00:10:24 · Terry O'Neil, Oliver Smith
[00:10:24] S1: Yeah, every time we look at a consumer, every time we underwrite a consumer, we're able to build additional pieces of information that help us connect better to the customer and make better credit decisions. It helped it also helps us with our partners build a competitive moat around their consumers, right? The more approvals that we can book, the more approvals that we can bring on responsibly helps us to bring more approvals through for our banking partners and even our fintech partners. I think the other piece that it does when you think about that volume, it helps us bring stability to the equation. It helps us bring more predictability to the flow that we're gonna come through. So aggregating those balances gives us more ability to open up capital so that we can fund those loans and move them from our partner's balance sheet into institutional investors. It's how we sort of aggregate everything together to bring, you know, the network effect of what Pagaya brings, right? Not just the decision to approve a customer, but also how we move that loan off of our partner's books into capital markets. Um, that scale helps us to do that very efficiently. [00:11:29] S0: And because you're working across all of those partners with different customer bases, geographic, your regional, like you get such a broad understanding of the market versus a bank that may have a slightly more narrow view on what they say yes and no to. [00:11:43] S1: Yeah. And I think the other thing that we see is the health of the consumer. [00:11:46] S0: Yeah.
00:11:46 · Oliver Smith, Terry O'Neil, S4
[00:11:46] S0: Yeah. [00:11:46] S1: Because we also see the servicing data, we not only see the demand for loans and how that's ebbing and flowing with the economy, we also see early signs of stress in the consumer. Yeah. Right. So we're able to look at first payment defaults or early day delinquencies across a much broader network and a vast network of consumers. So it gives us very specific insights into the health of the consumer. [00:12:08] S0: So if you see a part of your book going in one direction, you can take insights from that. Yeah, interesting. Um, what is what is it structurally different for traditional banks? Why is it structurally different for traditional banks to underwrite more near prime and subprime customers on their own balance sheets? I guess the question here is why aren't they doing it? Why do they need Pagaya to sort of help? How do how does Pagaya's sort of institutional capital network change that equation? [00:12:33] S1: I think it comes down to a couple of different things. As a former banker, um, I can say that most banks recognize there are risk appetite frameworks that you operate within, right? We always operated within a risk appetite framework that looked at target loss rates and what loss rate you were willing to bear on a book of business. Or you have very specific rules around how deep you'll go on a FICO con. [00:12:58] S4: Yeah.
00:12:58 · S4, Terry O'Neil, S2
[00:12:58] S4: Yeah. [00:12:58] S1: Um, so those create natural limits. And if you were, for instance, trying to, in a more traditional institution, expand your underwriting to say, I'm gonna book less than 640 or less than 620, yeah, the couple of things that you very you first have to figure out is how to move that through your independent risk organization and your risk organization so that you can comfortably say, I'm willing to take a loss rate above X on certain parts of my business. That's traditionally been difficult. Yeah. When you bring in a partner like Pagaya, because we're taking that risk off of your books, you're not adjusting your risk appetite framework. You can still comfortably operate within your risk appetite framework because the risk doesn't sit on your balance sheet. I think the second piece of the equation that would really need to be thought through in addition to adjusting the risk appetite is how you think about building scale in your loan book so that you can create the appetite on the on the investor side to bring the stability and the scale and the volume through. So there are two pieces of the equation that you would knit together, um, which is not impossible, but it would take much longer, right? And it would be a big change organizationally. Whereas when you bring a partner like Pagaya in, we bring those solutions and that scale to you without you really having to change your risk appetite. [00:14:22] S2: Interesting. Interesting.
00:14:22 · S2, Oliver Smith, Terry O'Neil
[00:14:22] S2: Interesting. Interesting. [00:14:24] S0: Um so what happens to your what happens to that funding model when the conditions change in the market, you know, when things get worse or when investor appetite changes. Um, you know, we've been in a certain economy for the last few years. It might not always be that way. It certainly has changed over the last few years. So what what happens when things change? [00:14:45] S1: I think what we have been focused on is ensuring that we have longer-term relationships with our investors so that we have not just scale, but also stability. And the majority of our relationship have a longer-term view on them. The other thing that I think is important about the network is the number of investing partners that we have in the Pagaya network. We have more than 150 investors. So it gives us flexibility and optionality so that we're better able to manage through those cycles. Our ultimate goal is to make sure that we bring stability to our partners. And that stability comes down into the not only the who we're underwriting, but that we're not having to pull back and ebb and flow if we see changes in the market.
00:14:45 · Terry O'Neil, Oliver Smith
[00:14:45] S1: I think what we have been focused on is ensuring that we have longer-term relationships with our investors so that we have not just scale, but also stability. And the majority of our relationship have a longer-term view on them. The other thing that I think is important about the network is the number of investing partners that we have in the Pagaya network. We have more than 150 investors. So it gives us flexibility and optionality so that we're better able to manage through those cycles. Our ultimate goal is to make sure that we bring stability to our partners. And that stability comes down into the not only the who we're underwriting, but that we're not having to pull back and ebb and flow if we see changes in the market. [00:15:27] S0: Yeah. One thing I always think about when I with the Pagaya model is um, you know, the bank retains the customer relationship. I think that is that is obviously so key to the solution. Um, but if if Pagaya helps a bank make an offer that it might otherwise not make, that customer relationship stays with the bank, but the c the credit risk that's comes to Pagaya. Uh so how does the bank benefit commercially from this? What what's the kind of model for the bank? What's the advantage for them?
00:15:27 · Oliver Smith, Terry O'Neil, S3
[00:15:27] S0: Yeah. One thing I always think about when I with the Pagaya model is um, you know, the bank retains the customer relationship. I think that is that is obviously so key to the solution. Um, but if if Pagaya helps a bank make an offer that it might otherwise not make, that customer relationship stays with the bank, but the c the credit risk that's comes to Pagaya. Uh so how does the bank benefit commercially from this? What what's the kind of model for the bank? What's the advantage for them? [00:15:58] S1: Yeah, I think first and foremost it's customer lifetime value because you're booking that loan. Yeah. Um, we're also buying that asset from our banking partners. So there's an opportunity for them to monetize uh accounts, applications that they would otherwise decline. Yeah. And then because the bank retains the servicing, we're paying a servicing fee to our banking partners. So they can think about, you know, traditionally um banks and lenders think about interest-based revenue. Yeah. This looks more like fee-based revenue because you're collecting a fee on the asset and a fee on the servicing. [00:16:33] S3: Yeah.