November 9, 2021
Editor’s note: Upstart Co-Founder and CEO Dave Girouard recently shared thoughts during the company’s quarterly earnings call about the last year as a public company, as well as a look to the future. To read more about Upstart’s Q3’21 Earnings, visit here.
Good afternoon, everyone. Thank you for joining us on our quarterly earnings call, covering our third quarter 2021 results. I’m Dave Girouard, co-founder and CEO of Upstart.
Today marks our fourth earnings report as a publicly traded company, and I continue to be amazed and delighted with the progress the Upstart team has made. This is an entirely unique time in our history and executing as a newly public company in this environment is not without challenges. Four out of five Upstarters joined our company during the pandemic; and many have neither seen the inside of an Upstart office nor met their new colleagues in person. Yet collectively they continue to knock down walls and make amazing things happen.
Artificial intelligence is perhaps the most transformational technology the world has yet to see, and Upstart is at the forefront of applying AI to the multi-trillion dollar financial services industry. So the scale of the opportunity is not lost on us.
Since the IPO
Q3 was another strong quarter of triple-digit growth and profits, and we’ll get to that shortly, but it’s worth pausing for a moment to reflect on what our team has accomplished in the year since we went public:
- In the six years leading up to our IPO, 620,000 loans were originated on the Upstart platform. A year later, our bank and credit union partners have originated more than 1.5M Upstart-powered loans, totalling more than $16B in originations.
- While there were 80,893 loans originated on our platform in Q3 2020, (which was the quarter prior to our IPO), we facilitated 362,780 Upstart-powered loans in Q3 2021. That’s a growth rate of 348%.
- As you could read in Upstart’s S-1 filing, our AI platform had experienced 9M repayments events and was trained on 15B cells of training data as of a year ago. Today, our platform has processed 17M repayment events and is trained on 28B cells of training data.
- A year ago, we had 10 bank and credit union partners on our platform. Today we have 31 partners and we’re adding them faster than ever.
- We’re also making progress in how rapidly we can onboard these partners. In fact, our most recent bank partner went live on the platform in less than 50 days.
- A year ago, a handful of auto loans had been refinanced in a single state. Today more than 4,000 Upstart-powered auto loans have been originated in 47 different states.
- We also became a “digital first” company this year. In the Q3 of 2019, 100% of our new hires were located in either California or Ohio. In Q3 2021, we hired new Upstarters in 25 different states as well as the District of Columbia.
Now I’d like to shift and talk about the products on our platform today—personal lending and auto lending—and the progress we’re making with each. Then I’d like to touch on a few new product areas that are important to our future and that we’re beginning to invest in today.
Personal loans continue to drive the growth and profitable economics of Upstart. Post-pandemic, the demand for these simple installment products has re-accelerated. I like to refer to personal loans as the “duct tape” of credit—a fast and simple solution that consumers love for their usefulness, affordability and accessibility. And banks are beginning to realize that offering instant all-digital personal loans makes sense, unless they want their customers to find them elsewhere.
Last quarter I told you that, for the first time, an Upstart bank partner decided to eliminate any and all FICO requirements for their borrowers. Today I can happily report that of those who were approved for Upstart-powered loans because of this change, 59% were Black, Hispanic or of low-to-moderate income.¹
And even better—I’m also pleased to tell you that four Upstart bank partners have now dropped their FICO requirement. In just a few months, what was perhaps a “canary in the coal mine” has now become a trend.
We applaud any and all lenders that eliminate credit score requirements. These trail blazers are building businesses that are more inclusive, more equitable, and yet more profitable. Their commitments represent a small step to the future but provide a major boost to the financial inclusion our country desperately needs. While this is just the beginning of a trend, we anticipate a day when lenders will struggle to explain why they rely on a three-digit number invented 30 years ago to make a credit decision.
While a lot of our energy goes toward serving quote-unquote “future prime” consumers currently left out of the financial system, we’re also launching initiatives to better serve those with no shortage of credit options. This makes sense because borrowers who use Upstart often see rapid improvements in their credit score and become suddenly very interesting to the entire consumer finance industry. Our bank partners want to serve these customers over their lifetime, rather than seeing them defect to competitors who constantly pursue them. And if this is important for our bank partners, then it’s important for Upstart.
It turns out it’s important for Upstart for other reasons as well. Only by serving consumers across the entire credit spectrum can we reach our full potential. Even if your credit score begins with a 7 or an 8, you are more than your credit score. By working with our bank partners, we’re beginning to deliver instant loan offers with no origination fees and with rates that are as attractive as any on the market. Full-spectrum competitiveness unlocks broader branding opportunities for Upstart—such as television. These are marketing channels that might not have made economic sense to us previously.
Our efforts in Auto lending continue to make progress as well. As a reminder, the Auto lending market is at least six times the size of the personal loan market.² And in our view, it’s at least as inefficient. Millions of Americans pay too much for their car loans every month, and I’m sure each would prefer to spend that money on something else. Or even better, to save it for a rainy day. If you don’t believe me, just Google “consumer reports auto loans” and you’ll see an interesting article published just a few weeks ago.
On the auto refinance front, we continue to make fast progress to eliminate the time and effort required to refinance a car loan. While the complexities of liens and titles, as well as a bewildering array of state-by-state processes, fees, and regulations conspire to keep Americans trapped in their mispriced car loans, we’re on track to repeat the funnel gains we experienced over the years in our personal loan product.
In their auto insurance commercials, Geico delivers a message that resonates with me—15 minutes can save you 15%. While we can’t use Geico’s tagline, my goal is that Upstart and our bank partners will emulate that value proposition for consumers who are paying too much on their car loans.
We’re also making rapid progress on our Auto purchase product. In the third quarter, we rebranded the company and the product formerly known as Prodigy to “Upstart Auto Retail.” But our progress in Auto retail went far beyond rebranding—in fact, we’ve now tripled the number of dealers on the platform compared to a year ago, and in Q3 we added an average of more than one rooftop a day.
I’m also very excited to tell you about a major new milestone for our company: Just last week, the first Upstart-powered loan was originated through our Auto Retail software with one of our long-standing dealership partners right here in the Bay Area. Our early experience is showing us how powerful it can be to offer instant decisioning, high approval rates, a broad selection of terms and payments, integrated into an all-digital process. This is a big deal not just for Upstart but for the entire auto industry—it represents the first step toward leveraging AI to rewire and revamp the entire car buying process.
And finally, we hear a lot of questions about where Upstart plans to go next. We’ve been clear with our lending partners and with the investor community that we intend to expand our AI platform beyond the personal and auto lending categories – and today we want to share more about those plans.
Small dollar lending
First, we are working toward a small-dollar loan product designed to help consumers with unexpected and immediate cash needs. Think a few hundred dollars repaid in just a few months. But importantly, we’re building a bank-ready product, at bank-friendly APRs—always operating within the 36% rate cap prescribed to nationally chartered banks and to those who serve U.S. military service members. In short, with better technology, superior risk models, and a dramatic reduction in the cost of origination, we hope to welcome millions of Americans into the mainstream financial system who would otherwise be left with far less attractive options.
Upstart stands to benefit from this small dollar product as well. It can significantly accelerate the pace with which we can bring the underbanked into the financial system, and it can likewise accelerate the pace of learning by Upstart’s AI models. We aim to bring millions of marginalized consumers onto our platform in the coming years, so that our lending partners can serve them with a host of affordable financial products over time.
Our bank partners rightfully feel pressure to better serve low-to-moderate income Americans, and we want to help them do that right. The interest in this small-dollar product from our bank and credit union partners is off-the-charts and we hope to bring it to market before the end of 2022.
Second, we believe there’s an unmet need to provide fast, easy access to affordable installment loans to business owners across the country. Every small business is different and they operate across a crazy wide spectrum of industries. So there are significant challenges to delivering a compelling loan product that is useful to business owners, yet is reliable, performant, and efficient enough for lenders. This challenge is tailor-made for Upstart. While there is no shortage of credit options to business owners, we aim to deliver the zero-latency affordable credit solution that modern businesses require. This is another product in high demand from our bank and credit union partners and we hope to bring it to market during 2022 as well.
And finally, I would be remiss if I didn’t mention what the late-great sportscaster Keith Jackson would call “the grand-daddy of them all”—the home mortgage market. It’s by far the largest consumer lending category. And to Upstart, it represents a proportionally large opportunity to improve the financial lives of Americans.
We’re all familiar with the financial crisis of 2008 to 2010, triggered by irresponsible mortgage lending among other things.
Well one sad outcome of that crisis was a seemingly permanent reduction in access to affordable mortgages to the average American. In fact, a study by the Urban Institute found that if you compare the number of mortgages originated to Americans with FICO scores less than 700 in 2001 (six or seven years before the crisis) with the number originated to that same group in 2015, you’ll find that there were more than a million fewer mortgages in 2015. This is what we call the “missing million”. And from where we stand, it’s crystal clear that a huge fraction of these million would-be homeowners are more than creditworthy and deserve access to an affordable mortgage.
This is an opportunity that we’re excited about and we’ll begin to invest significantly in this area throughout 2022. While this initiative has a longer time horizon on it, we felt it’s important to share our intention right now.
I want to say thank you to the entire Upstart team for once again making me proud to be a part of this company. Our team understands the impact that Upstart has already had in the world—and the magnitude of the opportunity in front of us is that much larger. But without the amazing talent and dedication of each team member at Upstart, that incredible opportunity would go unrealized.
¹ We determine applicants to be low-to-moderate income using individual income information reported by borrowers (in lieu of household income) and zip codes to approximate which census tract a borrower belongs in.
² Based on auto loan and unsecured personal loan data provided by TransUnion for Q2 2020 – Q1 2021.
This blog post contains forward-looking statements, including but not limited to, statements regarding our outlook for the fourth quarter of 2021 and plans for the future, including those related to small dollar, SMB and mortgage. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate”, “estimate”, “expect”, “project”, “plan”, “project”, “intend”, “hope”, “target”, “aim”, “believe”, “may”, “will”, “should”, “becoming”, “could”, “can have”, “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements give our current expectations and projections relating to our financial condition; plans; objectives; assumptions; market opportunity; risks; future performance; business; and results of operations. Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The forward-looking statements included in this press release and on the related teleconference call relate only to events as of the date hereof. Upstart undertakes no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. More information about factors that could affect our results of operations and risks and uncertainties are provided in our public filings with the Securities and Exchange Commission, copies of which may be obtained by visiting our investor relations website at www.upstart.com or the SEC’s website at www.sec.gov. These risks and uncertainties include, but are not limited to, our ability to sustain our growth rates; the effectiveness of our credit decisioning models and risk management efforts; overall economic conditions; disruptions in the credit markets; our ability to retain existing, and attract new, bank partners and lenders; and our ability to operate successfully in a highly-regulated industry.