Challenger bank Upgrade, which LendingClub founder Renaud Laplanche launched in 2016, seems to be benefiting from the recent bank crisis, a hybrid credit/debit card and television commercials featuring a "debt donkey." It now has 2.5 million customers, 1,400 employees and 200 bank partners.
The fintech got a lift from the failures of Silicon Valley Bank and Signature Bank.
"There's been a flight to quality with a lot of deposits going away from the smaller banks," Laplanche noted in an interview.
Upgrade raises deposits online and sweeps them to its bank partners. It also makes personal loans that it sells to banks.
"It's been harder for the bank partners to raise deposits on their own," Laplanche said. "So our program has become a lot more popular now. The banks can use our national brand and access to online marketplaces to raise more deposits."
The average deposit at Upgrade is around $18,000, he said.
"It's very diversified. It's a lot of small depositors," Laplanche said. "So far it's worked out OK."
Hybrid debit/credit card
Upgrade's newest product is the OneCard, a hybrid credit/debit card that the company is testing with a few thousand customers.
"We're still understanding how people are using it, how they think of it," Laplanche said. "We are trying to make it easy to understand."
If a customer classifies a purchase as "pay now," it will be settled that day from that person's bank account. Upgrade offers credit through Cross River Bank and Sutton Bank.
"The technology is pretty simple," Laplanche said. "It would be like paying your credit card balance every day."
If a transaction is classified as "pay later," it will stay on the credit line.
The card only uses credit rails, so Upgrade receives credit card-level interchange fees.
Upgrade customers are putting 30% to 40% more of their purchases on the card, Laplanche said.
Consumers find the Upgrade card simpler than carrying two cards, he said. It's also a way for consumers to get credit card-like rewards, 2% or 3% cash back, on debit purchases.
A growing number of hybrid financial products are being offered in the industry, according to Rudy Yang, senior analyst at PitchBook.
"We believe the emergence of these offerings is natural," Yang said. "They offer a creative method to combine existing financial products and services, many of which have individually existed for years and have been hard to innovate."
The Upgrade card is a good example of a product that combines the aspects of a traditional credit card and a personal loan, which can help consumers with budgeting and building credit, Yang said.
The card could benefit Upgrade by incentivizing users to open a rewards checking account and maintaining deposits, he said.
Over the next six months, Upgrade plans to scale up the OneCard.
Building trust through digital channels
Like other challenger banks, Upgrade doesn't have physical branches, so it has to build trust in other ways, such as providing value and communicating well, Laplanche said.
"A lot of customers come to us because they get more value from us and we have a really good rewards program," he said. "We have no fees on our checking account, no fees on our credit card. Every monthly statement reinforces that trust and that sense of value."
Upgrade uses email and push notifications through the app, but not too often, he said.
"We're respectful in the way we communicate with our customers," Laplanche said. "We don't bombard them with notifications and with demands that they rate their experience, all these things that are annoying." The company sends no more than an email a week.
Another trust builder: humans in the company's Phoenix contact center.
"About 20% of the calls we're getting are pre-application, and very often it's just, people want to know that it's a real company, that there's someone there," Laplanche said.
The three challenger banks have defied the odds and created business models that have made them net positive in a market where fewer than 5% of startups are making money.
People calling in will ask how long the company has been around, how many employees it has or where it's based.
"They don't have an issue yet, but they want to know that if they have an issue, they can talk to someone," he said. "We tell them, we have five floors in this office in downtown Phoenix. If you drive by, you can see our name on the building. I think it helps."
People find Upgrade through digital partners like NerdWallet, Credit Karma and Bankrate.
The company has also been running television commercials that feature a "debt donkey" that the main character brings into a furniture or bike store and abandons when someone recommends Upgrade's card.
"It was hard to get the donkey to behave in the furniture store for an entire day of filming," Laplanche said.
"There is a certain metaphor there, with the buzzword of debt donkey," said Brian Riley, director of the credit practice at Javelin Strategy & Research. "It is memorable and probably appeals more to younger age cohorts than others. Like any good commercial, be it Cheetos or Budweiser, the theme does not have to be great American prose, but rather memorability, and the commercial does that."
Up next: A secured card
Upgrade plans to launch a secured card in the third quarter, to help customers with low or no credit score get access to credit.
"For every mobile banking customer who isn't yet eligible for credit, we want to sort of get them there," Laplanche said.
The card will start out 100% secured, so a customer might put $100 on deposit and get a $100 credit line. But once the person starts making payments and shows responsible behavior, they might be upgraded to 50% secure, and be able to use $200 worth of credit with the $100 on deposit. Over time, that could drop to 25% or lower.
"We can draw a pretty quick path to credit," Laplanche said. "I think it's a good way for people who are new to credit to get access to credit with a responsible product."
Secured cards sometimes get called a bad deal for customers because they are basically vehicles for accessing consumers' own money and paying fees along the way.
Laplanche said he thinks of the secured card Upgrade is building as "a transitory state."
"We don't want you to be stuck in a secure account for very long," he said. "It's just a way to get you going, build your credit and then as soon as possible, we release a proportion of the deposit or give you access to a bigger card."
Several other challenger banks are also working on secured cards, including Current.
"It's partially because fintech customers tend to be younger consumers and new to credit," Laplanche said. "So I think there's more of a need for it."
Upgrade's secured card "will help add ballast at a time when consumers face household budget stress," Riley said. "It appeals to those with FICO scores below 660, and will likely help build a following in that group, which can benefit from enhanced credit scoring as their accounts mature."
