Hi guys, welcome to the Fintech Coffee Break. I’m your host, Isabelle Castro. This week, I shared my coffee break with Ed Mallon, Chief Investment Officer at Pagaya.
This year has been difficult for lenders and the consumers they serve. Rates are at record highs, and ratings agencies are applying added pressure. Meanwhile, the heightened cost of living has increased the need for consumer credit, particularly among the financially fragile, who are the first to be disregarded by lenders as they tighten their approval rates.
Pagaya has positioned itself to work within this environment, providing banks with the ability to accept more loan applications using alternative data. I spoke to Ed about our approach and possible strategies for lenders during this difficult time.
Isabelle Castro 0:50
Ed, how are you today?
Ed Mallon 0:52
Oh, fantastic, Isabelle, nice to join you today.
Isabelle Castro 0:55
Nice to have you on the show. I’m really looking forward to this. So, to begin with, what gets you up in the morning?
Ed Mallon 1:02
Yeah, I’d say what gets me up in the morning, every day is I know, there’s always something new that I’m going to learn. It could be something that’s going on in the market, it could be something that’s happening with our business, it could be a challenge that we’re trying to solve. So that continuously, you know, learning that you have that goes on throughout your career is really important really engages you. I mean, I’m surprised that I know much less today in my 50s than I did in my 20s. But I think that’s part of growing up and learning more. And I think to challenge yourself every single day about how can you learn and how you can how can you be better at what you do is really what motivates me in the morning.
Isabelle Castro 1:41
That’s really important. I agree with you. So tell me about your career journey to Pagaya.
Ed Mallon 1:48
Yeah, so you know, it’s funny, I started up my career, you know, out of out of a university up in Boston, and then I came to New York, about, you know, 2627 years ago, and I joined the small, like fixed income boutique, you know, there were like less than 100 people there. And it seemed like a pretty interesting opportunity. They were kind of figuring things out. And so I started to work with this company, and got a lot of experience working within different areas, and really got introduced to the consumer space. You know, in 2009, when the New York Fed gave BlackRock a call, which is the company that I went to and turned out to be quite a successful financial juggernaut. Yeah, they reached out to us, you know, after Lehman Brothers filed for bankruptcy, and they said, hey, you know, this market is shut, you know, how can we open it up. And so we work with them, they were talking to other investors, and they came out with this program called the term asset backed lending facility, where you buy consumer assets, and the New York Fed would give you financing. And as I was doing the analysis, I realised how resilient this asset class was, where you could have like unemployment go to 20%. And you wouldn’t lose money. It was probably the fastest risk committee ever had at BlackRock were literally the head of risks that no brainer, how do I invest? And so that kind of turned me on to the space. And then as we moved out of the financial crisis, you started to have these new lending models start to come about peer to peer lending, which had been started in like 2006. But we started to be one of the first institutional investors of BlackRock in the space and to the very first greeted securitization. And so when Gaul who’s our CEO here at Pagaya, was thinking about expanding the business into the US, he reached out to me and was trying to tempt me to come come away from BlackRock where I had been for 20 years. And so what blew me away when I met him, and I met, Avi Tal, who was our CTO now is our CO President, in Yahav, Yulzari, who’s really been instrumental in the business development of the business, but the three founders of this when I saw what they were doing, I was blown away, it reminded me very much of the work that we had done at BlackRock in terms of creating risk analytics for the mortgage market. So when BlackRock got started, it was a very new market institutions didn’t understand the risk. And I felt that Pagaya was doing that, albeit with much more modern technology that allowed us to have a very specific view on the risks. So that got me excited, because I said, Look, if you can have analytics like this, there’s an amazing opportunity for us to help investors and help consumers. And so that’s it. So I met him. I joined the company, it took him a while to get me to come over probably like six or nine months. And then I’m sitting there and we work with like three people, and $35,000 in the bank account. So it was you know, it’s kind of a rude awakening to come here. But I think ever since then, this this vision that the founders have had for the business about how do we you was data how do we use artificial intelligence? How do we use machine learning to create better outcomes for not only the consumer, but the lending businesses that we partner with as well as investors, court important part of the equation is always looking for good returns.
Isabelle Castro 5:19
I really liked that story, you can sense the excitement that you guys must have felt sitting in that we work and kind of, you obviously really wouldn’t say buy into the dream, because it was such a good take on the technology that you could use to address this market. So it just you can, it’s really conveyed, how much you guys pushed behind this and really believed in it. And that’s amazing. I want to bring your attention, your attention, your focus now to kind of like the wider environment, let’s start wide, and then maybe go a little bit more granular. So the macro economic environment has got increasingly challenging over the past year. How would you say this is affecting lending in general?
Ed Mallon 6:13
Yeah, I would say like, it’s super difficult, in general, across the market for lending, right, you know, cost of funding has increased significantly over the past year. History of uncertainty in the economy also sort of impacts how capital gets treated at banks. And so for the most of the traditional lenders, it’s a huge headwind. For us, it’s a little bit different, because we’re a bit counter cyclical, where when it’s tougher for others, we tend to see more business flowing our way. So I’d say it’s a bit of a mix, where I’d say like, in very general terms, you’re seeing less lending going on. And a lot of that has to do with uncertainty in the economy and higher cost of capital.
Isabelle Castro 7:00
Okay. Okay. And how do you work within that kind of how have you positioned yourself in that counter cyclical thing?
Ed Mallon 7:09
Yeah, so So sort of our idea of, of working was liquidity. When we initially started out in the business, you didn’t really have the ability to sort of set you have sort of, say, what you wanted your risk to be, like, what should someone paid for a loan? How long should the loan be, etc. And so what we did was, we started to go to lenders, and we said, hey, you know, we look at this, and we see that you have a lot of applications that are coming into your underwriting system. And we see that very few of those are getting approved. And a lot of that has to do with like, if you’re a bank, it becomes very expensive when you start to go below a certain FICO score. And so we said, hey, why don’t we take a look at these borrowers, and we’ll price them up. And if those consumers will accept those offers, will buy those those assets into our portfolio. And so we’ll help you underwrite these borrowers that you’re less comfortable lending to, will bring the capital so that you don’t have to take any balance sheet risk on your business, because we have this network of investors that are looking for these attractive, short term investments that you get from from these types of assets. Okay, and so what happens is that, as lenders face a more difficult environment, they’re basically sort of increasing the level of who gets approved, so less and less people are getting approved, and more of their customers are getting abandoned. So us coming in, helps them serve their customers better. It’s still there alone, because we know that consumers have a strong affinity for brands. And so what we’ve done is we’ve partnered with the most recognised and appreciated brands across the US so that we can help them allow their customers access to credit, where normally they wouldn’t be able to give that to them.
Isabelle Castro 9:12
Okay. I can imagine this is particularly important, especially recently, like, in August, I think it was rating agencies like Moody’s were downgrading banks. Did you notice any significant change from the kind of banks that you work with or on the banking ecosystem in general, did you notice an impact from those kind of announcements in August?
Ed Mallon 9:42
I think like sort of the rating agencies, you’re downgrading the US government at this point is a little more symbolic than anything. And in I think it’s right, right, you have one, when we look at sort of You know, debt over the past, you know, decade or so it’s exploded relative to GDP and the government side. And on the corporate side, the consumer has actually gone down over the past decade. And so I think like the challenge that we see, is that, right? US government bonds are certainly like they’ve had their worst three year returns in the history of the United States. I recently saw, I recently saw that stat. And I think that there’s a lot of short term maturities that are going to need to be rolled in the near future. So this is going to be a difficult environment. And it’s going to have sort of impacts to the funding market as that supply comes in, or it’s going to make it more expensive. And I think probably the bigger issue that’s driving banks is that they are essentially, as they have more uncertainty about the economy, they need to effectively raise their lending standards, which means that they aren’t able to provide as much capital to other investors. So I think it’s it’s a bit of a combination of, of one, I think, in isolation, a downgrade of the US Treasury. I’m not sure how much it means at this at this point. Certainly, there’s a lot of dysfunction going on. In the in the US government right now, or in the House of Representatives specifically in we would expect or not expect, but certainly it’s not out of the realm of possibility that you could go through another government shutdown, like we did a few years ago. So I think like it’s it’s not, I think, the rating agencies standing up and saying this and saying, Hey, look, you know, get your, your stuff together is fair, I just don’t know how meaningful it is on on the market. I think more of the supply and demand dynamics will be much more disruptive over the next call it 12 to 24 months in that market.
Isabelle Castro 12:03
Oh, wow. So you’re saying 12 to 24 months, there’s still going to be kind of disruption in this kind of lending environment?
Ed Mallon 12:11
I think so. I don’t think that we’re anybody’s looking for a quick rate cut. I think as we’re looking at the economy, you’re still you’re seeing growth, slowing, you’re spending, growth slowing, you know, job openings, slow. Yeah, it’s things are slowing, but they really haven’t sort of turn negative quite yet. Like my expectation is you kind of need to see a decrease in earnings from companies before you start to see a broader impact to the consumer. And the reason I say that is the consumer is in a very unique position today, unlike they’ve ever been where their cost of debt on a monthly basis is the lowest it’s been in about 40 years, a little bit higher than it was during the pandemic. When we look at the utilisation of debt, whether it’s like home equity loans, you’re well below where we were pre pandemic credit card utilisation below where we were pre pandemic. So things like this, the consumer has the benefit of their biggest debt cost is now locked in in 30 year mortgages at rates that are roughly half of what they are today. And so that being the consumer is like one of the consumers business, the biggest expenses, creates a split in the economy between like homeowners and higher wage people and non homeowners and lower wage.
Isabelle Castro 13:39
Okay, and do you see that split kind of growing wider than
Ed Mallon 13:44
I think like, the challenge that we have is that when we’re looking at inflation, inflation is still increasing, albeit at a slower pace. And for consumers with less income. They don’t have as much let’s call it discretionary income to absorb those costs. So, you know, we’ve been really worried Yeah, I don’t want to overstate it, but for lower wage workers, like a rise in fuel prices becomes very impactful to their credit performance. Because, right, it’s dollars that they have to spend to go to work or for food, right food costs have really sort of gone through the roof. You know, anyone who’s been to a grocery store, you know, it doesn’t take much to see that. Like, that’s another thing that’s that’s highly impactful as you start to go up in wages and you get above let’s call it, you know, $55,000 -$65,000, a little bit above, let’s call it the medium income in the US, that starts to dissipate in terms of that impact to the consumer.
Isabelle Castro 14:43
Okay, okay. That’s really interesting. Yeah, I wanted to ask you about this the, I mean, in light of the economic kind of challenges over the past year, it seems like longer it might be in longer. Consumer Those who are financially fragile are turning to credit and financing options, they need the banks, they need this kind of like you need this to be approved. How can lenders balance fulfilling this demand, particularly for these clients that might be higher risk might be in financial distress with the added pressure that they have right now?
Ed Mallon 15:22
Yeah. I think that the challenge I see in with most most lenders is that, it seems that a lot of underwriting is very binary, right? You’re a good borrower, for your bad borrower. And it’s based off of some, let’s call it statistic, let’s say someone’s credit score, or their debt to income. And they’re saying, Hey, if you’re above this, you’re good. And it’s below that. You’re good. Otherwise, you’re bad. And that’s not right. Because when we look at it, we have a bit of a different perspective, because for each loan that we’re buying, we’re looking at it and we’re trying to estimate, what is the return on asset for that loan? So like, what do we think that return that loan is going to make for our investors? And so when we’re looking at each, you know, individual consumer, I’d say like, the real thing that our AI, you know, credit decisioning model is doing is understanding like, is this an affordable loan for the consumer, you know, based on their income, the other debt that they have? And I’d say the other thing that we’re also looking at is, since we have like, on average, like 20 years of credit history, like what’s their willingness to pay? Right? Are they paying consistently over time? Or do they always pay late, but they always pay? Those are the best, because, you know, they’re great credits, but their credit, it’s very difficult for them to access credit, because they aren’t that organised. So I’d say like, those are, you know, some of the differences of today’s market and I think understanding the affordability for the consumer, and knowing when to say no, right? Because like, we’re going to understand, like, is this affordable for someone, but we’re also calculating what’s the risk. And so there’s a point where the risk is sort of more than what they can afford. So it just means that you shouldn’t, you shouldn’t offer that loan to someone. So I think it’s making sure you’re being disciplined. But I think also taking that second level and third level look, will help you better, make sure that you’re not putting people in a difficult position, because generally, what we find is that these types of like when you give someone a personal loan, and they’re making payments every month, that helps improve their credit, lowers their cost of credit going forward. So it becomes like a self help, you know, credit trade for for those consumers.
Isabelle Castro 17:58
Interesting. You met the you mentioned AI? Are there any other particular or go into AI a bit more, but are there any particular technologies that you see helping this situation that perhaps blenders can implement?
Ed Mallon 18:15
Yeah, so I think like, you know, as we think about sort of the technologies that you can can use, I would say that a lot of this has to do like when we’re using our credit decisioning model, we’re using that to help a lot of financial institutions, a lot allow access to nonprime customers, right, because it just doesn’t make as much sense for a bank to hold those assets, because the cost of capital is much higher. And so for our technology, what we’re doing is we’re effectively taking machine learning, and data science. And we’re taking all of the data that we’re getting from each of the these consumers. So on average, we’re getting about 1000 data points from each consumer to evaluate them. We also have the data on let’s call it a million live loans that we’re collecting. And so if you think about the data that we’re receiving every day, it’s on average this year, about 100 million data points. And so all of this data that we’re using also is compliant with the regulatory system that they have for consumer credit, which is very important, right? You can’t go out and say, Hey, someone is, you know, like, using some sort of alternative method to evaluate consumers isn’t allowed in the US and it’s certainly not allowed if you’re working with large Finance, Financial institutions. So I would say like the data that we use, is very, it’s it’s compliant with the credit rules, but it also is very substantial in terms of being able to on understand what that consumer has done, and how they will perform under credit. So I think it’s much more different than, like traditional methods of using, like credit scores or, you know, you know, typical regression analysis, all all we’re doing is we’re saying, hey, there’s a lot more data that’s out there, we’re using technology to consume that. But it’s not like, Hey, someone watches Netflix for two hours a week, and this person watches for six hours, so they’re good credit or bad credit. It’s like, okay, this person, you know, makes 20 credit payments a quarter, you know, they make, you know, $110,000, you know, their debt to income is this, they, you know, they live in this state, you know, they’re occupied, yeah, their occupation is this. So there’s a lot of things that will determine how the consumer works. And by using this technology, it allows us to sort of look through the data and make accurate sort of moment to moment decisions. Because if you think about it, we’re seeing literally millions and millions of applications every single week, or, you know, across our network.
Isabelle Castro 21:13
So having that volume of kind of applications allows you to identify these patterns and still remaining within that whole customer privacy kind of thing. But being
Ed Mallon 21:25
because everyone who takes like, who agrees to alone, they give explicit permission for you to access their credit data. So it’s not like we’re taking information from Facebook that they didn’t know, they know that it was okay. It’s just real sort of financial information.
Isabelle Castro 21:44
Okay. Nice. I mean, we’re coming to the end of the interview. I mean, what’s your advice to lenders trying to work with in this climate?
Ed Mallon 21:56
Yeah, I’d say for them, you probably the best advice I could give them is to reach out to us. And the reason I say that is that right now, they’re being forced to say no to more and more of their customers, because of this challenging environment. Right, they’re having other problems with their balance sheets, right. So as we think about this market, we’ve been able to go out, and like, work with credit unions to help solve capital problems for them. So like, last month, we partnered with hedge fund called var day, we provided 100 million dollar capital solution to a bank. We’ve also from our investor network, we’ve raised about 4.9 billion across 11 different search securitizations to help fund loans within our 25 Different or whatever it is 25 plus different lending partners that we work with. So we’re helping them do a lot more business. And they don’t have to take balance sheet risk, it’s their customer, the customer only knows them, they don’t know us. And so the servicing standards that they have, won’t change. And I’d say the other thing that we can bring to them, is given that we have a very broad view of the market, we’re bringing a lot of the best practices that we’re seeing across the market. So whether that’s making sure you have an automatic payment plan, and we can quantify what’s the credit cost of not having that, helping them in terms of what are the best servicing standards to use, especially when people are having trouble paying their loans. And so taking all of this information from the network, we’re able to go out and socialise that. And also, quite frankly, we want to sit with them. So we’ll have our risk team will sit with these partners on a monthly or quarterly basis, depending on the size of the relationship. And we’ll talk about where we see opportunities, where should they maybe sort of pull back from where should they maybe lean into? And so trying to have a holistic conversation of how do we help you become better at your job, because we have a very deep research team and a lot of technology expertise. We’re a lot of the firms that we work with don’t necessarily have that same type of capability. So So I would say like, as we think about it, you know, having the ability to do more business without taking balance sheet risk, and retain the customer we think is just it’s a win win win solution. And on the other side of that it’s creating very attractive investments for our investor network. And it’s helping the consumers get access to credit where everyone’s saying no to them today.
Isabelle Castro 24:38
No, exactly. You’re it’s a win on all angles, really, in this context, isn’t it?
Ed Mallon 24:46
And it’s like, I don’t think they understand from a regulatory standpoint, like how much harm you know, some of this regulation is having to the consumer who wants to access credit and So I think like having a solution like this is one that really helps the banks do what they want to do, which is serve their customers and then serve as many of those customers as possible.
Isabelle Castro 25:11
Yeah, I mean, this is what’s important, right? When the economic challenges are as they are right now. You wouldn’t they want to be well, everyone involved wants access to credit. So it’s good that you have this solution and can kind of service that. So, before we go a cup of an in questions, so you give me your advice to lenders trying to work within this climate. Now I want to know, a general piece of advice that you have been given that you would give to others. This can be personal or professional, whatever you feel like
Ed Mallon 25:53
it’s kind of a punchy piece of advice. And it was, it was don’t bark at air plants. Okay. Don’t you know, don’t wet waste your precious energy on things where you can affect the change?
Isabelle Castro 26:10
Okay, I like it, maybe,
Ed Mallon 26:12
and maybe Bob Marley said it a little bit better. Only the foolish dog barks at flying birds.
Isabelle Castro 26:19
Okay, cool. I kind of want to ask a little bit of kind of backstory to that. I don’t know whether that’s too much. And maybe we don’t have much time for that. But
Ed Mallon 26:29
it’s a longer story. But we can save that for another time.
Isabelle Castro 26:32
Another time? It’s good. Your curveball question? What is your life’s theme tune? Your theme music?
Ed Mallon 26:42
My life theme music. Yeah, that’s a great one. I think lately, my theme music is hip hop is dead.
Isabelle Castro 26:50
Okay. Yeah, you’re answering these questions that I want to know more to be honest. But
Ed Mallon 26:58
it’s like you didn’t Yeah, that soundtrack in my head is very noisy. I think it’s just like, you know, it’s kind of saying, hey, something’s gone away, but it’s still there. So it’s like, we’re in this tough environment. But you just have to keep sort of fighting through it every single day and sort of pushing through it. And I’ve always found that, you know, times that are the hardest in your career, or when you learn the most. And when you’re going through them, like you don’t have any sleep. You’re extremely stressed. So if I think back to like, oh, nine, like and all of the things going on then and, you know, banks going out of business. Sure. craziness, incredibly stressed. But today, as you think about that, you’re like, Wow, that was really I learned so much. It really made me better at what I do. And I think this is the same type of environment where, let’s face it, we haven’t seen rates this high since 2009. And it’s a time to learn it’s a time to be better at your business. It’s a time to take away market share from others. So I think it’s it’s, it’s a time where you can affect the most change and have the biggest impact when things are more difficult.
Isabelle Castro 28:14
Okay, that’s quite a positive look on it, which I like I was like positivity? How can people get a hold of you? Maybe follow you? Contact you even?
Ed Mallon 28:26
Yeah, they can follow me on LinkedIn. Send me an email. You know, call me whatever works, whatever works for people.
Isabelle Castro 28:35
Okay, cool. All right. Well, thank you. Thank you so much for coming on the show. I’ve really enjoyed our chat, and have a great rest of your day.
Ed Mallon 28:43
Great. Thank you. You too, was terrific speaking with you today.
Isabelle Castro 28:49
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