Should we get started? All right, cool.
Am I on? Yeah.
You're on. All right. Joining us for our next discussion is Jon Dobres. He's the CFO of Pagaya. Jon became CFO in June of this year after previously serving as Chief Strategy Officer. He joined Pagaya in 2021 to lead strategy and corporate development, following senior investment roles at Hudson Executive Capital and a number of other places. Jon, thank you for joining us today.
Thanks for having us.
Absolutely. Pagaya's business model gives the company access to a uniquely wide breadth of information across the consumer finance landscape. I am curious if you could just start by talking about the recent trends that you are seeing in the consumer finance space. What are your lending and capital partners leaning into and most focused on, and what you guys are doing to serve their needs?
Yeah. We have a really unique vantage point on the full spectrum, from the lending partner side of our network to the investor side. Today, we have more than 35 lending partners, all consumer credit, obviously, personal loans, auto, and point of sale. Ally, US Bank, most recently Citizens, which is a big win for us. On the other side of that network are some of the largest, most sophisticated capital providers in the market. Very good view on both. As you know, that network, over the last 12 months, has produced run rate of about $14 billion of funded loans. We are, even in this funding rate environment, we are $200 million run rate of GAAP net income. Really been executing very strongly over the last couple of years.
What we really focus on are kind of the mission-critical needs of the lending partners, and that kind of serves the whole network. From like a thematic point of view, on the personal loan side today, and Citizens is a great example of this, there is almost been a separation between banks' balance sheet strategies and their product strategies.
Citizens, just continuing that example, got out of the personal loan business five years ago. What they came to the realization, and we see this across a lot of the banks in our pipeline, is that to retain deposits and to gain new deposits, they need to have a compelling suite of products. That might not always align with their balance sheet. That has provided a real opportunity for us to provide that product for them, and then for them, other than monetizing, which is also happening-
But for them, what that does is it makes their existing deposit base stickier and happier and provides a lot of value. On the auto side, our core value prop is the relationship between the lender and the dealer. What we've been able to do with Ally and some of our other auto lenders over the last year, which we see huge receptivity to through a lot of large auto lenders, is allow them to become more full spectrum in nature. What that does for them, one, it brings really good servicing revenue, additional volume, but more than anything, it improves their relationship with their dealer network. The dealer is more likely to use a lender when that lender provides more of a one-stop solution, and that's what we do for them.
On the point of sale side, which is obviously a much smaller business for us today
Right.
Sort of similar to the dealer, we improve the point of sale provider's relationship with the merchant. They're able to expand with Sezzle. We're able to expand the product so they can go to a merchant and provide in a one-stop shop way. That's really, like overall, the trend we're seeing is a realization that our product set provides an ability for these lenders to better address the needs of their core constituencies. On the investor side, even with higher rates, our spreads above the two-year, the two-year is our benchmark rate, the spreads above the two-year have stayed sort of consistent or in some cases have actually narrowed by 20 or 30 basis points. And that's a result of just very strong investor demand, both on like kind of the traditional ABS side and then other vehicles as well.
What we're seeing is consistent performance from the consumer. A lot of that, and we can get into this later, a lot of that is our ability to kind of go up the funnel a bit and choose from more attractive borrowers and delivering assets at scale to the investor base that they're very interested in investing in through a variety of different structures.
Got it. I guess, like, you guys have done extremely well with credit, to your point. That's why you're seeing good demand on your paper. What do you think is driving that? I mean, has the underwriting process gotten refined as you've done more of these? I mean, obviously, you could talk about the economy because it's been a really choppy environment. Maybe just talk about the consumer and your own credit quality.
Yeah. So, with the consumer, we made a decision toward the end of 2025, beginning of 2026. I don't think we communicated it perfectly because the market didn't love it, but we said that we were limiting some of our origination in our riskiest tiers. The reason we did that isn't because we were seeing pressure in those tiers, and we're actually not really seeing pressure in it today either. However, those tiers tend to have lower income consumers relative to the rest of our book. As inflation persists, I mean, obviously higher gas prices affect everyone, but it really affects a $60,000-$70,000 income borrower more than it does, I mean, I'm not saying-
Intuitively.
Anybody that's all that-
Right.
More than it does someone higher up. We've concentrated our origination on the personal loan side. I think we're average $120,000-$125,000 today in terms of income, high 600s in terms of FICO. Auto is a secure product, so a little lower, but that's up more than 20% in terms of income. That's been very supportive of credit for us. That tends to be, the underwriting there tends to be more consistent, sort of lower beta in nature. We've had, excuse me, very consistent credit as a result of that. Generally speaking, and we're hearing this from most of our peers, with some notable exceptions, but we're seeing the consumer hold up. But we are conscious of the fact that inflation continues to run hot, and we need to think of the portfolio in that light, and we have.
As we think about your actions that you took earlier this year, do you see that furthering as inflation still persists higher and interest rates remain high? Or do you think like you guys have tightened it?
I think we're in a good place right now.
Okay.
Our credit stance hasn't changed from that point, but we feel very comfortable with all the indications around where we're underwriting now, and performance as it is now. As some of these new partners, especially on the bank side, begin to scale more, we have more and more applications in those targeted risk tiers. So we feel like we have a lot to choose from.
Got it. I mean, these new partners, obviously there's been a number of them. Are any of them like very specific to adding a decent amount of incremental growth? Do those skew mainly towards personal loans, or are they a broader set of products?
Yeah. Our partner wins this year were, I mean, FNBO is actually a point of sale win, but for the most part, they were personal loan new partners. You will see, it takes us, and some of this is intentional, it takes us some time to ramp the volume with new partners. You can have the best AI in the world. You need to actually see some performance, and that can take three, six, nine months to make sure what we're actually underwriting is consistent with all the work we did leading up to it in terms of performance. You will see some of those personal loan new adds begin to contribute materially, I would say the second half of 2027. Again, Citizens is a very significant opportunity for us, but we added some fintechs also, which won't be as large when scaled, but will still be significant.
On the auto side, we didn't add a material amount of new partners this year. However, our auto growth this year was incredibly strong. I think for us, that's kind of a testament to how we work with these auto partners and our product-led growth strategy. We've talked about this a bit, but a couple years ago when you looked at, just taking Ally as one example, when you looked at Ally, we were just seeing the applications for the most part that they first actually turned down. How we've worked with them and other auto lenders over the last two years really, is to find other cohorts of borrowers where we can be more effective, where we can be more efficient with conversion. That's dramatically increased the number of applications we're seeing.
It's actually increased, in our mind, the quality of the borrower that we're seeing, and has allowed for real growth there. I think in a year when we didn't really add material new auto partners, we actually grew that business at a higher rate than anything else, which really shows what we can do with existing partners. Just one last point on auto. As you get into next year, and we talked about this on the call, we feel pretty comfortable at this point that we'll add a large auto OEM, the first half of 2027, which should be a very chunky addition to us. In auto generally, we're really concentrating our effort on larger partners. One, obviously the opportunity is bigger over time with a larger partner.
Two, a lot of our success on credit in auto, I attribute, in addition to I think our selectivity is good, I attribute that also to the quality of our servicing partners, which is very important. It tends to be that the larger companies have much better scaled servicing organizations.
Got it. When you would sign on that OEM, they would do obviously the servicing.
Yeah.
You would do their turndown products, or how would that work?
They retain the servicing
Right
As you said. That is actually the key sort of, to me, qualitative value prop of it is improving their relationship with dealer networks. Maybe that is a little less relevant in OEM.
Standpoint.
Right.
But from a monetization standpoint, it's a significant servicing fee, and it's straight to ROE, right? Because there's no capital set against it. Yes, they retain that fee. With most of our onboardings today, we're working through a variety of products. We would definitely look at turndowns, and that tends to be a much higher FICO customer also. The turndown is nicely on the upper end of where we typically underwrite. Also, that kind of counter flow that has driven a lot of our 2026 growth. In other words, making an offer if our counterpart is also making an offer, because we think we can produce something that the internal decisioning will suggest that ours has a much higher chance of converting.
Okay.
We see kicking off that relationship with a couple of different products.
Got it. As we think about other partners that you might add next year, big automobile, what other types of partners are you looking at in the pipeline?
We said this on the earnings call, we have another very large bank who we feel good about for 2027 on the personal loan side. When you go deeper than that, in the pipeline, there are a number of others in both auto and PL that we feel very good about for 2027. Just judging the pipeline and judging where we are in it, we think the first couple of announcements over the course of the year, whether that's Q1 or Q2, should be pretty substantial in terms of their size.
Okay. And then as we think about how many of these you can add-
Do you feel like you have enough capacity to be taking on even more, or what has to be done in order to ramp?
Yeah. Our personal loan business, as an example, has had a substantial number of partners for a long time. Some of them smaller, but in terms of onboarding them and sort of dealing with them on a week-to-week basis, which we do, there's not that much difference between a very large partner and a smaller partner. I mean, sometimes the larger partner can be easier just because they have more function internally.
In terms of our funding plan going forward, we've run scenarios from fewer partners coming on to sort of our best-case scenarios in the pipeline. From a funding point of view, we feel really comfortable about funding all that flow through the course of our 2027 budget.
Okay.
And beyond in terms of what we've projected.
Got it.
We sort of turn the page on 2026 with Q3 earnings. Obviously, Q4 is still important, but it's beginning to be baked and just really
Yeah.
Thinking about strategy for 2027 at this point.
Got it. You mentioned you guys signed on a point-of-sale partner this year.
Yeah.
When we think about the next 12 to 18 months, do you see other such point-of-sale partners coming on, and what gets the growth going there?
Yeah. We do see other point-of-sale partners in the pipeline. FNBO, who we signed over the last I mean, we've been working on it for a while, but signed over the last month or so, is point of sale in nature. It will be home improvement and other items like that. Where I see the growth beginning to ramp back up in 2027, though, is from some of the existing wins from earlier this year. The relationship with Sezzle has been working very well for us. We enable, I think, an improved merchant relationship for them. So they obviously are very, very strong in the more traditional BNPL space.
Adding a sort of six, 12, 18-month interest-bearing product, which is conducted at the point of sale, but we, in some ways, view the underwrite to be more similar to a personal loan, is an add-on for them that is significant, helps with their merchant relationships, and one that I think we can grow a lot through 2027. I think as you get through the year, looking at some of the existing relationships, whether it is Sezzle or FlexPay, that is really where the initial growth will come from. But we do see additional growth from new partners there as well.
Jon, as we think about the seasoning curve of partners, right? The partners that you sign this year, they probably contribute more to the following year, and then the partners that you sign next year will probably contribute more to the year after that, or how should we think about the sequencing?
Yeah. I think the 2026 partners will begin to add material volume as you get to the second half of 2027. The way we kind of see that is our application flow, which is the top of the funnel, right? Our application flow has increased considerably, and a lot of that is new partner applications. We intentionally, though, over the first six to 12 months, ramp partners up more slowly. I think I mentioned this earlier, but it's Listen, we do a ton of work beforehand on historical borrower and excuse me, historical lender flow, so we have a pretty good expectation of what we're going to see, but you need real performance to really feel comfortable to really ramp a program. Again, you can have the best technology in the industry. There's nothing like seeing actual performance.
From an integration point of view and really from a credit quality point of view, we want to take some time with that ramp.
Of course. It seems like even the origination flow for next year, kind of like that cake has been baked based on the partnerships you've signed this year.
It has. However, what also provides real upside and what provided some of the, I think, even stronger than we expected growth in the auto sector, for example, is how these new products really resonate and ramp.
On the personal loan side, we've had a lot of success with our direct marketing product, which is, it's not us putting marketing dollars out, but it's us using our partner's information to basically pre-approve sets of borrowers, and then they then proactively send our offers out. That's tracking very nicely. That can pick up more than we expect next year. There are different products that can open up flow in existing partners in ways that grow beyond just, we expect 10% growth from year one to year two on a certain partner.
Got it.
There are a bunch of levers there.
Okay. Maybe we can shift to the funding side a little bit, because I know you've rotated the funding base towards forward flow and revolving structures. There's been some pressure points in the ABS market for some. Maybe you could just talk a little bit about your experience there and what's happening in that market.
Yeah. So, our strategy on funding is to be diversified, so be in several different markets, and have, for a portion of our capital, have a long-term committed view. So, we're still executing very, very well in our core pre-funded ABS market, like ABS business, and it's still a very, very large business. But in terms of total funding, it's more like 50-ish percent versus maybe 75% a year ago. But again, it's not because of the execution. Rates are, or cost of capital is higher there, which is what we went through, why our net fee rate for Q2 and Q3 was at the lower end of the range.
However, spreads are still very attractive. Again, in the auto space, they're consistent or a little bit lower, and personal loans were 20 or 30 basis points lower. So, we still like that market, and from the investor side of things, we've almost become like an allocation to diversified consumer credit through people repeatedly putting money into these deals. However, there are other attractive markets, right? Forward flow will never be like 50% of what we do. The economics of forward flow generally are not as attractive as ABS or ABS-like structures. However, there is a cash advantage there, right? You're selling a whole loan, so none of our cash is upfront. So, we always see that as a slice, maybe say 15%-20%. Then there are structures that are in between.
We announced during earnings that we had our first off-balance sheet warehouse with ATLAS SP Partners. We'll have our second in the auto space. That will be a bank-led facility that should be online by the beginning of December. So, that provides additional capital over a two-year committed period.
It also kind of diversifies how we do securitization, because we can securitize out of that, which can attract a different investor base. Then we have other like bilateral structures. We see it more. What drives that is not that we are seeing stress in the ABS market. What drives it is we just think it is prudent to be more diversified across different pockets of capital.
Okay. As we look at the private market, I mean, do you see the return thresholds increase as like there is more volatility and rates go higher?
We generally solve for an ROA on these structures, and just like cost of debt has gone up slightly on the ABS side, these are marginally more expensive than they were. However, we think that expense is more than compensated by the increase in APRs that we have moved through to the market over the last couple of months.
Okay. You think you can continue to price up those loans as necessary, as needed?
Yeah, I mean, listen, we're in a rate environment now. I don't want to predict rates, but we're in a rate environment now that's obviously anticipating a few more interest rate hikes.
I think where we are pricing from an APR standpoint right now feels pretty good for some period of time. Obviously, if two or three hikes turns into five or six hikes, then we might have to look at that again.
Got it. That's across all products, because some of your products are probably longer duration than others, right?
I mean, so our personal loan product can be a three, four, five-year term product. The duration of those loans are about 18 months, typically. Auto is longer than that, but they're still like two and a half, three year in terms of duration from selling cars, everything else. So, the different markets from our standpoint are pretty correlated.
Okay, great. Maybe we shift to AI, because I know that's been a big underpinning of your success.
In underwriting. I'm curious, does the proliferation of AI lower the barriers to that competitive edge? Maybe we could talk about other stuff after this question.
Sure. I would love to talk about other stuff.
Yeah.
No. Listen, the AI question comes in a couple different ways for us. Our DNA from 10 years ago, the beginning of time, is what people used to call AI, which is machine learning. We ingest massive amounts of information, much of which is very proprietary. Today, it's run rate $1.4 trillion of application flow a year coming through the network. In real time, analyze all that information and enhance and update models, and a lot of that is automated. A lot of it's frankly meetings we sit in every week to look at what we're seeing and where we should tweak. That's still a huge competitive differentiator for us. That data, I think, in the current AI environment, is actually an even more valuable differentiator, right? For the most part, this isn't publicly available data that can feed into a Claude model.
This is proprietary in nature. I actually think in an AI environment, that data becomes even more of a competitive differentiator.
Got it.
There's AI sort of, it's not what you're asking exactly, but AI outside of the underwriting process. From the seat of a CFO, we're seeing pretty enormous productivity gains through what you would think of more conventionally using AI, but also just how we're reporting data, how we're analyzing data. All these other things are so much more automated in nature, and it's allowing some of the people who did that on the reporting side and the compliance side and everything else in a more manual way to be able to be much higher level on the information and then use that information as a tool to further enhance what we're doing. It's been pretty helpful for us.
Okay. I guess, the shopping journey for financial services products and consumption might change with agentic. What are you guys doing to prepare for that?
Yeah. It is super interesting. A significant amount of our flow today comes through what we refer to as the affiliates, Credit Karma, LendingTree, all groups like that. What we have been preparing for is sort of the next generation of those affiliates, which is making sure we are positioned when you are having a conversation with OpenAI, telling it you have a mortgage, a HELOC, blah, blah, what you should be. You have a need for X dollars of money, where is the right place for you to be? As that then becomes like a direct hit to, not a direct negative, but like a direct ping on a lender for a particular type of loan, making sure we are in that flow.
We almost think of it as like sort of a next-generation affiliate, and we are doing a lot of work around that today, and think that as you move forward, it is going to be an increasingly relevant acquisition channel for us, and one where I think the fact that we can be nimble and customized over the offers we are making is one that provides a lot of upside for us.
What do you think about this whole being able to comparison shop more with agentic? Do you think that that plays to Pagaya's edge or not?
I think it does. Listen, the ability to comparison shop, maybe it is not quite as nimble or far-reaching as agentic can become, but the existing affiliates are pretty good at showing you a bunch of different offers.
And our ability over the last couple years to become sort of expert on those networks, we actually have a separate product now where we bring lending partners into the affiliates because we are just a lot better at it than some of them are. Like that know-how, I think, will be very helpful to making sure we are producing relevant loan offers through whatever that affiliate ends up being. I think it plays to our strength.
Got it. I think one of the bright spots of the Pagaya story has been the significant operating leverage we have been seeing of late. Maybe you could just talk about what that path for the margins are over the next year or two.
Yeah. We see incremental FRLPC and investment income dollars because of that operating leverage hit net income at an extremely high rate for us. We see that continuing. I mean, whether our core OpEx a quarter is $45 million or $47 million, we do not really see that as movement. There is going to be some inflationary movement. There could be $1 million here or there, but there are no materially, even in an AI environment, there are no material increases in our projection period for that core OpEx.
We have the right sales team in place. We have a very large pipeline that is being adequately serviced today through them. Onboarding process gets better with each partner, and becomes more automated with each partner. And then there is sort of a bank infrastructure piece of it that I think is kind of underappreciated at Pagaya. But the reason it takes some time to onboard a bank is not really the technology piece. It is making sure the bank is comfortable with essentially loaning on our behalf, right? US Bank is still the lender.
When we lend, even though they're not taking the credit risk. They have to know that we have the right controls in place, that we're not going to subject them to some regulatory scrutiny or anything else. This isn't what you're asking exactly, but the lead time on onboarding a new partner is really that. It's sitting down with our risk org, which I think is the best in the industry, with our compliance org and everything else, to make sure that everything is properly aligned. Anyway, we have all of that in place. We have a very large technology data science team in place, and we don't see, for our pipeline, real increases in that cost base.
And as you think about benchmarking yourself, right, on your technology, how do you do that, right? How do you compare your technology to your competitors, and how do you determine whether or not you need to make more investments here? Or what is the risk that you might need to make more investments because of technology and the way consumption habits are changing?
Yeah. I mean, our DNA, frankly, because a I mean, we have a sales team that brings in very large accounts through a pipeline. What we've never had is conventional marketing, right? There are no Pagaya television commercials or anything else. Because of that, our OpEx has always been geared toward the portfolio management and technology side of things. We think with the existing team, and we've done this over time, we can be very responsive to whatever trends we need to address and anything else. It's not to say that occasionally we're not paying for differentiated data feeds or things like that, but that all can kind of be managed inside of the current budget. Again, within our current asset classes
Yeah.
On our current run rate and business plan, we just don't see the need to push those costs.
Okay. My last question before I open it up to the audience is, are there any new verticals that Pagaya would want to get into? I mean, you're making loans across a variety of different asset classes, but are there other areas that you might consider looking?
I mean, in terms of asset classes, listen, credit card is an area that we would definitely enter. We just want to tread carefully there. There's a long list of kind of greenfield startup credit card companies that 10 years out are still telling you about when they're going to get profitable. So, we're exploring different ways, obviously in a partnership model, to move into that space, and you could see that happen over the next 12 or 18 months. I think that's the most logical one for us.
Yeah.
Then there are other forms of point-of-sale lending that we have some exposure to now that we could get into more heavily. Like home improvement lending, for example, I think is an interesting area. But I think the next one, and I think it's a huge opportunity for us, is most likely credit cards. But it'll be, again, through a partnership model. The way I kind of look at it is, obviously it's a totally different asset class, but we have a $5 billion, plus or minus, auto business today, that we grew very quickly. And we could do that because we're partnering with groups who have longstanding durable dealer networks and great servicing track records. When you look at others who start from a direct model in the auto space, it's just much, much harder.
You have to build a dealer network, which essentially adversely selects you to dealers that others don't want to deal with, and you have to build up a servicing org. That partnership model we see as a real advantage and one that can. Obviously, it's a totally different space, but one that can be moved to credit cards. Because credit cards really address, and I'll stop rambling in a second, but credit cards really address the key thing that our personal loans address with banks, right? Especially in the co-branded credit card relationship, there's a tension between what the bank wants to put on their balance sheet and what the co-brand partner wants in terms of new members. The ability to expand that from conversations we're having, we think is really powerful.
All right. We'll stop there and see if there's any questions from the audience. There's one right there.
Hey.
Just one. Wait for the mic, yeah.
Any appetite on the healthcare side, veterinary, med spa?
I'm sorry, say one more time.
Your appetite-
Pet side.
For going after veterinary medicine, health spa. We're seeing Cherry, Sunbit, Scratchpay, a lot of these lenders come into these emergency medical procedure that your dog needs, right? Any interest on your part to get into that vertical?
I mean, elective medical is not really a core focus for us right now. We have some exposure to it through point-of-sale partnerships, but not in a material way. It's sort of like I said with the credit card example. If we enter any space, we don't want to like. This isn't just from a size standpoint, but we don't want to just dip our toe into something. All of these spaces, all of these sort of sub-sectors have their own characteristics that make the underwrite unique. It's not just. Where people really get hurt here is just looking at the borrower as opposed to looking at everything else in the ecosystem. So, like in medical, for example, different medical groups, different, whether it's dental or plastic surgery or I don't know what, have different credit characteristics.
Within each of those fields, each group has very different characteristics, before you even get to fraud and stuff like that. So, anything we enter into, we're going to be very committed and deliberate toward because they're all complicated on their own. It's not to say that elective medical is inherently a bad space. It's just not a target for us right now.
Any other questions in the room? All right.
All right. Thanks.
We'll stop right there. Thank you.
Perfect. Yeah.