Ahead of the Pack – How a Leading Neobank Is Cementing Its Position

"Banking has to work when and where you need it. The best advice and the best service happens in real-time and is based on consumer behavior, using principles of Big Data, mobility and gamification."

Brett King Founder of the first global Neobank

Very few readers will be able to recall the time before ATMs existed, but it’s not that long ago in the overall scheme of things. Chemical Bank was the first to introduce the technology in the US, when it installed a ‘Docuteller’ machine at its Rockville Center branch on Long Island in the autumn of 1969. Initial models were exclusively for the use of the bank’s own customers, with the concept of shared ATMs, which we now take for granted, being a 1980s development.

The first US ATM

Source: New York Times. The acronym ATM stands for automated teller machine

The financial services industry has been evolving, albeit at a very pedestrian pace, since the industrial revolution, but the disruptors are now taking center stage and threatening to turbocharge the speed of transformation, ushering in a new era of creative destruction.

The fintech sector has exploded in recent years due to the rise of Neobanks, virtual credit cards, digital currency, artificial intelligence-powered financial servicing, and conversational interfaces.

Neobanks are tech-first, new-age financial services providers, free from physical locations and traditional overheads. They are innovating much more rapidly than their conventional counterparts and offer their customers faster response times, lower costs, and mobile-first financial solutions.

According to a survey conducted by McKinsey and Company, between 2017 and 2021, the fraction of customers in Asia Pacific developing countries actively utilizing digital banking expanded rapidly, rising from 54 % in 2017 to 88% in 2021. Although Upgrade’s business is solely focused on the US, the McKinsey study illustrates the growing demand for digitalization in the banking sector, which is a global trend and one that is expected to propel the neobanking market.

‘Neobanks generally aim at providing more value and a better experience than traditional banks.1’

Renaud Laplanche
CEO and Co-Founder,Upgrade

Introducing Upgrade

Backed by Coatue and Vander Capital Partners, and counting among its investors the likes of Union Square Ventures, Silicon Valley Bank, Ribbit, and FirstMark Capital, Upgrade is a rapidly growing US-based credit-led Neobank and leading consumer-lending fintech platform. At Stableton, we have been investing in Upgrade since 2020 and our deep and lengthy association places us in a strong position to weigh up the intrinsic value of its capital-raising deals.

Headquartered in San Francisco, CA. Upgrade facilitates personal loans and credit cards/lines (Upgrade Card/OneCard), rewards checking accounts, and free credit monitoring and educational services. Upgrade was established in 2016 and has raised +$600m to date. In November 2021, the company raised its most recent funding round, a $280m Series F at a $6.3b valuation led by Coatue Management and DST Global.

Upgrade’s singular focus

Upgrade aspires to empower consumers with innovations that help them better understand and unlock their credit potential. It offers affordable and responsible credit to consumers through cards and loans, together with free credit monitoring and education tools.

Loans are provided to fair-credit borrowers, considering their credit score, free cash flow, and debt-to-income ratio. Users are able to receive personal loans up to $50,000 by either applying online or through Upgrade’s mobile app, and may receive loans for credit refinancing, debt consolidation, home improvement projects, or major purchases. Once approved for a loan, Upgrade usually deposits the funds into a user’s account within one business day.

Innovative business model

Upgrade provides the platform, and powers all credit-related decisions and backend functionality, while not bearing credit or funding risk. Instead, it utilizes low-cost funding from credit unions and banks to minimize the risks associated with marketplace lending. In March 2022, Upgrade reached the milestone of cooperating with 100 credit unions across the US. The credit unions purchase loan and card receivables from Upgrade and enroll their members through Upgrade’s platform.

As such, Upgrade benefits on both the supply and demand side from these partnerships, while credit unions can deploy excess liquidity and add Upgrade loans to their balance sheet to compensate for a surplus in deposits. These growing partnerships have diversification benefits for both sides.

At the edge of disruption

‘Every player in the fintech and neobank world is racing to build a super app, where we move upstream in the user’s decision-making process and encourage users to start their shopping experience from our own app. We think we’re ahead of the pack.2’

Renaud Laplanche
CEO and Co-Founder,Upgrade

In February, Upgrade added a shopping component, ‘Upgrade Shopping’ to its app and website, bringing it a stage closer to winning the ‘super app’ race. This new feature gives users 5% to 10% cash-back rewards at more than 20,000 retailers when using the Upgrade Card.

Upgrade Shopping was created through a partnership between Upgrade and Cardlytics, whose advertising platform runs in banks’ digital channels.

At the end of October, Upgrade launched its ‘Premier Savings’ account with an annual yield of 3.5%, just as the competition for deposits begins to heat up following substantial rate hikes by the Federal Reserve. ‘At 3.5%, we’re by far the best savings account in the country!3’ observed Laplanche.

Upgrade can afford to pay higher rates than rivals because of its network of small banks and credit unions. These institutions don’t have national deposit-gathering platforms and, as a result, are willing to pay more for funding. Upgrade is able to ensure this network has access to all the funding it needs by raising deposits on its behalf and then rewarding the depositors with higher rates of return.

Untapped Growth Levers

While Upgrade can already show an impressive growth record with its personal loan, credit card, checking account, and deposit account business, a variety of growth opportunities remain to be explored. The automotive financing and student loan markets are new segments that offer a $3.0 trillion market that can be entered easily by cross-selling.

Experienced and astute leadership team

Prior to co-founding Upgrade, CEO Laplanche co-founded and ran Lending Club, America’s largest online marketplace connecting borrowers and investors, and has been the recipient of multiple awards, nominations, and accolades. In 2015, Laplanche was featured in Bloomberg Markets’ ‘Most Influential List’, an annual ranking of the World’s top 50 most influential leaders across technology, finance, and politics.

The leadership team also comprises, Jeff Bogan, CFO, Adelina Grozdanova, Head of Investor Group, and Thomas Curran, Chief Risk Officer. Both Bogan and Grozdanova previously worked with Laplanche at Lending Club, where the former sourced more than $15 billion in capital from retail, institutional, and financial institutions. Meanwhile, Curran has 20 years of financial regulatory experience.

Built to last

We are impressed by the resilient nature of Upgrade’s business model and the experience and credibility of its leadership team. Upgrade is already a very profitable business, and we envisage a number of opportunities through which it could accelerate its growth trajectory in the period ahead.