Renaud Laplanche, the original founder and CEO of LendingClub and one of the first fintech disruptors, is launching an unusual type of credit product at his new company, Upgrade, that he refers to as “the vegetables of credit cards.”
It’s a cross between a credit card and an unsecured loan. Instead of letting a cardholder pay a minimum amount each month and revolve the credit indefinitely, Upgrade’s new card every month breaks the balance down into an installment plan that can be completed in 12, 24, or 36 months. (The cardholder can also pay off the balance in full at any time without a prepayment penalty.) The annual percentage rate ranges from 6.49% to 29.99%.
Upgrade partnered with Cross River Bank to create the new card/line of credit.
“The plan essentially forces you into that discipline of paying down the balance every month and paying down principal and interest along a straight line,” Laplanche said. “You know what you're going to have to pay and it doesn’t perpetuate that cycle that the credit card companies have been so good at perpetuating.”
Many credit cards also reward people for getting deeper into debt, Laplanche said. Upgrade’s new card rewards customers “for paying back, for doing the responsible thing, for doing what's good for them."
Customers get 1% cash back each time they make a payment towards their balance.
The Upgrade card, like many fintech lending products, is designed for the borrower who needs to meet an unexpected emergency but can’t handle a heavy debt load. An often-cited statistic in the fintech community is that 40% of Americans don’t have the wherewithal to meet an unexpected $400 expense like a new washing machine or new tires for a car.
With the Upgrade card, the customer is forced to pay that down within a defined period of time. If someone misses a couple of payments due to a temporary cash-flow issue caused by a dire circumstance like loss of a job, Upgrade will work with them.
“But it has to be extraordinary circumstances,” Laplanche said. “The contract that we have early on with our customers is that we, Upgrade, are going to help you get more affordable credit at a lower rate with no fee and none of the tricks of the credit card, a payment schedule with which we encourage you to pay down the balance every month, and a rewards program to help you do that. But you've got to do your share, which is you’ve got to make these monthly payments.”
The underlying technology
Laplanche’s team had to build new technology for underwriting, servicing and recordkeeping for the hybrid card/loan.
“Cross River has been really good at helping us through that and supporting us in that effort,” Laplanche said.
Some members of the tech team came over from LendingClub. Others came from banks and other fintechs including Square and Sofi.
“We’ve got good expertise now, but it took a lot of work to address how people might use the card in ways it wasn’t designed to be used for,” Laplanche said.
The underwriting technology, which is loosely based on what was originally created for LendingClub, uses machine learning to analyze FICO scores, credit history data from credit bureaus, income, employment and debt-to-income ratio. It also considers some alternative data such as utility bill payment history and cash-flow analysis. Cash-flow analysis is especially useful in accommodating for local cost of living, Laplanche noted — a $50,000 annual income means a lot more in a small town in the Midwest than it does in New York City or San Francisco.
The underwriting “benefits from 10 or 12 years now of advances in big data, ability to process large amounts of data, and access to more data points that were not necessarily available 12 years ago,” referring to the early LendingClub days.
“With more computing power being made available, we've been able to improve on all of these different dimensions,” Laplanche said. “And frankly just our own experience — we’re 12 years wiser. We've been doing this for a long time now, longer than anybody else.”
Laplanche’s history in alternative lending has not been without controversy. LendingClub was one of the first peer-to-peer lenders, where loans granted through the platform were bought by investors. The company grew quickly and attracted funding from high-profile investors like Mary Meeker and John Mack. It raised almost $900 million in the largest U.S. tech IPO of 2014 and the company was valued at $8.5 billion.
But in 2016, LendingClub’s board forced Laplanche to resign. In 2018, the Securities and Exchange Commission charged Laplanche with fraud for improperly using fund money to benefit LendingClub’s parent company, for which he also served as CEO. Laplanche and Carrie Dolan, LendingClub’s chief financial officer, also were charged with improperly adjusting fund returns. The two executives and LendingClub
Laplanche and Upgrade,
