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In this episode, I sit down with Jason Guss, CEO and co-founder of Octane Lending, to discuss how the company became the #1 powersports lender in the country. The conversation covers Octane’s early pivot from lender aggregator to direct lender, their dominance in niche markets, and strategies for thriving in challenging interest rate environments.
Jason talked about how their early focus on good unit economics and then profitability put them in a great position during the challenging times of 2022 and 2023, enabling them to gain market share and rebound quicker than their competitors. He also has some interesting things to say about the banks in the market and strong thoughts on the importance of capital markets.
In this podcast you will learn:
- Why an efficient capital markets function is so important.
- The A-B test that led to the founding of Octane Lending.
- Why they built a loan origination system right off the bat.
- The “burn the ships” moment when they decided to pivot the business.
- How they were able to last sixteen months with very little revenue.
- The different niches within powersports where they provide financing.
- The typical loan terms.
- The total size of the powersports market and the percentage Octane has.
- The advantages that Octane has competing with banks in this market.
- How their loan application works at the point of sale.
- How their customers are navigating a higher interest rate environment.
Read a transcription of our conversation below.
FINTECH ONE-ON-ONE PODCAST NO. 547 – JASON GUSS
Jason Guss: So whenever they want to start a financing conversation, whether it’s the customer themselves or with a finance manager or sales manager, that is as simple as possible as well. Integrating all of their systems, avoiding rekeying, all that type of stuff. We have various channels that make it super easy for consumers to get pre-qualified online or in the store by scanning things, et cetera, et cetera. We have all sorts of models that automate the need to upload manual documents in about 90% of cases, in the 10% of cases where for whatever reason, we need something to verify you. Most of those documents are also processed automatically. Whereas if you look at us five years ago, 100% of applications needed something manual, gotten that down to 10%. So we’re constantly trying to cut down so that the consumer or the finance manager or sales manager on the other side isn’t waiting on us. They are able to do move at their own speed.
Peter A Renton: This is the Fintech One-on-One Podcast, the show for fintech enthusiasts looking to better understand the leaders shaping fintech and banking today. My name is PR: and since 2013, I’ve been conducting in-depth interviews with fintech founders and banking executives.
Today on the show, I am delighted to welcome Jason Guss, the CEO and co-founder of Octane Lending. Now, Octane have been around for more than a decade and I’m definitely overdue to get Jason on the show. As the name implies, they are focused on secured lending for powersports. We discussed the early pivot they did that set Octane up for success and how they’ve been able to become the number one powersports lender in the country. Octane’s journey offers valuable insights into how to dominate in niche markets and the importance of capital market strategy and how fintech lenders can thrive even in challenging interest rate environments. Now, let’s get on with the show.
PR: Welcome to the podcast, Jason.
JG: Thank you so much for having me.
PR: My pleasure. Great to get you on here. I’d like to get this started by maybe just giving the listeners a little bit of background. You’ve been doing Octane Lending on it for a long time now, over a decade, but maybe you can just tell the listeners what, some of the high, I you haven’t had a long career yet, so Octane Lending has been the majority of it. Just tell us some of the highlights of what you’ve done to date.
JG: Absolutely. So I started my career actually at Capital One working in corporate strategy. And while I was at Capital One, I had the pleasure of being able to work on various parts of the business, including their auto lending business. And at the time, Capital One had acquired a card partnership business from HSBC, which included a powersports lending business. And so my career actually is launched directly from Capital One, where I was fortunate enough to have a future co-founder who did a rotation in the group and help me understand that there was a large yet very underserved lending market.
PR: Okay, so then what was it that, you know, maybe you could just tell us what was it that made you take the jump? Were you looking to become an entrepreneur, start your own business? What was the motivation there?
JG: Absolutely. So I was staffed on a project in Seattle and I had dinner with another one, the third future co-founder. And we were talking a bit about ideas that we had for businesses. And he talked about wanting to create a company in an overlooked yet large market. One there, there aren’t many investments in technology. So you wouldn’t be facing off with fierce venture competition. And I had remembered that my other future co-founder was describing the power sports market and how there were limited technical tools for the large consumer population to secure efficient financing. And that’s basically when we got started. But before we were ready to take the jump on this idea, we interviewed a bunch of people off our college alumni networks to come up with a short list of ideas that we thought could be interesting startups to pursue. We came up with three that we were serious about and we A-B tested our incubator applications and luckily in hindsight with everything I know now about running a business, the powersports idea is the one that got picked up for funding and that’s more or less kind of interesting story of how we got started there.
PR: Interesting. Interesting. so were you a power sports enthusiasts and maybe you can actually, and answering that describe what exactly you mean. Do you mean, you know, is this motorcycles, mainly ATVs? What are we talking about?
JG: Yeah, great question. So the power sports market is made up of motorcycles, which are pretty evenly split between cruisers, which is what you think of when you think of a Harley Davidson and sports bike, which is probably what you think of when you think of a Yamaha or Suzuki. The other half of the market is split mostly between ATVs, which are quads and UTVs, which are side by sides for people who are not familiar with these products. So you can think of it as kind of looks like a Jeep with outdoors as a roll cage.
It’s used primarily for off-roading, hunting, and various utility functions. So you can move stuff on your property. A lot of folks use it in agriculture, et cetera. And then a very small part of the market is snowmobile and personal watercraft. And so going into this business, I actually didn’t even really know what power sports were until my friend had raised the market to me. But having been in the market for 10 years now…just like it is for many other people in the power sport space, the first time I fell in love with the product was the first time I used it. And fortunately for us, our series A investor has a bunch of horse trails and trails through the woods in his property. And I was able to drive a UTV for the first time on his property many, years ago, right when we were kind of starting the business. And I immediately understood the passion and love in this market.
PR: Right, right. Cause that’s what we’re talking about here. I mean, this one thing to get an auto loan and some people are very passionate about their cars, obviously, but if you’re going to get an ATV or a motorcycle, oftentimes that is driven by passion. so maybe, which, which makes it, think a somewhat of unique lending vertical, but maybe you could talk about what was, when you looked at the state of the powersports market in, 2014, um, what was, what was it like? What did it need that Octane was able to?
JG: Yeah, so the interesting history about us is we actually didn’t start as a lender. We were originally a lender aggregator in loan origination system. And so the initial insight that we had is unlike the auto industry that functions very similar to our market. So in the same way you go to a car dealership to buy a car, you would go to a power sports dealership to buy a motorcycle or an ATV or a personal watercraft, et cetera. And just like in the auto industry…
PR: Huh, I did not know that.
JG: You know, over half of consumers are financing their purchases with retail installment contracts originated at the dealership through a finance manager. But unlike the auto industry where you have these aggregators like DealerTrack, Route One, et cetera, where a finance manager can submit a single application and get many, many quotes from various lenders. Think of it as if you’re less familiar with dealer track, you can think of it as like Lending Tree at point of sale or Credit Karma at point of sale, let’s say.
The aggregators in our market had almost no penetration with the major lenders. And so what would end up happening is these finance managers would rekey the customer information going from web portal to web portal. And so our initial business idea was to launch the lender aggregator to speed up the financing process. And in order to entice lenders to sign up for our aggregator, we also offered them a free loan origination system that was integrated into our marketplace. For those of you who are unfamiliar with an LOS, it’s an underwriting platform that you can use. In addition to that, we realized that a lot of the lenders in the market still engaged in manual underwriting, paper contracts, and all sorts of stuff like that. So another one of our initial innovations was fully automated underwriting, fully digital deal structure. So you have to remember this is a secured loan. And so the difference between this and an unsecured is that you might have a dozen different fields that you have to itemize and it matters how much you put in each field for regulatory or credit risk reasons. And so before us in a lot of the systems that existed for lenders, if you got even one penny wrong in one of these fields, it would kick an error. You’d have to talk to a human to kind of work it out. We built all the logic into every single one of these many fields so that they were error-proof, which sped up the deal time substantially. And then we’d flow you to paperless contracting as opposed to using paper contracts, which is even today, primarily the norm for many originators in our space. And so the way you could think of that is our initial value prop was speed and ease. We want to be faster and easier to help our customers get the best financing as quickly as possible.
PR: So you built a loan origination system before you started really getting going or what was the sequence of events there?
JG: Yeah. So it’s just like any other startup there. You can’t do everything at once. You have to sequence, get to MVP and launch things very quickly. So the dealer portal that we built, which had the structuring, the paperless contracts. And then we more or less, we built like a common app feature where you’d fill out the information on our screen, and then we would refill it for you on other lender websites. That was the very first product we had, but you know, fast follow maybe a few weeks after we launched that MVP. We also did MVP of our loan origination system out in the market that we were marketing simultaneously to lenders. You know, similar to what some other startups might have faced, we had the right problem, the wrong solution. And so the story I always like telling, lender aggregators are kind of interesting businesses. Even the best lender aggregators have this issue where a lot of the revenue comes from a very small number of partners. Because you actually don’t need hundreds of lenders for every part of the credit spectrum. You need a couple lenders in every part of the credit spectrum. And so just like other lender aggregators, like one lender, which is so much better than all the other lenders we had on the aggregator, provided over 70 % of our revenue. And when we launched in December of 2014, it was the best part of our platform. was phenomenal lender. We were able to speed up their process. They were using our LOS. It was really helping the business get going. And then in February of 2025, so we raised the seed round, launched our product in December of 2014. And now I’m just talking about six weeks later, I get a phone call and for no reason, nothing that we did, they just decided they didn’t want to do PowerSports lending anymore. And we always kind of realized that this business that we had was the right market, was the wrong solution, but we were getting a decent amount of revenue growth from this one part of our platform that was working. And we were trying to dilute ourselves to maybe the lender aggregator still could work out here. But the truth of the fact was that in this market, like many other smaller lending markets, there just aren’t enough lenders in the space to generate demand on that side of the marketplace. And so we were never going to be able to create a venture scale business.
And the largest best lenders had no interest in ever working with us because they were getting the volume that they wanted without having to pay an aggregator and they would lose some of their control, some of their autonomy. So it was the right problem, which was Power Sports was broke. The Power Sports lending market wasn’t as efficient as it could be, right? Slow lending, large parts of the consumer population underserved, either getting expensive rates or no rates at all. But lender aggregator wasn’t the solution. And this our only real partner who was working, leaving our platform, was kind of the push we needed to do the burn your ships moment, where we decided to pivot and instead of using the tech that we had built to power a lender aggregator, the merchant portal that was really efficient, the loan origination system, use that to power our own originator.
PR: Right.
JG: It took us a little bit more than a year to go through everything we need to do, which is you have to raise capital to be able to start lending. have to raise warehouse lines. You have to get licensed. have to create your underwriting models, all of that. It was a little bit more than a year and we launched our lending business. So we started the pivot in late February, 2015. We originally had our first loan in the beginning of June, 2016. And that’s really when the business started working.
PR: Right. Gotcha. Wow. That’s a long, in hindsight, it wasn’t, it didn’t break you, but that’s a long time to go without generating much revenue. How was that time?
JG: Yeah, absolutely. given that we’re in those days, everyone today sees these mega seed rounds, people are raising millions and millions of dollars. Yeah, we had raised under a million and a half and that was our seed round today. That would be a modest pre seed round. And so, you know, our burn was minimal. I think our maximum burn was maybe like 20 or $30,000. And so we always had really long runway. We were very disciplined. And that gave us the basically the space to make this pivot happen. And as you know, from other lenders that you’ve had on the show, there’s a lot of, there’s a pretty high amount of costs that you have to just start lending. especially if you’re doing it on balance sheet. And so we were fortunate enough that we were able to get the continued support of our seed investor, Contour Venture Partners continued to, to invest in us along with bring on some new investors, Fintech Collective, and ultimately IA Ventures, Berenson and Co. who came in for our series A, which we basically closed in September of 2016. So we were fortunate that we were able to raise additional capital through this pivot. We had a pretty compelling story because we had this lender aggregator. We had a decent amount of volume flowing through the platform. So we were able to show, hey, if we were lending, we’d immediately get traction. So we already have distribution.
We were able to cobble together a lot of historical data to show that the loans themselves were quite lucrative. That was probably the largest hurdle because most people’s intuitions are that these loans are just inherently too risky. It’s not a good business. And then we also were able to fumble around enough and close our initial debt capital, which would enable us to scale the lending business in 2016.
PR: So what are we talking about here as far as the types of the loans that you are doing? Is this similar to an auto loan as far as loan size, loan terms, that sort of thing? What are we talking about here?
JG: Yeah, so Octane today is quite large. We’ve originated almost 7 billion since inception. And I’m sure by the time this airs, we’ll be over 7 billion. We’ll originate 2.2 billion this year. Our home market is power sports, as I described, but we also operate now in mower, tractor, trailer, RV, Marine, and we’ve just entered the auto space. Every loan that we do is a secured retail installment contract or installment loan. So no credit cards and no unsecured collateral.
Most of the fintech lenders that you’re familiar with tend to focus on unsecured markets or credit card. And so that’s kind of one difference. Another difference is this is all done through point of sale. So this isn’t you know, mailing, mailing or SEO game or some sort of digital acquisition game. We do have various channels that help us acquire leads that we then give to our merchants, but every loan is originated as part of a retail transaction that’s occurring through a merchant or manufacturer that we are partnered with. In addition to that, similar to companies like Affirm, in the same way, they’re partnered with people like Peloton, we have partnerships with some of the largest manufacturers in the segments that we operate in, where they buy down the interest rate to offer the really great attractive interest rates to our consumers as a way for them to help move retail sales.
That’s a pretty large part of our business. And so from an average loan size, our home space of Power Sports, the average finance amount of around 13,000, whereas the auto space, depending on if you’re choosing, you know, used or new, may be from 30 to 50,000. So it’s a considerably smaller loan. The loan duration is pretty similar to an auto loan. So most common term is around 60 months. So you have a very low average payment depending on where you are on the credit spectrum between 250 and $300 a month.
And then our average FICO oscillates between 710 and 720. So think of this as an upmarket prime business, which makes sense, right? Given the fact that this recreational in nature, you have to have discretionary income to be able to participate in the asset because it’s not something you need to survive. And that’s actually one of the interesting insights that we had on the credit side of the house. Everyone’s intuition is because it’s discretionary, the credit is poor, but what they’re not thinking about is the fact that by nature of being discretionary, the customer demographics are unbelievably positively skewed. And so you end up with a very strong customer pool that they’re choosing to spend their 250 to $300 a month on this activity because they love it. It’s how they bond with their family and their friends, the thing that they love most in their life. Whereas, you know, folks might spend that money on other recreational activities, going to hotels and visiting places or whatever it is they’re up to. This is how this population is choosing to enjoy their weekends.
PR: So you mentioned you said you’re to do like $2.2 billion in loans this year. That’s a, that is not an insignificant number. And I, I’m curious about the, the size of the powersports industry and, your role in it. mean, how, maybe, you know, what, tell us what percentage of the market you have and, what about who controls the rest of the market?
JG: Absolutely, so the power sports markets about 30 billion in annual sales were on pace to originate about 1.9 billion this calendar year. So just under 6 % of the entire market. Then their originations outside of that are the other verticals that I described. So we’re still power sports dominated, but we have a growing business outside of power sports. As we look forward, we would expect the rest of the recreational verticals to mature and for us to become number 1 in those markets over time as well. But.
In terms of our markets that we compete in, specifically on the recreational side, so the six verticals, RV, Marine, Power Sports, Mower, Tractor, Trailer, every one of those markets tends to have two to three large banks that dominate that space. And then a long tail of credit unions and local lenders. And so those competitors change market to market in Power Sports. Our primary competitors are Synchrony, Sheffield, which is owned by Truist Bank. In Mower Tractor Trailer, we face off sometimes with DLL, which is owned by Rabobank. Sheffield’s the number one in the mower space. We face off against them. TD, unfortunately, had to exit the business recently, but they were another large competitor that we face off there. Synchrony also has a business in that market. RV, Marine, it’s more like M&T Bank, US Bank, Aqua. Those are the larger players in that segment. And then in the auto industry, which we are just getting started in, everyone wants to lend in that market. we’re basically facing up with almost all financial institutions that have consumer exposure.
PR: Yeah, that’s a big market. Right. Yes, yes, indeed. So it’s interesting, I’m, you know, like, there are a lot of the banks that you’re talking about, they’re, they’re not specializing in this market. I mean, maybe, maybe some of them have some of the smaller ones do, but is that, does that make it easier to compete? Because you are, you have domain knowledge that would be tough for any, any bank to duplicate.
JG: Yeah, great question. So Sheffield, which was acquired by BB&T, which is now part of Truist Bank, was built originally for the motor market. They later entered Power Sports and since have added a few other outdoor power equipment markets like HVAC and stuff like that. So everyone who works at that business only thinks about these markets. Where we have an advantage is their parent company does all sorts of different things. And for the parent company, it’s, know, they love this business, but they also love other businesses that they’re in. And so a huge advantage that fintechs in general have been able to do, like I see a pitch for the Synchrony, you know, attacking Synchrony in XYZ market probably every single week. I’ll see a new tech company trying to do that. And the reason why they have a chance, because remember Synchrony is filled with really smart people. Sheffield filled with really, really smart people. They have unlimited money.
If you look at the market cap of these businesses, Synchrony, last time I looked was around $28 billion. Truist Bank’s got to be over $40 billion now. The assets, a few hundred billion dollars for Synchrony, Truist is, they’re like a top six, seven bank in the US. So they clearly could deploy resources and somehow win here. But there’s a couple of advantages that you have. One is because of the regulation, it is very difficult for banks to build technology themselves because if you go through how you actually build technology correctly through an agile, know, through, if you’re working through agile as opposed to waterfall, there’s a lot of opportunities for things to go wrong and break. It’s in, you’re kind of fixing things really quickly. You’re trying to do very rapid launch cycles and sometimes you get something wrong. Well, if you’re Synchrony who’s originated billions and billions of dollars every single year, and something goes wrong, it’s much bigger deal than if you’re a fintech lender who has zero customers. And so whenever they’re trying to make major changes, major upgrades to these systems that were built decades ago in some circumstances, they kind of get stuck because the amount of regulatory oversight and protection they to do to ensure that nothing ever goes wrong because their scale is so massive makes it really difficult for them to actually build technology.
And in addition to that, if they do want to build technology, it’s not that they can’t, it’s just hard. It’s unbelievably expensive. So if you’re at Synchrony parent, the businesses that we compete with are like an installment line of business, but most people don’t even know that Synchrony does installment loans. They think of them as a private label card business or a Synchrony Care Credit is the kind of the big business lines there. It’s more likely that Synchrony Care Credit will get the several hundred million dollar tech investment than the segment I’m going after. Now, the segment I’m going after is employed with really smart people who only think about this problem, but they’re not going to get the resources from up above. That gives an advantage to us as a tech company where we’re only thinking about this and we can also build technology far more nimbly, far faster to be able to have a chance to compete with them because incumbents are really good. They’re really smart. They already offer really cheap rates. You’re really going to have to provide like a 10x value increase to have a chance of displacing them. And in order to do that, you have to be able to innovate on the technology side of the house. And if we had to build as slow as they did, then we’d have no chance, right?
PR: Right, right. Okay, so I wanna talk about your lending process and your underwriting. I’ve heard you describe Octane as making financing as easy as cash. Now I’ve seen other people claim that. I’d love to kind of get a sense of what it’s like someone walks into the Honda or Suzuki dealership or a Harley dealership and they wanna finance their purchase. Explain how you operate there.
JG: Yeah, so that’s an aspirational goal to make it as easy as cash. Now we’re chipping away slowly at it, but it’s one of our key value props is speed and ease. we, always view that as one of the key differentiators. So what that means is we invest very, very heavily in never being the bottleneck. So what I mean by that is everything’s automated on our side. We try to make everything as easy and simple as possible. And let me tell you, secured lending can be complicated. And so in the early days, our platform wasn’t that simple. We weren’t living up to the promises, but we always invested, listened to customer feedback and made our platforms better and better. It also means that we try to integrate into as many of their workflows and many of their systems as possible. So whenever they want to start a financing conversation, whether it’s the customer themselves or with a finance manager or sales manager, that is as simple as possible as well. Integrating all of their systems, avoiding rekeying, all that type of stuff. We have various channels that make it super easy for consumers to get pre-qualified online or in the store by scanning things, et cetera, et cetera. We have all sorts of models that automate the need to upload manual documents in about 90% of cases, in the 10% of cases where for whatever reason, we need something to verify you. Most of those documents are also processed automatically. Whereas if you look at us five years ago, 100% of applications needed something manual, gotten that down to 10%. So we’re constantly trying to cut down so that the consumer or the finance manager or sales manager on the other side isn’t waiting on us. They are able to do move at their own speed.
PR: Right. Because that’s like a car purchase. You’ve gone to a test drive, you get excited, and then you can wait for an hour while all of this documentation is happening. And some of the traditional lenders and the car dealers that are out there, I went through that process not that long ago. I was staggered by how inefficient it still is in 2025 in some areas.
So you’re saying you’re not the bottleneck. It’s you’ve got all the, all the information and then, then what, what happens once they, they’re approved, they, know, what, what’s that, how’s that process you’re sending? You, you send the consumer like what, maybe explain how, how you take, a security interest in the, in the, and the asset and, and what that’s like at the end of the sale.
JG: (25:31.098)
Let’s start at the beginning. So about 45 % of our applications come through what we call consumer. This is a various prequel channels that we have that are embedded white label integrations into over 800 dealership websites, manufacturer websites, all sorts of media properties, various things like this. And then 55 % of our applications we can, we call dealer channel. Dealer channel means either a sales manager or more likely a finance manager at one of these dealerships submits an application that they’ve received from the consumer. The applications that start on the consumer side, they’re integrated into the dealers, all the systems they need to help close that deal and make it as quickly as possible. It’s just a couple of buttons. They could finalize the approval. Usually what ends up happening is they have to verify the vehicle to ensure that whatever they select on the website was actually what they ended up wanting to purchase at the time of actual sale. But think of it as you submit eight fields online, the dealer then needs to kind of confirm one field. It’s very, very simple. Then once that goes, there’s a waterfall of a bunch of things that occur immediately.
So when you’re online or the finance manager submits, all the credit underwriting happens instantly. So we’re pulling various data sources, doing the full credit underwrite, and that determines what risk tier, how much amount of finance that you could have, the APR, loan to value that we’re willing to lend out, everything like that. Simultaneously with the credit underwriting is also a KYC and fraud check. So similar to that, we have various models, various data sources where we’re trying to confirm, are you who you say you are? And if you’re not, what would satisfy us to believe that you are who you say you are? And so based off of the KYC fraud check, that’s where we might need some manual things to verify you. And so, you know, it could be identity, a phone, something along those lines like ID or phone. Sometimes we’re able to automate that. As I mentioned, you know, 90% of the time, the goal is to get that down to 95% of the time. But, most of the time we can do it. It’s kind of really only in tricky cases where things are just too much mismatching that we can’t automate that. And then on the credit underwriting side of the house, the only thing you’ll ever have to manually verify is income. We’re able to also automate that 90% of the time. There’s only 10% of the time where we weren’t able to automatically verify you for some reason and you would have to either connect a bank account or upload a pay stub, in which case that stuff is also verified generally immediately most of the time. And if it can’t for whatever reasons, it’s usually like trickier self-employed cases, then we have a team that can underwrite that very, very quickly. But you’re really kind of talking about edge case scenarios where you have to do something like that.
With all of that, all the offers that you’re, we try you for every single possible offer. Those offers are then shown to the finance manager who then talks to you and says, okay, like, you know, what term do you want, here are the different APRs, this is how much we could finance you. Once they understand all of that, they itemize the deal. Once again, all the logic for what they could put into every single field is already automated into our system. And that can vary by state for regulatory reasons, by vehicle type for regulatory reasons. And then there’s also various risk controls on certain types of things that you could finance with us. Then once you have that structured, and if there’s any errors, it shows them exactly what the error is. They can just fix it themselves. They’re able to chat with us whenever they want. But what we find is that most merchants who like us within a few deals, they don’t really need to talk to us unless something unusual is occurring. But we’re here if they want help. And then it flows you to paperless contracts, which are sent to the consumer and the dealer. They both sign. Then the consumer’s done. They can leave, take their vehicle, and go.
And the whole process, it just kind of depends how long the discussion is around financing options and all that type of stuff and how much they want to finance, what financial products they want to buy. That’s between the dealer and the customer. We’re not bottlenecked at all in that. If you’re all green, so like that 90% of the time, know, decision automated, the credit fields, very few credit fields needed and the paperless contracting, very simple. You can be done in a handful of minutes. Where it could get a little bit longer is if you’re in one of those weird tail case, higher risk situations where there’s a little bit of back and forth, but as I mentioned, sub 10% of the time, and we’re constantly investing in models and data to get that number smaller and smaller and smaller. And then, you know, also how much time you want to spend talking to the finance manager or the sales manager, negotiating the deal or whatever, that could be a bit of time, but we’re not involved in that. And then the dealer, then just has to, we’ll tell them exactly what they have to upload for whatever the vehicle is. And usually it’s just a proof of title, which they do at their dealership. And so that helps us secure the lien. And then we have all sorts of mechanisms to follow up if something’s not done correctly or something like that, which is once again, those are like more tail scenarios.
PR: Right. Right. Okay. So you’d launched Octane in a, in a very low interest rate environment, zero, zero percent interest rates for, were, were not, you know, most of the last decade until very recently. So I’m curious to see since the, the Fed started raising interest rates, I guess it’s been two plus three, three years now. How has that impacted you guys? Cause this has said to discretionary product. And I imagine it’s somewhat interest rate sensitive or is it? Maybe you could tell us a little bit about how you’ve been able to navigate it, how ultimately the consumer is navigating this high interest rate environment.
JG: Yeah, so one thing that’s a bit counterintuitive is, we hear it all the time, when the economy gets poor, you’re going to do no originations. What I always say is we’re not going to be able to say no fast enough, because nothing happens in a vacuum. The same set of circumstances that correlate with weak retail, which we’ve been in a weak retail environment since 22, part of that is because of the pull forward of demand at COVID. Part of it is from the macro factors you were just talking about in some uncertainty in the market. But our volume grows substantially despite that, because number one, retail sales, they’re kind of moving mid-single digits one way or the other. They’re either growing mid-single digits or they’re shrinking mid-single digits. And we’re trying to grow this business. In the early days, doubling the business, now that we’re so large, our target’s more like 40 % at year over year. So going from positive five to negative five isn’t going to make or break our ability to grow 40%. It’s going to be around the margins anyways. The second thing is competition pulls back substantially. And as I mentioned, even though we’re quite large, we’re number one now based off our analysis of the market is not publicly data. So we have to do our own analysis of market share. It effectively, we’re selling about under 6% of sales. So if the competitors are pulling back, even if retail sales are shrinking, there’s a lot of market share up for grabs. So a story I always like telling is in COVID. So we were a much smaller business when COVID broke out.
We tightened our underwriting about 75% between February and April. As you have to remember, everything ended up being fine, but people thought the world was ending, especially for lending businesses in March of that year. And our volume doubled between March and April, volume still doubled. And that’s just because lenders pull out so much whenever you have these kind of extreme shocks. Now, in general, COVID, that was…
PR: Wow.
JG: …pretty extreme. That’s kind of like Lehman Brothers failing in the correction that happens the day after Lehman Brothers fails. Usually it’s more of a gradual thing. So lenders are typically gradually tightening or gradually loosening. You’ll periodically have someone just leaving market. That does happen, but that’s relatively uncommon. And so, but those forces of tightening or loosening are usually more than retail sales movements. And that’s really the whole story. Now, did we do as a business? Like every other fintech, we faced challenges. know, 22 and 23 were really difficult years. One benefit that we had is because we’re in a market that most VCs don’t really think about, we always had to be well ahead of our skis on our KPIs in order to raise capital relative to what other people would do in a more marquee market. In addition to that, we always knew that capital wasn’t a given. And so unlike larger fintechs that have been very successful, that were able to raise lots of capital, but run really large losses for a long period of time, we didn’t have that luxury. So, we generated 22 million of net income in 2021, right? So we, and we were cashflow positive in 2020. And so our focus on profitability before kind of the corrections on 22 put us in a much better position. Whereas there are lots of other fintechs who were shaky unit economics in zero interest rate, but we’re able to be subsidized by venture dollars that when venture dollars got taken away and they had massive burn and their unit economics now got slashed, we’re in a much, much worse position versus us starting from operating profitability, an extremely strong unit economics. Our unit economics got slashed by two thirds, but they were still profitable in 22. And then we focused in 2023 on getting our unit economics back to where we wanted to be on a through-cycle average. We knew the unit economics of 2021 were too good to be permanent. We knew there’d be some reversion of the mean and it turns out we got a really rapid, fast reversion to the mean. And then we were able to kind of focus on lowering our expenses, lowering servicing, investing a lot in automation to lower servicing and origination expense. Things on the risk side of the house to make our risk posture much stronger, improving mix and pricing and all those types of things, continued investment in capital markets. All of those things helped us return to gap net income profitability in 2023. I mean, I don’t think there are many businesses that can have their unit economics cut by two-thirds and then return to profitability less than a year later. And, but that singular focus enabled us to do that. So basically what happened when we knew that the world was turning really quickly in Q1 of 22, because what was happening with inflation and of course, Ukraine-Russia war had just kicked off, which was kicking off a lot of uncertainty in the credit capital markets. And so we got a little bit of a jump on it. We started tightening the underwriting there, whereas a lot of people didn’t start tightening the underwriting until several months later. And then we would hold all these pricing meetings basically twice a month until we got our unit economics back to where we wanted to be.
And that kind of singular focus we threw out at the OKRs that we had developed at the end of 21 because they were no longer relevant in the beginning of 22. We moved from a year focus to I believe we did quarter goals, which is a very short-term relative to what you would normally do because the world was changing so quickly in early 22. And then once things got a little bit normal, we had made a lot of progress returning profitability. We were able to go back to six months goals. And now, of course, we’re back to.
annual goals and whatnot, be able to think a little bit more long-term. But kind of that singular focus around ensuring that we can return the profitability are since the beginning, focus on unit economics, all of those things, believe, positions as well. The last thing I will say is something that some fintech investors and founders don’t really understand or they undervalue relative to the true values, capital markets.
Everyone understands you have to have the best user experience, the best technology. Everyone understands that you have to have a pristine credit performance. Not everyone understands what that means, but they know that credit’s important. But what usually is kind of a back office thing that a lot of fintechs aren’t thinking as much about that they should be is capital markets. And I’ll just tell you a quick story about why this point is so critical. Our very first warehouse line was priced at a thousand over Libor. Okay. Now today our average warehouse lines are inside of 200 over SOFR. Libor got replaced. Most people are replacing with SOFR. They’re basically the same thing. And our last securitization was 124 basis points. Now this doesn’t even talk about all of the fact that our first warehouse line, we had to give away some more. And so it’s actually even more expensive than that, doesn’t even talk about the fact that our advance rates are much better, meaning the amount of cash we’re putting into every loan is much more efficient for us today than it was back then. But that is well over 800 basis points of improvement. Our annualized net loss rate is 2%. We’d have to have negative losses to see the exact same improvement. And so a lot of problems why investors think lending is so bad, it’s actually because they didn’t really have a thoughtful capital market strategy. And so they never made money and they always needed more cash to be put in the balance sheet. But investing heavily in capital markets, the same way you invest heavily in technology, heavily in credit, it’s one of the secrets to being able to build a business. Because lending is not a bad business. Bad lending is a bad business. Good lending is one of the most profitable businesses. You just have to be right on credit and you have to be right on capital markets. You need to build it a little bit more thoughtfully than you would in a SaaS company where you don’t have the same type of volatile dynamics on revenue and losses. So I’ll get off my soapbox, but that’s effectively how I feel about that.
PR: Okay, well, that’s a good place to end it, Jason. It’s certainly been a pleasure chatting with you and great to finally get you on the show and best of luck to you and thanks for joining us.
JG: Thank you so much for having me.
PR: Okay, see ya.
I want to pick up on that point Jason made about capital markets. You new lenders often fail because of high customer acquisition costs or poor underwriting. Get either of those things wrong early and you will struggle to survive. But once a lender is established, then capital markets takes on a much more important role. For Octane Lending to have a more than 800 basis point improvement on their cost of capital is testament to their focus on capital markets. It may not be as sexy as spending money on technology or AI underwriting models, but this back office function is key to building a sustainable and profitable lending business. Anyway, that’s it for today’s show. If you enjoy these episodes, please go ahead and subscribe, tell a friend or leave a review. And thanks so much for listening.