Revolutionizing the Lending Space

Fintech is continuing its upward trajectory by leveraging technological solutions to solve traditional banking problems. And Upgrade is part of that wave, enjoying significant success in the credit market since its inception in 2016.

After the recently raised series E funding round in August 2021, an IPO is ultimately in sight for Upgrade: “We believe we will be ready to go public in the next 18 months,” Upgrade co-founder and CEO Renaud Laplanche told the financial services news platform “Bank Automation News”.

Upgrading the lending experience

Founded by Renaud Laplanche, the founder of LendingClub, Upgrade, Inc. provides affordable and responsible credit of up to $50’000 to a broad universe of mature, mainstream customers. These customers are a tricky target. They are already creditworthy, with an average age of 42, a credit score of 700, and a household income of $130’000. These are typically customers of the more traditional banks – Wells Fargo, Bank of America, etc. – and Upgrade has revolutionized their credit experience. Upgrade provides quality credit products, financial health tools, education, monitoring, and notifications. Even being declined for an Upgrade product is an added-value experience, with means provided to improve financial well-being.

Credit first

This commitment to responsible lending contrasts with the traditional banks who, in the view of Laplanche, “have an incentive to keep customers in debt as long as possible”[1].

An Upgrade credit card starts at 6.9%, well below the average entry rate of 12 to 13%. The business sets repayment periods for debt so that customers can avoid a relentless and often ruinous credit cycle. And the brand encourages users to pay down their debt rather than spending more to earn more. Instead, customers receive rewards when monthly balance payments are made. Upgrade will even create an installment plan if a customer cannot pay a monthly balance payment. These measures cement the company’s position as a responsible lender.

The business model adds up

Upgrade is a “marketplace” lender. It originates the loans and sells them to third-party investors (credit unions and asset managers) instead of keeping them on its balance sheets. It is the same principle as the LendingClub model Laplanche used in his previous role.

Therefore, much of Upgrade’s funding comes from the small banks and credit unions that are buying up its loans. Laplanche confirms that “credit unions have the lowest cost of funding of all, as [they are] tax-exempt non-profits – even lower cost than if we were taking deposits”[2]. The FT believes this has helped elevate Upgrade to the top of its annual list of fastest-growing companies by CAGR (682% between 2016-2019).

Rapid growth continued during the pandemic, and revenues rose to $100m even as US consumers paid off credit cards and other forms of debt. Mainstream lenders responded by reducing loan origination volumes by half: they were worried about unemployment and defaults. But Upgrade’s typical consumer was much more likely to weather the economic storm, staying employed and continuing to pay down their loans.

This seems to validate both Upgrade’s choice of the target consumer and its payment-focused product design. The FT also describes Laplanche’s belief that this distributed banking model “protects Upgrade from overexposure to volatile capital markets, where many other marketplace lenders sell their loans”.

Expanding the portfolio

Unlike many neo-banks, Upgrade did not start with the usual checking account/savings account structure. Instead, it launched with a credit focus – specifically personal loans and credit cards – intending to broaden its portfolio to include more neo-bank offerings in the future. Fintechs often launch with checking accounts and debit cards because these products create regular interchange incomes. Upgrade launched with higher-margin credit products and is now expanding into lower-margin consumer banking – a back-to-front model that enables the company to extend its customer lifetime value. Upgrade’s checking account and debit card launched in January 2021 with no monthly fees, no minimum balance, and everything controlled via its mobile app. Checking account customers also receive lower rates for Upgrade loan products.

The company also recently launched the Upgrade Bitcoin Rewards Card – a classic Visa credit card that delivers 1.5% in bitcoin rewards when you make payments. BlockFi and Gemini have also recently launched bitcoin reward cards, but, as these are still not generally available, Upgrade has the advantage.

Upgrade customer feedback has been overwhelmingly positive: its Net Promoter Score (NPS) is currently 78 – comparable to Apple at 72 – whereas the legacy bank average is just 2.

The Upgrade team

Headquartered in San Francisco, Upgrade employs 390 people across its San Francisco, Phoenix, and Montreal hubs and has quadrupled headcount since its launch. It has been voted “Best Place to Work” in the Bay Area for the past continuous three years.

Upgrade’s leadership team, headed by Renaud Laplanche, is a heavyweight band of financial, regulatory, and technology big-hitters – many of them from Laplanche’s previous enterprise LendingClub.

Credit where it’s due

In four years, more than 15m people applied for an Upgrade card or loan, and the business made over $7b in affordable and responsible credit available. Upgrade’s credit products primarily drive this scalable and hard-to-emulate business model, and Laplanche confirms that its strategy is to “monetize our base through credit”.

And this strategy is paying off, with Bloomberg reporting that Upgrade’s signature credit card product generates $1b in new credit lines every year. Upgrade’s website states that its 500’000 customers have borrowed more than $5b between them.

Entry at the Latest Valuation

Upgrade announced that it had raised $105m at a $3.3b valuation, led by Koch Disruptive Technologies, the investment arm of Koch Industries. The profitable startup additionally counts Santander InnoVentures, Silicon Valley Bank, Union Square Ventures, Ribbit, Vy Capital, Uncorrelated Ventures, and Ventura Capital among its existing investors.

By entering at the most recent round valuation, registered Stableton Marketplace users have the opportunity to be part of the Upgrade success story. Register at www.stableton.com to learn more. The end of the subscription for this opportunity is on 17 September 2021.

[1] https://techcrunch.com/2020/06/17/credit-focused-fintech-startup-upgrade-raises-40m-after-reaching-100m-run-rate/

[2] https://www.ft.com/content/3fc7fc68-7671-4be1-a100-a7af81408cbe