbers in front of my head, but you're speaking about a very big portion of the full market of the personal loan that is being driven by so-called the fintech players. On the auto loans, because it's very much driven by the dealership experience and the fact that you are actually going to a place to pick your car or to choose your car, I think the nature of that will still remain very traditional for many more years. And as we think about there, we almost don't see any partners that are coming from the more quality tech enabled way, and most of them are more traditional, both on the banks and on the non-bank type of auto lenders. POS is a combination of two. POS, like you will find that banks are getting into, and we have a very interesting discussion regarding that and the ability to operate that because it's taking a little bit of more tech forward, but it's like a place where Banks don't want to give up on that and want to be a very major player because of the credit card and they want to make sure they're going to stay relevant. And we are supporting in that. But in the same time, you see the BNPL, which is growing very massively and is growing more and more over here. So the right answer for that is really how the market will evolve. We as an enabler and the infrastructure of the network that we are building is really to provide a faster growth and and bigger partner pay trades in this part. And we will play alongside the markets as they are involved. And obviously that creates for us a very high diversity of offering, which create a much more stability and create uniqueness of the Pagaya network as part of that, which is a compromise of all of that. Mike, you want to add to that maybe?
spk01: Yeah, I guess first off, I just appreciate you calling out the thought because it's exactly the way we think about it, which is what's most important are the partner relationships, funding, and then risk management. And that's really what we were built on. So you're exactly right in thinking about it that way. Just to put maybe some near-term context onto what Gal said, our network volume this year, when you look at the outlook that we provided, that's largely all of the growth from this year is largely driven by existing partners. And so when you think about even the large banks that we've onboarded this year, which took between six to nine months to get up and running, really the impact on that from a network volume standpoint won't come until next year. And so just think about that lead time as you think about the growth in our bank strategy as we begin to onboard more partners That fuels really the next leg up of our network volume growth as we move up from the, you know, in the $7 billion plus range that we have for this year into the coming 2023, 2024.
spk09: Understood. That's very helpful. Thank you. And listen, congratulations on, you know, just all the... Well, the success in these kind of challenging times sounds like you haven't taken your eye off the ball in terms of executing on the pipeline, even though the capital markets always have their volatility here and there.
spk06: We appreciate that, David.
spk04: Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. And your next question will be from Vincent Kentik at Stevens. Please go ahead.
spk08: uh thanks for taking my questions uh first one wanted to talk about the um the conservatism in your underwriting so uh you know it's interesting uh the approvals down 45 percent um in September year over year but um you know the implied guidance for uh fourth quarter it's only down a little bit quarter recorder uh plus your I think the implied take rate is still very strong at 9.2 percent so if maybe you could talk about the strength of your underwriting, what's assumed in the, you know, the applications and updated underwriting. And, you know, the fourth quarter with, you know, being conservative, is it a good jumping off point when we think about the growth in volumes that we should be thinking about for 2023?
spk07: Thank you. Thanks very much, Vince.
spk01: Appreciate the question. Let me start at the top and then maybe Gal will want to add. Really, we're encouraged and we continue to be encouraged by the level of application flow. So with a greater pool of applications, we can be more selective to drive investor returns. And that's really what we're focused on. So you're right in pointing out that we've been tightening in the conversion. By seeing a greater pool of applications, we can continue that while maintaining or even growing network volume. And we can actually then drive through the models a higher expected return for our investors. And so there's a lot that goes into that in terms of the way that the models are built. But just think about it from a high level that by seeing a greater pool of applications, we can be more selective to actually generate a better output for our investors. Anything you would add to that, Carl?
spk06: Yeah, I think from that perspective, it's like trying to create really an ecosystem where you're trying to be creative for all. So we are creative to the investors by pushing the conversion lower and higher return, but at the same time standing next to our partners and becoming a bigger part of their production during these days. So it's like it's a balancing act between knowing to find the right place in between all of these relationships, and that's really the thing. of the ecosystem, and that's what brings us to believe that we are building a win-win-win outcome for all of the participants that are working with us.
spk08: Okay, that's very helpful. Thank you. And second question, kind of following up on the funding questions, but if you could update us on how your investors are thinking and what they're sensitive to. I guess today we saw spreads tighten just broadly and equities go up because... Inflation started to come down maybe a little bit. I'm just wondering maybe if you could talk about what your investors are focused on, what they're sensitive to, and the appetite for growth from here. Thank you.
spk06: So I think from an investor perspective, the thing that our investors care about the most is the stability and the consistency. the one thing that we built rather early on, and it's important to say, it's rather unique for a company in our size, in our stage to have that, is the diversification and the variety. And that gives us the ability to become first the one-stop shop of all these players, and in the same time, to have a very deep discussion and understanding of what drives the different parts. So, like, the ability to drive... Stability of that type of stuff and to enable access to from the public markets to the private market in a very I would say unique Unique way is really the thing that driving us and brings a lot of efficiency to that to that model so like we are really in early days of being able to open that amount of pools of capital into the real economy as we call them through our infrastructure network and and we see that the things that are really most interesting to our investors is to continue to deploy capital in a very stable and predictive way. So we feel very good about the fact that we can enable them to do that.
spk01: I would maybe just add one point to that. I would just add one point, which is, When markets are very volatile, one thing that is very helpful as a part of our model is that we're locking in the cost of capital before we're actually sourcing those loans. And so when you have that known cost of capital in the deal, then as we go out and, again, targeting those investor returns, it allows us to do that a little bit easier than if you're having the loans first and then looking for funding in a very volatile rate environment.
spk07: Very helpful. Thanks very much.
spk04: Thank you. Now back to Gal.
spk06: To close, I would like to say how proud I am of our team. We remain focused on our mission and expansion of our network infrastructure, enabling us to deliver results for both our partners and investors. Thank you for joining us today, and we're looking forward to continue partnering with you in the future.
spk04: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
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