Upgrade was founded by well known Fintech entrepreneur CEO Renaud Laplanche. He founded LendingClub (NYSE: LC) and ran the marketplace lending platform for 10 years taking the company public in 2014 before being pushed out. Laplanche was soon back in the game with Upgrade – a new online lender that did not involve retail money. Formed in August of 2016, Upgrade quickly completed a Series A funding round raising $60 million in both equity and convertible securities. At that time, the funding was described as “the largest Series A in Fintech ever and probably one of the largest in the history of technology financing.”
We recently caught up with Laplanche. Our discussion is below.
Crowdfund Insider: Tell us what makes Upgrade unique.
Renaud Laplanche: Upgrade has a unique strategy. While most neobanks or challenger banks in the U.S. and Europe have focused first on deposits, savings and payments products, we are building a neobank around credit products.
Credit is 70% of banking revenue worldwide, and obtaining credit is often the main reason consumers seek a bank relationship, so we think it makes sense to build a neobank on a strong credit foundation.
In just three years since we launched in 2017, more than 10 million unique users have applied for an Upgrade loan or card, and we have issued over $3 billion in consumer credit. In Q3 this year we will be launching our first mobile banking product, designed to deliver exceptional value to mainstream consumers.
Crowdfund Insider: What products does Upgrade currently offer?
Renaud Laplanche: We started with credit products: we first launched in 2017 an unsecured consumer loan, often used by our customers to refinance an existing credit card balance at a lower rate and more consumer-friendly terms.
Then we realized that we could move “upstream” in the value chain and not only refinance credit cards but replace them entirely. In October 2019 we launched Upgrade Card, a very innovative product that combines the flexibility and convenience of a credit card with the lower cost and predictability of an installment loan.
Upgrade Card essentially makes installment lending available at millions of retail locations, everywhere Visa is accepted. The card has been rapidly gaining adoption in the U.S. with an annual rate of $500 million in new credit lines already being made available to consumers.
Crowdfund Insider: What makes Upgrade credit products more responsible?
Renaud Laplanche: Upgrade loans and cards all have a fixed rate, fixed monthly payment, and a “straight line” amortization, meaning that our customers pay down their debt in equal installments every month.
This is very different from traditional credit cards, which pretty much all feature variable rates, so the eventual cost is unpredictable for consumers and hard to budget for. But the worst feature of credit cards is the so-called “minimum monthly payment” that is designed to keep consumers in debt longer, and keep the outstanding balance as high as possible so credit card companies can earn more interest.
If a consumer makes the monthly minimum payment each month, it will take 25 years to pay the balance in full, and the cost will end up being 3 times the initial charge on the card. This is how so many families end up in a revolving debt cycle, with American families now owing on average more than $8,000 in credit card debt.
Crowdfund Insider: Who are your customers?
Renaud Laplanche: We serve a very broad range of mainstream consumers. Our customers are 42-years old on average but there is a very wide dispersion around that average as they live in nearly every state in the country, and are representative of the general U.S. population.
Our customers, however, tend to earn significantly higher than average income, with an average individual income close to $100,000 (more than twice the national average). They also carry a higher-than-average balance in their main checking account, with an average daily balance close to $5,000.
They generally use credit, have a mortgage, an auto loan or lease and one or two credit cards, so they use credit but have the financial resources and job stability to support their credit. They have also shown extraordinary resilience during the COVID-19 crisis, as evidenced by a very stable delinquency rate.
Crowdfund Insider: What has Upgrade done differently in relation to COVID-19?
Renaud Laplanche: We have implemented a forbearance plan designed to lower monthly payments for our most impacted customers, although most of our customers have declined the plan and are continuing to make their regular payments.
We also introduced our first contactless Upgrade Card and made the card available in digital form through both Apple Pay® and Google Pay™ to enable mobile payments.
This is in line with the World Health Organization’s (WHO) recommendations that consumers limit the use of banknotes and, when possible, use contactless cards or smartphone payments to reduce the risk of coronavirus transmission.
Crowdfund Insider: Can Fintech help the economy during the COVID-19 crisis?
Renaud Laplanche: I believe Fintech has a role to play in helping the economy during the COVID-19 pandemic by helping consumers stay healthy while keeping access to the products and services they need in their daily lives. At its core, Fintech is about using online or mobile devices to access financial services.
By limiting in-person interactions and reducing trips to the local branch, Fintech products help users meet their needs from the safety of their home.
Crowdfund Insider: Some credit platforms are experiencing a sharp decline in originations this quarter; how is Upgrade doing?
Renaud Laplanche: Some of the legacy credit platforms rely on securitizations and hedge funds to finance originations and lost most of their funding sources in the last couple of months. Upgrade is very different as loans are mostly funded by small banks and credit unions that are dependable and steady and have remained active throughout the crisis. We have tightened our credit standards but have continued to originate at a steady pace.
Upgrade Card originations, in particular, have continued to increase in Q2. Also, we are getting an increasing portion of our revenue from payments rather than credit (such as interchange fees on Upgrade Card), which is continuing to rapidly ramp up.
Crowdfund Insider: How is loan performance? What has Upgrade done to mitigate risk?
Renaud Laplanche: Loan performance has held up very well so far. We’ve offered forbearance plans, which only a small number of our customers have chosen to take advantage of. Overall, our delinquency rate is down from last quarter.
Crowdfund Insider: Do you anticipate consolidation in the broader Fintech space?
Renaud Laplanche: Probably.
Not every Fintech startup is going to make it through the crisis, and there will certainly be opportunities for the larger and better-funded players to scoop up quality products and teams. We’ve generally preferred to grow organically but will be on the lookout for interesting acquisition opportunities.