Pagaya Technologies Ltd. (NASDAQ:PGY) Q3 2022 Earnings Conference Call November 10, 2022 5:00 PM ET
Company Participants
Jency John – Head of Investor Relations
Gal Krubiner – Chief Executive Officer
Michael Kurlander – Chief Financial Officer
Conference Call Participants
Eugene Simuni – MoffettNathanson LLC
Joseph Vafi – Canaccord Genuity Corp.
David Scharf – JMP Securities LLC
Vincent Caintic – Stephens Inc.
Operator
Good day, and welcome to Pagaya’s Q3 2022 Earnings Call. Today’s conference is being recorded.
At this time, I would like to turn the call over to Jency John, Head of Investor Relations. Please go ahead.
Jency John
Thank you, and good afternoon. Welcome to Pagaya’s third quarter 2022 earnings conference call. Joining me today to talk about our business and results are Gal Krubiner, Chief Executive Officer of Pagaya; and Michael Kurlander, Chief Financial Officer. You can find the presentation that accompanies our prepared remarks, our earnings release and a replay of today’s webcast on the Investor Relations section of our website at investor.pagaya.com.
Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to our competitive advantages and strategy, macroeconomic conditions and outlook, future products and services and future business and financial performance. Our actual results may differ from those contemplated by these forward-looking statements. Factors that could cause these results to different materially are described in today’s press release and in our most recent Form 6-K as filed with the U.S. Securities and Exchange Commission, as well as our subsequent filings made with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
Additionally, non-GAAP financial measures will be discussed on the call. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and in the appendix to the earnings presentation, which are posted on our Investor Relations website.
With that, let me turn the call over to Gal.
Gal Krubiner
Thank you, Jency, and thanks for all of you for joining us today to discuss our third quarter 2022 results. For today agenda, I will discuss financial and operational highlights from the third quarter and provide an update on how we continue to expand our network and financial infrastructure before handing it over to our CFO, Mike Kurlander, to discuss our financial results and 2022 outlook in more detail. We will then take your questions. In Q3, we continue to progress on our three key strategic objectives, expanding our network, raising capital and strengthening our financial infrastructure.
Starting with growing our network. We continue to scale existing partners while onboarding new partners and driving product expansion. Existing partners’ monthly application flow grew by approximately 20% from January to September. This is a reflection of the values Pagaya network can provide. In tough macro cycles, partners can continue to grow their businesses with limited incremental risk or capital requirements. Within our PoS products, we are excited to announce that we have recently onboarded a top-tier point-of-sale provider to our network. This partnership is an important milestone in our continued expansion across the U.S. financial ecosystem.
In a few minutes, we will share more details about expansion of our auto loan products. Our dealership penetration through our auto partner now cover over 70% of all U.S. franchise dealerships. Our ability to consistently raise capital allowed us to continue powering our network partners. Despite challenging market conditions, we raised over $2 billion in funding in the third quarter, a reflection of the threat of our funding model and investor relationships in both public and private capital markets.
We continue to strengthen our infrastructure. Growing application flows through our network is improving our decision feedback loop. We have evaluated over 77 million applications since 2019 and 41 million applications in the first nine months of 2022, representing 120% growth versus the same period last year. We are pleased with our results this quarter. We delivered a $1.9 billion in network volume, which grew 26% versus the third quarter of 2021. Our total revenue and other income grew by 49%, reaching a record of $204 million. This continues our track record of delivering topline growth every quarter since inception, reflecting ongoing expansion of existing partnerships and accelerated growth in our newer product, particularly credit card and auto.
Our adjusted EBITDA in the third quarter was negative 5.2 million, reflecting lower margin in our newer program, financial markets volatility and ongoing investment in our future business. Mike will discuss our financial outlook in more detail in a few minutes.
Our company was founded with a mission to improve lives by partnering with financial services providers to make financial opportunity more accessible, leveraging our data reach proprietary technology. Our business model is a B2B2C platform sitting in the middle between partners and institutional investors. As a reminder, Pagaya is not a lender or a servicer. We enable our partners to provide enhanced access to financial products and services and facilitate the deployment of capital on behalf of investors. You can see how our network works in practice on Slide 7.
Partners join our network because of the power of our infrastructure, which converts partners funnel more efficiently and effectively thereby enabling them to improve access to financial products for those customers. Onboarding a partner to our network typically takes six to nine months. We spend hundreds of hours working with employees at all levels of the partners organizations to ensure we are delivering the right level of service, seamless integration and customized capabilities to meet the unique needs of each partner. This enables us to build significant trust and a deep knowledge of our partners’ current and future priorities. As a reflection of this trust and value we can deliver since inception, no partner has left our network, demonstrating the stickiness of our network external connectivity once established.
After our network is integrated into our partner system, our proprietary technology, seamless customer experience and flexible solution helps partners achieve more satisfied customers. This in turn drives incremental revenue and reduce customer acquisition costs. At the same time, partners see higher brand affinity, which leads to increased lifetime value. Through our network connectivity to institutional investors on the other side, partners can grow their businesses with limited incremental capital resulting in higher return on investments.
Today, our network sells 25 plus partners across more than 50 channels in five different products; personal loan, auto, credit card, point-of-sale and real estate. Our infrastructure is informed by over 16 million training data sets analyzed by over 250 data scientists and processes nearly $600 billion of application volume that flows through our network annually.
As you see on the right side of the slide, our network has been growing exponentially with a total 77 million applications evaluated since 2019. At the root of our network is the infrastructure we are building to power the real economy, helping U.S. financial institutions grow their businesses, in turn enabling them to better serve their customers. Our network currently spends dozens of partners across multiple products across the country. This breadth of collectivity is critical to the power of our network, giving us enhanced insights on changing economy, demographic and consumer behavior trends across the U.S. Every new partner we onboard, new channel we open an existing partner we scale further add to these data sets, making our model smarter and allowing us to better serve all partners and investors on our network.
This is the essence of the Pagaya flywheel and all comes back to our key assets, the network range, which we have created that connected partners, investors, and consumers through our ecosystem. It is truly one of a kind since inception nearly $1 trillion of application volume has been processed through our network. Supporting this infrastructure is a sophisticated differentiated data engine that plugs into the lending origination systems of financial institutions across the U.S.
Connecting the Pagaya infrastructure to each partner’s owned network, including the [dealerships] merchants and consumers. Pagaya is more than 2,000 partners that sells customers in different regions across products and with different [indiscernible] profiles. These partners also offer the customers a range of services including marketing, origination, servicing and collections.
Our decision layer is continuously collecting information from applications across partners network amounting to nearly $1 trillion in application volume processed since our inception. That information covering nearly 300 million unique customer consumer data points feeds into our data layer, which engineers the data to continuously train our AI.
In addition, our enrichment layer brings in real-time information from other sources such as CRA, Census Bureau and other public and private sources. This combination of high volume, velocity and variety of data gives us a unique vantage point and trains our AI to be more proactive and accurate as well as to rapidly adjust to evolving market conditions.
Those insights are also helping optimize our partners businesses in ways that will be difficult for them to achieve on their own. For example, our network can detect fraudulent activity quicker than any single partner. We can track instances of similar characteristics or behaviors across the flow of multiple channels. In fact, in 2021, we identified similar anomalies in application request across platforms. While other non-network originator were impacted, we were able to notify those on our network, allowing them to act quickly.
Institutional investors also benefit from joining our platform. Unlike other market players, we provide a one-stop shop for access to multiple financial originators providing diverse exposure to consumer assets. Our network infrastructure enable us to help grow our partner business even in a significant market dislocation. Last quarter, we showed you a case study of the partnership during and immediately after the COVID-19 pandemic.
We grew from a 2% to 33% of the partners origination in the environment of shrinking credit boxes and tight liquidity and continuing to grow to 37% in 2021, reflecting the stickiness of our value proposition. We are seeing the same trend among our partners today. We are now seeing accelerated demand from our partners in the current market dislocation as they tighten their own credit boxes.
As you can see on the right hand side of Slide 14, we enable 7 point uplift to a partners origination from the first quarter to the third quarter this year, further strengthening our network connectivity to our partner. The structure of our business model and our advanced AI capabilities enable us to efficiently navigate macro economical cycles and deliver consistent growth for both partners and investors.
As a completely complimentary solution to our partner, it is not surprising that application flow grow over time and even faster in tight credit markets as lenders tighten the credit boxes. Our partners rely on Pagaya even more to continue growing their businesses in these days. In the first nine months of 2022, we have seen application flow accelerate growing at a 120% versus the same period in 2021.
At the same time, we are constantly adjusting our model lead time to optimize the risk return balance on behalf of our investors. This ability to dynamically adapt production through cycle is only possible because of the infrastructure we have built. In the current environment, we are reacting quickly by lowering our conversion rate by 45% in September, 2022 versus September, 2021. As we shift to more resilient lower profiles to optimize investor returns. We remain focused on standing by our partners, helping them grow their customer base and generate new revenue streams and by our investors consistently offering them unique opportunities for investment through cycles.
Now let me pivot to discuss the next stage of the expansion of our networks, Auto and PoS. Pagaya auto business was created in 2019. With the idea that the network raise we connected in the personal loan market could be replicated to help transform the auto financing market. And with our personal loan partners, we offer auto origination a fully complimentary solution to enhance their ability to better serve dealerships.
Over the last few years, we have been focused on onboarding and signing new auto partners across the country to the Pagaya network. Exclusively through our 10 plus auto partners, we have built our distribution into over 12,000 franchise dealerships, representing nearly 70% of all U.S. franchise dealerships. However, while we have greatly expanded our presence, we are just beginning to capture the potential volume opportunity.
Approximately 80% of auto loan originations making up hundreds of billions of dollars in volume flow through franchise dealerships to auto lenders representing massive growth potential. We evaluated approximately $25 billion in auto loan applications in the third quarter, growing over 300% since the fourth quarter of 2020. Since we launched auto in 2019, we have evaluated nearly $140 billion in network volume. The large auto lender we onboarded in the second quarter of the year has helped step change our auto growth, allowing us to penetrate thousands of dealerships across 29 states.
Capital deployed monthly to purchase auto loans has doubled from January to September, and application flow through our network has accelerated. We remain focused on our strategy to scale our network partnered by partner and locking unique distribution channels in this case dealerships through our embedded technology. This is the framework of how we think about scaling all of our product offering. Our network connectivity enable us to replicate the value we provide to investors in our personal loan product across other products too.
On Slide 19, you can see the performance of Pagaya auto production versus a market level benchmark. The chart details 30-plus [indiscernible] delinquent rate over time for loans as 10 months on book. Our AI infrastructure enables lower volatility with better relative performance versus traditional underwriting method even as we have rapidly scaled the products.
Leveraging our experience in personal loan and auto, we are now expanding into point-of-sale markets with a similar go-to-market strategy. Our goal is to partner with leading PoS payments providers to help them increase conversion rates at the point-of-sale, helping grow the retail partners businesses. We are in the early days of scaling our point- of-sale penetration, but believe our network infrastructure and connectivity can support even faster role of these products. It is estimated that there are over $50 billion of point-of-sale sales in the U.S. annually with rapid expected growth as the digitalization of payment continue to accelerate.
Leveraging our installment loan experience, we can provide value to our partners across numerous in market offering and penetrate new merchants relationships through our partners. We are excited to have onboarded a top tier point-of-sale platform. This represents a key milestone to accelerate our point-of-sale product, powering a national merchant community. This lender has a fast-growing U.S. presence, serving approximately 30 million U.S. consumers across 10,000 U.S. retails.
This represents a meaningful step change in our pace of growth. Onboarding a leading lender as one of our first partners in point-of-sale is a clear example of how the power of our infrastructures grow over time. We are excited to work closely with this partner to expand the U.S. businesses while helping them to build a new stream of services and performance data to further enhance their lending capabilities.
Let me now hand it over to Mike, who will discuss our financials and 2022 outlook in more detail. Mike?
Michael Kurlander
Thank you. Gal. The growth in our network is driving our momentum, resulting in a record quarter of total revenue. Network volume and revenue in the first nine months of the year have now surpassed the full-year 2021 levels. This growth has predominantly come from existing partners and we expect medium-term growth to be further enhanced by new partners and programs that are in our pipeline. As we’ve mentioned, our funding model is unique and that we raise cash upfront from investors prior to facilitating the acquisition of assets from our partners. This creates two distinct advantages over the traditional approach.
First, by securing capital, we have an ability to continue operating through very near-term market dislocations. And second, we are locking-in the cost of funding, which helps us price risk efficiently and optimize investor returns. We appreciate the trust our investors have had in us, which has allowed us to raise capital through market cycles with over $13 billion raised over the last three years. Of course, we are sensitive to the uncertain world around us and are continuously focused on growing and further growing our investor base.
Going into more detail of 3Q, we raised funding across both ABS markets and our privately managed funds. Within ABS, we raised approximately $1.7 billion this quarter despite an increasingly challenging market environment, executing four benchmark deals across our top three products, including our first-ever rated SFR transaction, which received a Tripe-A rating from both Moody’s and DBRS. Our investors get the benefit not only of yield and short duration, but specific to Pagaya deals, investors gain exposure to assets originated by multiple lending platforms, providing diversification all-in-one transaction. In the fourth quarter, we just recently closed on another benchmark deal of $700 million in this very difficult market environment.
Turning to our balance sheet and liquidity. Due to the pre-funded vehicles, we do not currently utilize our balance sheet for loans and we hold over a third of our balance sheet in cash with no corporate debt, all backstopped by an undrawn revolving credit facility. Outside of cash, our largest asset on the balance sheet is investments in loans and securities almost entirely related to regulatory risk retention, security interests in the ABS transactions that we sponsor.
Our net economic exposure after accounting for third-party interests is less than $220 million and only a small fraction of the network volume that we generate, demonstrating the efficiency of our business model. I’d also note that over 50% of this exposure is in debt securities.
Now let me discuss third quarter results and our 2022 outlook. This quarter, we grew network volume by 26% and revenue from fees by 45% over the third quarter of 2021, primarily due to continued expansion of existing partnerships and faster growth in our newer products, particularly auto and credit card. Our take rate was at the higher end of our historic range at 9.6% driven by better economics on personal loans our most mature product.
Production costs rose from 5.4% of network volume in the third quarter of 2021 to 6.7% in the third quarter of 2022, primarily due to newer partner programs and growth in our newer products, particularly auto as we expand our dealership footprint through our partners. We reported adjusted EBITDA of negative $5 million, reflecting continued investment in our platform and a weaker macro environment.
Finally, I’d like to give some context on our updated 2022 outlook. We are maintaining the guidance ranges we provided in our second quarter results on network volume, total revenue, and adjusted EBITDA. In light of the ongoing uncertainty in the macroeconomic environment, we are guiding to the low end of the respective range for both network volume and adjusted EBITDA. This is a reflection of three key factors.
First, our business and network continue to grow at a rapid pace. At the same time, the pace at which macro conditions are evolving has changed significantly in the past few months. Remember, our network volume is a function of both application flow and the conversion rate that we apply to this flow. While application flow continues to grow in line with our expectations, we have been intentionally lowering our conversion rate to shift to a more resilient borrower demographic, thereby impacting total network volume. I would also note that the two partners we recently onboarded will take time to ramp and will be more meaningful to our network volume in 2023.
Secondly, and unsurprisingly, the current dislocation in the financial markets impacts the level to which Pagaya can monetize application flow from our partners, affecting our profitability in the short-term. We continue to see significant volatility in financial markets, but over time, we expect asset pricing will stabilize with cost of capital certainty.
Lastly, our operating expenses remain elevated, reflecting continued discretionary investments in our infrastructure, technology and people. After a large growth in overhead necessary to become bank and public company ready, the pace of growth slowed in the third quarter as we begin to reach scalability and prioritize our investments against our long-term strategic ambitions, especially in light of the current operating environment.
With that, let me hand it back to the operator for Q&A after which Gal will make a few brief closing remarks.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] And your first question will be from Eugene Simuni at MoffettNathanson. Please go ahead.
Eugene Simuni
All right. Well, thank you very much guys. I wanted to start maybe with a question on the credit quality of the loans that have been originated through your platform. Obviously, not on your balance sheet, but with your asset investors. So helpful to see the chart again on the auto loans showing that you had of the benchmark, but can you comment a bit on the other asset classes? Last time you shared kind of similar chart on the personal loans, but would be helpful to hear some comments on the quality of the credit book across the portfolio?
Gal Krubiner
Sure. Eugene, thank you for your question. It’s Gal here. So to your question, as we shared in auto loans parts, in the other asset class, we see the same trend. We are seeing stabilizing parts that are coming in line with what we expect and credit is very much stabilizing as we expect. We saw a function change in June, where liquidity was really much driven outside of the market and drove the ability for players like us to provide a much better outcome for our partners, but at the same time provide much better return for our investors.
Internally, we look on ourselves from a relative value perspective and we see that like our ability to outperform what we think is the benchmark is substantial, continued and coming as a few hundred basis points over a long period of time. Now all of that is being driven by the 45% reduction that we did in our conversion rates. That’s the way we moderate and we control the investor return and making sure we are being able to deliver what is expectation given the higher financial volatility in the market.
Eugene Simuni
Got it. Okay. That’s helpful. Thank you. Then maybe another question is on the more strategic level about your growth of your network. It was very helpful to hear comments on the expansion of the auto business and the new relationships with point-of-sale players. There was not as much mentioned this time of the – your big bank initiative with large bank initiative, which you talked about a lot last time. So I’m just curious on the progress of that or is that part of the kind of auto loan expansion? I mean big banks are the ones your auto loan partners. Can you update us on that?
Gal Krubiner
So Eugene, you are correct. The auto loan is definitely driven by the addition of the bank and we see much more pipeline behind that. So as you can imagine while onboarding a major auto loan partner, there are many others that are looking at that and starting to become realization of that. In the third quarter, we were focusing a lot on onboarding and expanding what we did with a big bank on auto, which is a step function change for us. And as we – why we speak, we’re continuing to onboard more and more states out of that through that partner and many dealerships to them.
And as I said, from a pipeline perspective, we are in a discussion with, I would say almost all of the top 25 banks in different stages and we are in different type of integration or discussion to integration with many of them. So the focus remains very much on top of that banks in the U.S. or major banks in the U.S. I should have said are the main focus of the team and we feel from a pipeline perspective that we have – needed to execute on that in different levels.
Eugene Simuni
Got it. Okay. Well, thank you. I’ll leave it there.
Operator
Thank you. Next question will be from Joseph Vafi at Canaccord. Please go ahead.
Joseph Vafi
Hi. Good afternoon and thanks for taking my questions. I know Michael, I heard you say that you did – you’ve already closed another funding vehicle here in Q4. But I just thought I’d just check in on real-time appetite on the investor side beyond closing that deal relative to the macro. And then I’ll have a follow up.
Michael Kurlander
Hey. Thanks so much for the question. You’re right. We did just price a deal earlier this week for $700 million that brought our quarter-to-date of funding raised to $1 billion. So what we’re seeing is – clearly cost of funding has gone up, but the market is open. And I think what we’re seeing now is a differentiation as investors look for issuers to come to market with products that those investors are looking for. And it really helps to have a pre-funded model, which again really provides a benefit for us of not only certainty of funding, but for the investor side, they’re getting one-stop shopping of multiple platforms in one deal. And so we’ve seen a really positive reception for that even in today’s market.
The other thing that you’re finding is, we have a number of strategic capital partners and so in the real-time market that is really playing out favorably for us in the sense that across sovereign wealth funds, pension funds and large asset managers, we’ve built that track record where those investors know what they’re getting and they’ve continued to participate. And so as we sit here today, we’re very pleased in the fact that we were able to do those two deals even in this market environment.
Joseph Vafi
Got it. And then I’m just a little curious, why take rates higher in personal? I know you mentioned it’s your most mature line of business. Is it just more operating leverage because you have a cost structure there that’s different or is there something else going on as to why the take rate there is higher than some of the other loan classes?
Michael Kurlander
Yes, Joe. As it relates to take rates, so just thinking about our revenue side, you’re right, and that personal loans are our most mature product. The partners that we have been engaged with have been partners of ours now for multiple years. And one of the things that you saw in the presentation is over the recent time period is credit boxes have tightened up given the dislocation in the macro. We’ve been able to provide more value to those partners. We’ve been able to take more of the volume that they provide and doing that we’ve been able to generate better economics as those partners have grown. And so that’s really more apparent in the personal loan space because the volume in that side is bigger given that we’ve had the partner relationships for longer.
Joseph Vafi
I see. Got it. So would it be fair to say that if some of your other verticals kind of mature a little bit more, there’s a possibility of that same phenomenon to occur there too? Or is it more related to the macro and where we are right now?
Michael Kurlander
You hit it, Joe. That’s exactly the way that we envision the business and it’s a 100% the way that we think this will play out.
Joseph Vafi
Got it. And then maybe I’ll just sneak one more in on auto. Just wondering, I mean, it’s a great distribution channel that you’ve got there. Just wondering at that dealership level, are they going to be running various loan platforms where you may potentially be still competing with others or how is that going to kind of unfold at the dealer level on a loan application? Thanks a lot guys.
Gal Krubiner
Hi Joe. It’s Gal here. So just to a – quick reminder, when we are thinking about the auto and the dealerships, we’re actually partnering up with in auto lenders. So in any case it will not be a Pagaya per se and it will not be something that they will see or we will be with others. We are mainly an enabler. So think about it that the world is not changing from a consumer perspective, from a dealership perspective. Most probably they don’t even know it’s Pagaya differing. But we connected the API through the different lenders and the distribution of that auto lenders has a distribution of dealerships and were embedded through them, through their brand, through their name and actually taking these take rates. So from a consumer and a dealership, nothing is changing and we are riding with them and helping them to get to the scale that you see on the presentation, which is rather impressive.
Joseph Vafi
Makes sense. Thanks, Gal.
Operator
Thank you. Next question will be from David Scharf at JMP Securities. Please go ahead.
David Scharf
Good afternoon, thanks for taking my questions as well. Hey, I also wanted to dig in a little more into the newer asset classes and network expansion. Starting with auto, the list of lenders you’re working with that are included in your securitizations, is a very healthy kind of who’s who of some leading subprime lenders, the Westlakes and CPS flagship. I’m wondering as we think about the pipeline, are there any OEM captives that you’ve been in discussions with and/or some of the larger bank subprime lenders like a Santander, Wells, Chase?
Gal Krubiner
Hi, David. This is Gal here. I will take this one. So thank you for the nice comments and we definitely feel that our present in the auto space is healthy and good. As we’re thinking about the pipeline and the next steps, we are putting our efforts more towards the big banks. There are certain big banks that are holding major part of the U.S. distribution and we are very natural for us given all the things that we build and a lot of the investments that we have done to be focusing on these things. So not to say that OEMs are not relevant or not an opportunity, we’re definitely going to go after them, but from a short-term perspective, we’re from a pipeline perspective, we are more advanced than focused on the big banks in the U.S.
David Scharf
Got it. And just referencing, just so I’m clear based on the answer to the prior question on the transaction flow, I assume an auto application still gets sent by a dealer-over-dealer track or route one to the lender who happens to be your client. And you’re just doing the underwriting on the backend, it’s completely invisible even to the dealer as well, correct?
Gal Krubiner
100% correct. You got it, right.
David Scharf
Got it. Hey, shifting to point-of-sale, once again in this case, just trying to get a better understanding of what type of loan you’re actually underwriting, you use the term platform when describing the new partner in the U.S. Are we talking about a traditional second look point-of-sale lender? Or by the use of the term platform, are you referencing for example, a large buy now pay later provider or a network like a charge after?
Gal Krubiner
Yes. Sure. So let me start with connecting the dots here first and then I will comment on your second half of the question. So when we think about the underwriting, the funding and all the things that we do here in Pagaya, we are thinking from where is the problem that we are solving and who are, what is the situation at the end that the consumer is facing that we are trying to support and we are going – we are going to that through the partner that has the most amount of access to that. So as you said with the dealerships, that’s very clear that like the auto lenders are our clients and that’s who we partner with and we work with and no one else knows about us.
And the same thing is happening, on actually the PoS where there is a merchant at the end, but actually behind that there is a, what we refer you to a major BNPL player that has a very wide range of presence in the U.S. and a lot of merchants that they are working with. So we are coming again behind the PoS provider, behind the big BNPL player and we are helping them provide that type of credit for the consumers. So again, think about us as an enabler in these both cases and the credit we are providing. We are connecting to one very big BNPL partner and we have an exposure to millions of U.S. customers and thousands of U.S. [indiscernible] through that.
David Scharf
Got it. Understood. And I only asked because the PoS financing market ever since BNPL became a – such a visible product, the lines blur between traditional PoS lenders and BNPL and obviously there’s an awful lot of runway ahead of you with other lenders as well. Hey, lastly, sort of connecting all of those dots about who your actual partners are on auto and PoS? Maybe just a overarching strategic question. Clearly just all the dislocations in the capital markets lately have kind of shown a light on the importance of having stable partners and access to capital and certainly so-called fintechs have had maybe a more volatile experience accessing the capital markets than more traditional financial institutions.
If you had to, guess what your mix of sort of loan volume will look like in three years with respect to how much of it would be generated by – what we would think of as traditional banks, financial institutions versus how much would be generated by the bulk of your current client base, which you deem to be fintechs. When does that kind of mix ultimately transition to where it’s closer to 50/50, do you think? And it would seem like auto gets you there quickly as well?
Gal Krubiner
So I think, from the strategic question, it’s an evolving and an interesting one. First of all, when you think about it, let’s lay out the asset class or the markets we’re actually working, right? So we have like a personal loan PoS, credit cards and auto loans. Let’s put this far aside. When you are thinking about that, we are trying to be as much as possible, nimble and relevant to the market we are operating in. So when we started on the personal loan, the personal loan is really driven mostly by the more I would say tech-enabled type of partners, right? So if you think about it, I don’t have exactly the numbers in front of my head, but like you were speaking about a very big portion of the full market of the personal loans that is being driven by so-called the fintech players.
On the auto loans because it’s very much driven by the dealership experience and like the fact that you are actually going to a place to pick your car or to choose your car, I think the nature of that will still remain very traditional for many more years. And as we think about there, we almost don’t see any partners that are coming from the more call it tech enabled way, and most of them are more traditional both on the banks and on the non-bank type of auto lenders.
Now, PoS is a combination of two, PoS like you will find that banks are getting into, and we have a very interesting discussion regarding that and the ability to operate that because it’s taking a little bit of more tech forward, but it’s like a place where banks don’t want to give up on that and want to be very major player because of the credit card and they want to make sure they’re going to stay relevant. And we are supporting in that. But in the same time you see the BNPL, which is growing very massively and is growing more and more over the year.
So the right answer for that is really how the market will involve we as an enabler and the infrastructure of the network that we are building is really to provide the faster growth and bigger partner pay trade in this part. And we will play alongside the market as they are involved. And obviously that creates for us a very high diversity of offering, which create a much more stability and create uniqueness of the Pagaya network as part of that, which is a compromise of all of that. Mike, you want to add to that, maybe.
Michael Kurlander
Yes. I guess first off, I just appreciate you calling out the thought because it’s exactly the way we think about it, which is what’s most important are the partner relationships, funding. And then risk management and that’s really what we were built on. So you’re exactly right in thinking about it that way. Just to put maybe some-near term context onto what Gal said, our network volume this year, when you look at the outlook that we provided, that’s largely all of the growth from this year is largely driven by existing partners.
And so when you think about even the large banks that we’ve onboarded this year, which took, between six to nine months to get up and running, really the impact on that from a network volume standpoint won’t come until next year. And so just think about that lead time as you think about the growth in our bank strategy as we begin to onboard more partners that fuels really the next leg up of our network volume growth as we move up from the $7 billion plus range that we have for this year into the coming 2023, 2024.
David Scharf
Understood. That’s very helpful. Thank you. And listen, congratulations on, just all the success in these kind of challenging times. Sounds like you haven’t taken your eye off the ball in terms of executing on the pipeline, even though that capital markets always have their volatility here and there.
Michael Kurlander
We appreciate that, David.
Operator
Thank you. [Operator Instructions] And your next question will be from Vincent Caintic at Stephens. Please go ahead.
Vincent Caintic
Thanks for taking my questions. First one wanted to talk about the conservatism in your underwriting. So it’s interesting, the approvals down 45% in September year-over-year. But the implied guidance for fourth quarter, it’s only down a little bit quarter-over-quarter, plus, I think the implied take rate is still very strong at 9.2%. So if maybe you could talk about the strength of your underwriting, what’s assumed in the applications or updated underwriting and the fourth quarter with being conservative? It’s a good jumping up point when we think about the growth of in volumes that we should be thinking for 2023? Thank you.
Michael Kurlander
Thanks very much Vince. Appreciate the question. Let me start at the top and then maybe Gal will want to add. Really we’re encouraged and we continue to be encouraged by the level of application flow. So with a greater pool of applications, we can be more selective to drive investor returns, and that’s really what we’re focused on. So you’re right in pointing out that we’ve been tightening in the conversion. By seeing a greater pool of applications, we can continue that while maintaining or even growing network volume, and we can actually then drive through the models a higher expected return for our investors. And so there’s a lot that goes into that in terms of the way that the models are built, but just think about it from a high level that by seeing a greater pool of applications, we can be more selective to actually generate a better output for our investors. Anything you would add to that, Gal?
Gal Krubiner
Yes. I think from that perspective is like trying to create a really ecosystem where you are trying to be accretive for all. So we are accretive to the investors by pushing the conversion lower and higher return, but at the same time standing next to our partners and becoming a bigger part of the production during these days. So it’s like a – it’s a balancing act between knowing to find the right place in between all of these relationships. And that’s the really the thing of the ecosystem. And that’s what brings us to believe that we are building a win-win-win outcome for all of the participants that are working with us.
Vincent Caintic
Okay. That’s very helpful. Thank you. And second question, it’s kind of following up on the funding questions, but if you could update us on how your investors are thinking and what they’re sensitive to. I guess today, we saw spreads tightened just broadly and equities go up because inflation started to come down maybe a little bit. I’m just wondering maybe if you could talk about what the – what your investors are focused on what they’re sensitive to and the appetite for growth from here. Thank you.
Gal Krubiner
So I think from an investor perspective, the thing that our investors care about the most is the stability and the consistency. The one thing that we build rather early on and it’s important to say it’s rather unique for a company in our size, in our stage to have that is the diversification and the variety. And that gives us the ability to become first, the one stop-shop of all these players. And in the same time to have a very deep discussion and understanding of what drives a different part. So like the ability to drive stability of that type of stuff and to enable access to, from the public market to the private market in a very, I would say, unique way is really the thing that driving us and brings a lot of efficiency to that model.
So like we are really in early days of being able to open that amount of pools of capitals into the real economy as we call them, through our infrastructure network. And we see that the things that are really most interesting our investors is to continue to deploy capital in a very stable and ability and predictive way. So we feel very good about the fact that we can enable them to do that.
Michael Kurlander
I would maybe just add one point to that. I would just add one point, which is when markets are very volatile, one thing that is very helpful as a part of our model is that we’re locking-in the cost of capital before we’re actually sourcing those loans. And so when you have that known cost of capital in the deal, then as we go out and again targeting those, the investor returns, it allows us to do that a little bit easier than if you’re having the loans first and then looking for funding in a very volatile rate environment.
Vincent Caintic
Very helpful. Thanks very much.
Operator
Thank you. Now back to Gal.
Gal Krubiner
To close, I would like to say how proud I am for our team, we may focus on our mission and expansion of our network infrastructure, enabling us to deliver results for both our partner and investors. Thank you for joining us today and we’re looking forward to continue partnering with you in the future.
Operator
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you please disconnect your lines.
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