Pagaya (EJFA), a leading AI lending software company, is going public through a SPAC merger with EJF Acquisition Corp valuing the company at $8.5 billion. For decades, financial institutions have been relying solely on FICO scores (FICO) to determine an individual’s creditworthiness. However, it can be quite biased, especially against people like new immigrants or graduates who don’t have a credit history. Pagaya is trying to solve this problem by building an artificial intelligence lending network that leverages its AI capability to determine an individual’s creditworthiness without having to use a FICO score.
FICO score is calculated by payment history, amounts owed, length of credit history, new credit, and credit mix. Whereas the AI network uses more data points such as what degree you attended, or what city are you born in, to have a more humane and accurate calculation of your creditworthiness.
The AI lending network aims to help businesses increase their lending demographic and efficiency while maintaining a low default rate. It provides customers such as banks, fintech companies, dealerships, and brokers a centralised AI data solutions that evaluate customers’ credit in real-time. The network then automatically matches applications to the criteria set by different businesses. The whole process is automated and done in real-time which streamlines the traditional complicated lending process.
The company started off providing solutions for personal loans in 2018 and had been expanding into different markets such as auto loans, credit cards, and business loans. Their network volume increased from $0.7 billion in 2019 to $4.4 billion in 2021 and is forecasted to increase to $12.8 billion in 2023. 17 million applications have been evaluated in the last 12 months, and the large network volume allows Pagaya to have a large data asset of over 16 million data points. This leads to high and ever-improving accuracy in the evaluation process. Pagaya currently has a 100% retention rate with all of its partners. The company recently on-boarded Sofi, one of the fastest-growing fintech companies in the US, and Visa, one of the largest financial service facilitators as its latest partner which validates the quality of their lending software.
Unlike competitors such as Upstart (UPST) and Lending Club (LC), Pagaya does not provide any loans themselves. They license their solution to partners such as Visa and earn a fee when a product is sold via their AI network. This means they don’t have to worry about customers defaulting which allows them to have a revenue model with much lower risk compared to traditional lenders.
The company’s revenue is growing quickly, they reported $320 million for the first three quarters of 2021 which is up 220% year over year. The company is expected to further grow its revenue to $1 billion by 2023. Their facilitator position in the industry along with their streamlined solution allows them to grow quickly in the financial industry by initiating partnerships with large banks or other fintech companies. They can also expand into new markets like mortgages which represent a huge TAM in the loan industry. If Pagaya can prove its AI technology to be reliable and is able to increase credit access while maintaining a low default rate, it might replace the FICO score over time as more financial institutions adapt its AI technology.
The company is one of the best SPAC to consider owning right now as it is growing extremely fast and is trying to disrupt the industry with its revolutionising technology. Its future opportunity and TAM are huge if it can successfully prove its AI lending capability.
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