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In the consumer lending space, fintech lenders have been using AI in their underwriting models for many years. But there are still many consumers who slip through the cracks and get declined for credit when they should have been approved.
My next guest on the Fintech One-on-One podcast is Gal Krubiner, the CEO and Co-Founder of Pagaya. They work with a large number of both traditional and fintech lenders and apply their sophisticated modeling to find consumers who have been mispriced. Their two-sided marketplace then works with investors to fund these consumer loans.
In this podcast you will learn:
- The founding story of Pagaya.
- Why they decided to focus on consumer credit.
- How they are partnering with both fintech and traditional lenders today.
- Who they are working with on the investor side of the marketplace.
- The types of data they are using in their underwriting.
- How their underwriting models have evolved over time.
- How investor demand for their ABS deals is trending.
- How the US consumer is holding up when it comes to loan repayments.
- Trends in credit availability for consumers.
- Why the lack of credit availability is a good thing for Pagaya.
- The impact of rising interest rates on consumer credit.
- Why all the attention that AI is getting is helping Pagaya.
- What happened when they invited ChatGPT to their earnings call.
- How being a public company has changed Pagaya.
- How he is thinking about the macro environment in 2024.
Read a transcript of our conversation below.
Episode 451: Gal Krubiner, CEO and Co-Founder of Pagaya
Peter Renton 00:01
Welcome to the Fintech One-on-One Podcast. This is Peter Renton, Chairman and co-founder of Fintech Nexus. I’ve been doing this show since 2013, which makes this the longest running one-on-one interview show in all of fintech. Thank you for joining me on this journey. If you like this podcast, you should check out our sister shows The Fintech Blueprint with Lex Sokolin and Fintech Coffee Break with Isabelle Castro, or listen to everything we produce by subscribing to the Fintech Nexus podcast channel.
Peter Renton 00:31
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Peter Renton 01:10
Today on the show, I’m delighted to welcome Gal Krubiner. He is the CEO and co-founder of Pagaya. Now if you’ve been around fintech lending for a while you no doubt have heard the Pagaya name. They have been around quite a few years working with many of the leading fintech lenders, and more and more working with traditional lenders today. So we talked a lot about their AI-based underwriting models and what that means, what makes it different, we’re going into quite some depth there. We talk about the state of the consumer. We discuss ABS issuance, we talk about how the consumer has been holding up when it comes to consumer credit, talk about the impact of rising interest rates. And we also discuss what life’s been like as a public company, and much more. It was a fascinating discussion. Hope you enjoy the show.
Peter Renton 02:05
Welcome to the podcast, Gal.
Gal Krubiner 02:07
Thanks a lot.
Peter Renton 02:08
Okay, so let’s kick it off by giving the listeners a little bit of background about yourself. I know you’ve been doing Pagaya now for a while. But why don’t you hit on some of the highlights of your career to date?
Gal Krubiner 02:22
Again, Peter, thank you so much for having me today. It’s been, it’s been a pleasure. So a little bit of background about myself. I was born and raised in Israel. All my adulthood, I was living abroad, Switzerland, London, and in the US, studied economics and statistics, was falling in love with the financial world very much out of the gate, and was working at a banker in UBS and Deutsche Bank on financial products, specifically on CLOs in different parts. And somewhere around 2016 started to flirt with the idea of how technology could be injected into these very unique markets and could create a disruption, and form together with my other two co-founders Avital Pardo, which is the CTO and Yahav Yulzari, which is the CRO of Pagaya in 2016. Fast forward to 2018, I moved to the States, because it was very clear that New York is the capital of the capital of the world.
Peter Renton 03:32
Right!
Gal Krubiner 03:32
And therefore, it was true that in between these amazing buildings, the right people that make the right decisions are sitting, and I should be part of them. And fast forward thereafter, build the company to be hundreds of millions of dollars of revenues. With the premise we have today and took it public, just over a year ago, and build it to the Pagaya we know today, together with an amazing executive team. and the co-founders.
Peter Renton 04:02
Let’s just go back to 2016 for a minute. And the consumer credit was was starting to get disrupted. We have a lot of the online lenders that were getting some serious traction. Was there something that they were doing that you saw as an opportunity or what was the specific opportunity?
Gal Krubiner 04:19
Let me, or allow me to take even one, or half a step before.
Gal Krubiner 04:23
Is before even we got to the consumer credit, I think the premise was Big Data, AI, which are buzzwords today. But back then were tools to assess risk, sophisticated ones, advanced ones, but really the ability to do that. How can they disrupt and help the big capital markets of the world and people in general? When we started to dig into that it was very clear that one of the areas that has the utmost amount of data and has the ability to make big changes rather quickly, was the consumer credit as you mentioned, with the merge of the fintech, lenders per se, Renaud from Lending Club back then, Aaron from Prosper, and so on and so forth. And the idea that we can help these different lenders to be able to say yes to more consumers, or in the way we put it in our mission, to provide access to credit more often to people, was really the premise behind everything. And the idea that AI and the right connectivity could make it happen. And maybe a last point to that, it was very obvious to us that the work of a lender, or the fintech lenders as such. did such a great job, call it fintech lending 1.0 that we as another competitor, not going to bring a real value to the world. So we went to the backseat of the B2B2C model and as an enabler of, at the beginning fintech lenders today, just every lender or a bank out there.
Peter Renton 04:23
Okay.
Peter Renton 05:27
Right, right. So maybe you could just talk about today then, how how you’re actually partnering, I mean are you…you talked about like these online lenders or fintech lenders, they had specific credit boxes, often, many people would come in, and they’d have to turn them down. And I know that that’s how you started, right? You started with working with those turndowns. But how are you partnering today with both fintech lenders and traditional lenders?
Gal Krubiner 06:32
So let’s go back for a second for the problem set, which is although fintech our progressed a lot and the financial system has progressed a lot in the United States in the last four decades. Still, there is something like 42% of people that are getting rejected, declined, whatever you want to call them, in the moment when they are applying for a credit. Now think about it from two aspects of that – One is the efficiency part of it, which is they already came to the place, they already look for the credit. And still there is this decline. And think about it from the other aspect of the emotional piece of the person who is going through that who now needs to look for a different solution, and has, is experiencing a bad day, because of the because of the no that he got. So when we thought about that, and the way we partner with the different partners, to your question, is we are connecting via technology into these partners, we are embedding our AI and capabilities into the loan origination systems of these different partners. And we are allowing to increase the approval of different borrowers, which day for some reason has decided to decline. This is so meaningful, that we’re coming to a 20% lift in the most, in the good cases of better approvals, more funding. And for the lenders, the most interesting part is while this consumer is becoming their consumer, and recognizing their brand, we are still coming back with the ability to fund it and to take it off their balance sheet.
Peter Renton 08:12
Right. Yeah, that’s a really critical piece, right? Because you see, you work both sides of the, of the equation here where you’ve got the lenders, and then you’ve got the investors on the other side. So maybe, what types of investors are you working with?
Gal Krubiner 08:26
So the investor side, if you think about it, when we are speaking about it, and it’s a two sided lending network or AI lending network, we have the most known institutional investment tools in the world. JC is the most well known one, the sovereign wealth fund of Singapore that is working very closely with us. Vardy, Angela Gordon are all names that were publicly out there that are working with Pagaya. And using our technology and capabilities to get access to these assets. And on the other side, the lenders, which part of them is the fintech you’ve discussed about, but they are more traditional players. Like Westlake, for example is the latest announcement that we have, which is now routing to our systems into our capabilities, consumers from their four dealership networks. Another one that you’re very familiar with is Ally Bank, which is the biggest subprime lender bank in the US. And obviously, we’re looking to sign up more and more, but the bottom line is in between auto loans in between consumer credit and up until POS which our most known partner there is Klarna. We have a very well diversified partners into our network that are using day-to-day, while we speak, fully automated 24/7, the systems and the solutions of Pagaya to be able to provide more access to more people more often.
Peter Renton 09:56
Okay, so I want to dig into your underwriting just for a minute, if we could. How does it work? Are you using data beyond like credit bureau data? Are you really focusing just on on the same data that that other lenders are looking at?
Gal Krubiner 10:14
So as you can imagine, working in the US and being heavily regulated financial service, we are very much bounded to the FCRA compliant data. And therefore, most of it is the Credit Bureau as such, and the proprietary data that we have, I would say that the one layer that we have very strongly that that is helping us in these capabilities of the underwriting is the data that is being created from the different lenders that we are working with. So while a mono lender has its own data set, when we are sitting in the middle, and having this unique point of view of the different flow, and the different changes that all the lenders are doing, it’s informing us, it’s helping us, it’s helping the models to be more accurate into their ability to assess risk, and to be able to price it well. And a lot of times, like we are getting the question of like, why should the banks or the lenders collaborate with you and provide you the data? And the truth of the matter is, is as long as we get more data and the datasets is more robust, we can, by definition, approve more consumers, the interests are so much aligned, in that respect, that we are at this point with our partners working very collaboratively, to be able to provide the most robust data sets to our models to be able to approve the highest amount of consumers out of the gate.
Peter Renton 11:38
Okay. And I presume, you know the one of the great things about AI is that the models get better over time. Can you tell us tell us how your models have evolved, since your first, your first go round?
Gal Krubiner 11:50
So the very basic evolution I will speak about it is the movement from the very straightforward personal loan into different markets. So the shifts and the ability to inject into our models, information from personal loan space, auto loans, and up until the POS and the point of sale. So a very strong, robust kind of like view of the consumer from different type of angles, that usually, a specific lender is looking on it only from the angle, they are looking to provide the credit. The second piece is there is a level of granularity of data that you’re being able to conclude and to capture when you’re working with different lenders or different channels. And that is allowing you, think about it as a box, that is everytime getting a little bit bigger, and a little bit bigger, and a little bit bigger, and the outskirts of it, are the ones you’re making and becoming more mainstream. So think about the evolution of the models of being able to capture different types of flows, different types of borrowers, expanding into different types of cycles, etc. To be able to inform, really the definition of risk, and therefore to be able to price very well. Another anecdote that I can give is, that people are less talking about, but when you’re setting up an interest rate, beside the very competitive part there is for the market in the so called adverse selection or the positive selection that one could get, there is actually an outcome of like the pricing that you are determining into the ability of different borrowers to actually stand within the payment. So if you would price that as a 12% or 14 or 16, that that will translate it into a different monthly payment for that borrower, and therefore will impact the probability of default of the borrower to pay. So I think within time, what we focus in Pagaya, I’ve learned in the research department did an amazing job in that, is to think about the pricing, dynamic pricing, in part as a factor that should be included into their ability to provide applications. Really, what is the thing that will be most helpful for them from a lending perspective?
Peter Renton 14:04
Okay, so I just want to be clear on something for a minute. Are you always bringing the two sides of the marketplace, meaning your lending technology and the investors? Or do you also work, because then some people might want to keep this on balance sheet, right? They want to add more borrowers, they want to monetize their declines, or help approve more, which your software can do, but they might want to keep it on balance sheet. So do you work in two ways where you will just provide the technology and not the balance sheet or do you always work with both sides?
Gal Krubiner 14:36
So as for now, our business model is really tied with one each other. So, production is the investment and therefore the underwriting is correlated to such, but in the future we are thinking about opening that and providing as a service for different types of population, or for different types of partners that are looking as you say, to get the the beauty about the underwriting capabilitie,s but in the same time to keep the assets on their balance sheets.
Peter Renton 15:02
Right, right. Okay. Okay, so I want to talk about the ABS markets. You’ve said, you talked about your background in structured credit. I was just reading your earnings report from Q2, and you said there you were the number one personal loan ABS issuer. So you’re obviously putting a lot of deals through, large deals. Is investor demand, still staying strong for this asset class?
Gal Krubiner 15:27
So that’s a great question. And again, just 30,000 who have PAID, which is the shelf that is actually representing the personal loan, ABS issuance is the dominant shelf in the US, and today for many investors. If you want to get exposure to consumer credit, you’re actually choosing Pagaya, by definition, because we are one of the largest, the most liquid, and the most well known out there. I would say that investor demand is actually getting stronger and stronger. The weakest point I will, I will highlight it as the end of Q4 2022. And from there throughout 2023, we see more and more demand coming through as a lot of talks about the economy getting to a better place, and understanding that the consumer is standing strong and being able to push the economy as such. And that the backdrop of kind of like lower performances of vintages that tripled in in the heights of ’21. And the start of 2022 is actually fading away, we see many more players are coming into the ecosystem. And our transactions are hugely oversubscribed, one after the other, in the market. So that’s, I think the biggest sign for your question of the demand for our so called paper.
Peter Renton 16:52
Right. Let’s talk about the economy for a minute, because you’ve got a unique view, particularly on the sort of the non-prime consumer. There’s a lot of talk about student loan repayments are starting back up again and the consumer, how long could the consumer hold up? I mean, are you seeing any signs right now that the consumer is having problems paying back their loans?
Gal Krubiner 17:16
So if I need to summarize the two biggest phenomena that we see, we see a rather strong stability on the consumers payment and the ability to pay definitely, from anything that was originated in the last year or so. So I would say that from the total variation of the ability of consumers to pay is actually we don’t see any signs for that as such. I think you could assume that for now. And again, things are changing every day. But that the inflation wave that was very noticeable in the ’21, and ’22 is kind of behind us from a consumer perspective. And things have rather stabled from that perspective. Let’s see what’s going to happen with oil prices in the next few quarters. But like for now, that’s definitely the statement that we are seeing in our insights of our AI network. On the other side of it, credit availability is in the highest decline. Definitely the longest period we’ve seen of declining credit availability. So the what the Fed does, from an interest rate perspective is definitely impacting the ability of different borrowers to have access to credit. And we see that consistently from Q3 last year, and getting stronger and stronger headwinds as the day goes by. So, so a lot of like lack of availability of credit for different people. And different borrowers which is I think, is the main theme. And a lot of it is a combination of two. One is the Fed that I already mentioned. And the other one is the so called banking crisis that we are experiencing or the lack of liquidity in the midsize banks, which are, by definition, the strongest force for providing these type of loans and liquidity to the market from a consumer credit aspect. So these are the two major things we’re seeing out there.
Peter Renton 19:06
So is that lack of credit availability a good thing for Pagaya? Because you work on expanding credit availability. Or are you being negatively impacted overall?
Gal Krubiner 19:15
So yes, you’re absolutely correct. This is a positive thing for Pagaya. The fact that there are less credit available out there, we are filling the gaps. We just announced today that we partnered up with Varda, which is one of the biggest asset managers in the world and one of our investors to provide $100 million+ capital for one of the credit unions out there’s, so it’s giving us push for our business model and some kind of a catalyst for our existence. And in the same time, I would mention that this is more a semantics thing to say, so like if we spoke about ’08, which was the big thing for pushing big banks to become more conservative. I definitely feel that the last events that happened in 2023, and particularly SVB, have had a shift in the thinking of the mid-size, super regional banks and credit unions on their ability to be competitive and in their ability to be aggressive from a pricing perspective as such. And I think it would be very interesting to see fintech going forward, which adjusting a little bit more to capital markets, Asset Management money rather than depository capital, capital as such, and Pagaya is a player that has a very strong footing on the sides, is definitely benefiting from that. And you can see that over the quarterly earnings that you have mentioned, that usually lending businesses in these environments are shrinking by 20-30%. And Pagaya, is actually growing and continuing to grow. So the proof is in the pudding, to survive.
Peter Renton 20:49
So what about the interest rate increases that we’ve seen? I’m just curious about the pricing of loans, obviously has gone up, we’re at now over 5% Fed funds rate. And two years ago, we were close to 0.25. So that is not all being passed on, right? Is that sort of one of the things that’s really stopping the availability? I mean, what’s the impact then of these rising interest rates?
Gal Krubiner 21:21
Yeah, so it’s exactly what you said, I can give you even something more interesting to think about from a consumer perspective and part-owner where they, where it meets the actual consumer. I will say there are two major populations, that feeling the impact, most and for most. On the little bit more subprime, lower FICO people that usually would have been under the federal cap of 30, or 36% APR, call it a year ago, and now 5%, higher, let’s assume just 1-1 increase has happened. Now they’re above these cap, just all else being equal. And therefore, they are out from the mainstream ability to borrow from a regular lender. So I would say that that is definitely impacting the, a little bit softer population that would have any way hard time accessing to credit and many of them are being pushed out from the system. And this is very negative outcome, sometimes necessary to tame the inflation, but definitely has a negative impact on millions of lives of people in the US. And the other side of the equation is a little bit on the demand side. Think about the super prime, borrowers that like, you’ll remember a lot of that advertisement of like you can buy a car with 36 payments and 2.99% APR, or sometimes even lower than that, that world doesn’t exist anymore. So if you think about the 5%, as a floor, plus take a little bit of the spread, like 8% became the floor even for the most super prime type of borrowers. And therefore many of them are deciding just to use their own good, saving or cash, rather than to borrow at something that, for them is a high interest rate. The middle population will experience just a little bit more expensive, expensive credit, the less availability but like the more subprime population will be game out from that thing, which is a negative thing. And the super prime will most probably reduce their demand for credit as such.
Peter Renton 23:31
I’m curious about that top end. The people that are sort of, you know, they’re pricing out. I mean, a lot of what you do, right, is you sort of isolate those people that have been mispriced by the people that use the bureau scores, and that sort of thing. So are you able to sort of help temper that? Of those numbers of people? I’m just curious, when you get up to that 36%, and you say some people are just pricing, pricing out. Are you able to kind of come in then and help, like reduce the number of people that are pricing out?
Gal Krubiner 24:02
Yes. So that’s exactly how we are helping. We are helping different consumers and the population and the ability to find people that will be rejected and would not kind of like stand within these thresholds of the 36. Which actually now, this is a very good 18% loan, or a 16. So there is a lot of that that is happening more today. Because the pool of people that are left outside is bigger. So it’s exactly playing to the premise of Pagaya. And the reason why we exist, and how we think about the world, and what we are working with our models in our AI network to be able to provide.
Peter Renton 24:40
I mean, you’ve been doing AI from the beginning, and the last 12 months has seen an explosion in AI discussions. I mean we saw all the big CEOs in Washington the other day, talking with senators. I’m curious about all the attention that AI is getting. Has that been helpful for Pagaya, or is that really a distraction?
Gal Krubiner 25:05
So I actually love it, I think there is something about the human nature, that doesn’t have really the ability to assess value until it’s not being easily digestible. And what I think OpenAI did, and it’s specifically that company with a ChatGPT, it made it easy for people to understand how much value there is in AI. If you will go back to the financial industry, or the fintechs, or many other type of industries, the existence of AI, and the actual value and implementation of that, actually happened in between ten years ago, to three years ago. Now, obviously, there is much more to do and many more places to, to be impacted by that. But like, a lot of things that, you know, like the Google search engine, especially on the different parts of it, is built on big data and AI. But the ability to make it so popular, so easy to understand, was really brought to the world by OpenAI and ChatGPT. Now what that is creating, is creating a very different perception of people into the value it can bring. So think about the Chief Credit Officer that is sitting in a big bank, that now his managers, and the compliance people, and the regulators, and everyone’s speaking about that. It’s easier for him to come in to say, you know, that actually could bring value to our business too. So maybe let’s talk with Pagaya, and be able to try to see how we can leverage that. So the ability to bring it easy to you at your home, as you call it, and the ability to understand what it means, is helping people to bring it to the mainstream. And for that, I think the world in general owes a big thanks for ChatGPT. And by the way, funny enough, in one of the, one of our earning calls, I don’t know if you noticed, I think, two earning calls ago we got ChatGPT, we gave him all the inputs of all our historical earning clauses as scripts, and we asked him to play a role of an analyst. And to ask the question of what is the most interesting question that they could ask? And answer it as it was God? Check it out in one of our scripts, you will be amazed!
Peter Renton 27:26
Right! I remember reading about that. That was really interesting. I’ll make sure I link to that in the show notes, because I think it is really worthwhile checking out. Okay, just a couple more questions here. I want to talk about being a public company because it hasn’t been an easy time for really any fintech company in the public markets recently. But I don’t really want to talk about stock price, I want to talk about how being a public company has has changed Pagaya.
Gal Krubiner 27:54
I think it’s creating a very positive feedback loop. Think about working with a mirror in your face every day. So no more excuses, no more being able to hide the things you’re weak at. And it’s actually driving to a much quicker, better outcome for your ability to execute. You need to be careful on that. Because overhearing what people are saying over too short periods is not helpful. But always remembering that you have a goal to work, a mission towards ability to distribute that. I think it’s very rewarding, and I definitely, with all the challenges, will advocate for any founders, or CEOs when they think the company is ready to jump to the water, and to do that, because that’s the best way to create an excellent organization. I definitely think Pagaya is one of them.
Peter Renton 28:46
Okay, so last question. I know you can’t make any forward looking statements about Pagaya. But when you look at 2024, I’m interested in how you see the macro environment and the impact on the consumer lending space, and whether you think we’re still going to be in a strong environment next year.
Gal Krubiner 29:07
So if I need to guess, and this is only a guess, I would say that the experiment that all of us were a part of which is providing money for the people as part of COVID. And therefore after finding unique ways to take the money back to the governments in the form of higher interest rate, has created a lot of uncertainty. Usually businesses and people are not good with a high uncertainty. So I do think that as we go into the future, and 2024 being being the next step of it, we’re going to have more certainty on the understanding of these impacts. And therefore will create more stability, that in return will turn out to be more pragmatic and positive view. So actually, I’m optimistic about the future. And I think that all of what we are experiencing right now is just an outcome of a very big experiment that all of us happened to be part of, and the other outcome of that could be much worse. So I think that if we go more and more into the future things will come back to what we used to know, before. And hopefully that is going to be positive for all of us, and for the consumers to be able to continue to provide that as such.
Peter Renton 30:18
Okay. Yes. Well, I hope so as well. Gal, really appreciate you coming on the show today. Thanks so much. It was really interesting conversation.
Gal Krubiner 30:25
Thanks a lot, Peter. Appreciate you having me.
Peter Renton 30:29
I hope you enjoyed the show. Thank you so much for listening. Please go ahead and give the show a review on the podcast platform of your choice and go tell your friends and colleagues about it. Anyway, on that note, I will sign off. I very much appreciate you listening, and I’ll catch you next time. Bye.
