Our Investment in Pylon
The mortgage industry is entering a new era of restructuring, following one of the greatest housing booms we have seen in a generation. During this time, we will witness a consolidation of industry players, wide-scale adoption of new technologies and processes, and an increase in efficiency which will largely benefit the borrower. There will be new winners and losers; antiquated, closed-loop systems will be replaced by emerging products that leverage significant trends prevalent in other areas of the economy. These include the bundling of microservices, cloud-only infrastructure, adoption of APIs, vertical software, and efficient operating systems.
Concurrently, the relationship between consumers and the financial system is shifting dramatically, creating large-scale disruption and unbundling in areas including wealth management, insurance, banking, and payments. As members of the crowded fintech landscape fight for differentiation, a new crop of embedded fintech players have emerged, allowing startups and industry incumbents alike to offer product-centric offerings to drive revenue diversification.
We believe this inflection point in technology and consumer behavior will usher in dramatically improved alternatives to legacy products and processes, which is why we’re excited to share our seed investment in Pylon. Pylon is the first fully embedded mortgage system that offers end-to-end white labeling, flexible APIs and integrations, regulatory and compliance support, underwriting logic, and a robust capital markets takeout. Pylon’s platform builds on top of decades of technological advancements which continue to bring the once paper-based industry into the digital world. Conversion Capital is thrilled to lead Pylon’s Seed funding, and I’ve joined the Board.
The Pylon co-founders, Trent Hedge and Marco Monteiro, have a special mix of technical know-how and business experience, which we believe can build the next generation of mortgage offerings through better systems, applications, and delivery. Previously, Trent co-founded Atmos, a digital custom homebuilder, and Marco was an experienced engineer, having worked at top companies including Databricks and Instabase.
The US mortgage market is the largest and most complex asset class in the world and is a crucial component of the US economy. It supports the consumption and economic prosperity of millions of people and is central to the American dream. However, this important product has been slow to catch up to the evolution of technology and trends in consumption. Two decades ago, mortgage applicants would go to their local bank branch, which provided checking and savings accounts, to apply for a loan. After endless paperwork, the branch would give them a mortgage rate based on your income, FICO score, LTV, and debt-service ratio. These factors are still important, but the way we engage with, and access credit has changed. Dozens of startups have begun chipping away at every piece of the mortgage process, intending to streamline and digitize the standard loan application from multiple weeks down to days.
While the mortgage borrower base has been slowly detaching from traditional lenders and moving to consumer-centric fintech companies, the economy has also been evolving. Like the mortgage industry, consumer internet went through an evolution. Cloud unbundling and embedded technology attacked financial services, as well as other industries. Fueled by cheap venture dollars, the consumer and fintech boom created competitors across a multitude of different products, including neo-banks, payments, wealth management, and insurance. Technology created large-scale efficiencies and better forms of engagement across the system, and consumers were catching on and demanding more. This unbundling era created thousands of businesses all vying for the same customer wallet. Fast forward to today – the stakes have never been higher, and the competition has never been fiercer. As the technology drawdown continues and CAC payback extends, every company must offer more compelling products and services to survive.
The perfect storm for embedded mortgage:
- Cloud Infrastructure: The trend towards cloud-only computing continues to expand across industries, offering a more flexible, efficient, and scalable platform. This transition has changed how startups and established companies interact with customers. As this transition matures, we will see an acceleration and bundling of microservices, which will reduce costs and increase efficiency.
- Growth in Consumer Fintech: After the global financial crisis of 2008, we saw a surge in fintech innovation driven by a lack of trust in banks, regulation in financial services, and unbundling of products across the financial services sector. For example, there are now over 200 neo-banks worldwide, all offering similar products to different consumers. Over time, the need for these businesses to diversify their product offerings will accelerate, and mortgage is one of the most profitable and long-term opportunities in financial services.
- Embedded Fintech: In 2023, the embedded fintech boom will continue, with more and more software and technology companies adding financial services to complement their core product offerings and generate more revenue per customer. For the past decade, financial services companies have been moving away from legacy providers to new, more agile product companies.
When investing in technology, we look for companies that solve hard problems that force a change, not a comparison. Pylon exhibits these traits, which is why we’re thrilled to have them join Conversion’s portfolio of category-defining lending tech companies including Blend (NYSE:BLND), Vesta, Qualia, Figure, Polly, Wisetack, and Ramp.
At Conversion, we are energized by the role that technology plays to replace outdated systems in large markets. Trent Hedge and Marco Monteiro have assembled an incredible team, so if you’re passionate about the evolution of financial services and changing how consumers access financial products, please check out the company’s engineering and other job openings.