Transcription:
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Penny Crosman (00:03):
Welcome to the American Banker Podcast. I'm Penny Crosman. The Neobank upgrade is one of the few challenger banks that seems to have prospered during 2023 a year when many fintechs struggle to make money and several had layoffs. What might 2024 look like for the company? We're here today with Renaud Laplanche, founder and CEO of Upgrade. Some of you may know him as the original founder of the first online lending FinTech or one of the first online lending fintech's Lending Club in 2007. Welcome, Renaud.
Renaud Laplanche (00:34):
Thank you for having me.
Penny Crosman (00:35):
So one thing I've been asking other people about lately, just as sort of a point of curiosity is to what extent do you feel that the Challenger Bank FinTech movement, which arguably started with companies like Lending Club and Prosper back in the two thousands, at least that's one place you could say as a starting point. How far do you think that has come in terms of its original mission, which I think was trying to help people with their financial lives and make banking easier?
Renaud Laplanche (01:10):
Yeah, I think we're getting there. It certainly taking longer than we all thought it would in terms of, as you said, proof fulfilling the mission of making credits more affordable and more responsible and more generalities. So improving people's financial lives and helping 'em reach their financial goals. But I think FinTech companies have a few things going for 'em, but banks don't. I think we have a more modern technology stack. We operate in a way that's more nimble, that's powered by technology that's lower cost than the banks not having the branch network creates some challenges, but also comes with a lot of cost savings and can pass on this cost savings to the consumers. And so the value got to take these assets and benefits and really turn them into real business advantage. And certainly the first generation of FinTech companies like Prosper and Lending Club, I think I accomplished a lot with a pretty narrow focus.
(02:34):
We had this one product personal loan that we think is a great consumer product. It helps a lot of people refinance their credit card, that lower cost with a more responsible and predictable repayment schedule. A lot of people just carry over their credit card balance month over month. If you switch that to personal loan, it comes with your finish line and equal monthly payments, you're paying down your debt every month. So there's a clear benefit in terms of responsible use of credit and eventually saving money on the cost of your credit. But it had a pretty narrow focus. So what you've seen is around 2015, 16, you've seen a second generation of FinTech companies emerging and tackling a broader scope of some of the initial FinTech companies like SoFi, broadening their scope and really becoming neobanks and offerings of mobile banking as well as all kinds of credit products and sometimes of asset management and insurance. And so always takes time to build and distribute, but I think we now have multiple neobanks each having between a few million customers and up to 15, 20 million customers. So I think we're making a dent into the issue for sure.
Penny Crosman (04:18):
So when we last spoke in May about Upgrade, you had about 2.5 million customers, about 1400 employees and about 200 bank partners. Can you share where you are today, what some of those numbers are today, and were you able to keep growing through the rest of the year?
Renaud Laplanche (04:39):
Yeah, yeah, we did. So we have about 5 million customers now. So parts of the increase from 2.5 to five came from the acquisition of UPLIFT that we did as a summer. It's a travel DNPL company that works with airlines and cruise line hotel chains to make travel more affordable. And so they came in with a couple of million customers. Some of 'em were already great customers. So once we did it, I think we probably picked up a bit over a million customers and kept growing on our side. So yeah, we're about 5 million customers now, 1600 employees, probably about 250 of long buyers bank partners. So yeah, I think that 2023 wasn't a fast growth year back 20 20, 21, 22, but we managed to keep growing, remain profitable, which were really the goals even though we tightened credits in response to high inflation, high interest rates and more and more consumer credit concerns. But we're able to keep growing on multiple metrics beyond that.
Penny Crosman (06:03):
Some of the neobanks that make loans and sell them to banks struggled last year in the rising interest rate environment. How did you not get as affected by that?
Renaud Laplanche (06:21):
I think we were affected for sure. I mean, I think in total we tightened credit by 60%. So big, big credit tightening that again was made necessary by the fact that high interest rates and high inflation made it harder for a lot of consumers to balance their budget and remain current on their credit obligations. And also there are some concerns that the energy economy might be suffering as a result of the rates heights and would be heading into possible hard lending. And these concerns haven't completely been dissipated, so we haven't loosened credit since in any way. We're continuing to have pretty tight credit box, so that's certainly slow those down like everybody else. I think one thing we have, or two things we have going towards is one, we have multiple products. So mobile banking for example, maybe it's not as sensitive to credit conditions.
(07:35):
So that kept growing really fast, including checking and savings accounts and savings accounts grew faster in a higher rate environment. And then we launched a number of new products. So we acquired, at least we launched a home improvement financing products and Summer launched a indirect auto product. So we now have two cores to the business. One is direct to consumers, mobile banking, personal loans and credit cards, and the merchant networks with auto home improvement, financing and travel and auto improvement and travel are really three big spend categories and spend categories that are meaningful to consumers. There's really a great opportunity to build a brand because really these are things you generally care about, your home, your car, and taking your trip trip. And so since these products were all pretty new, they're growing faster. And so all that between mobile banking and the new products, all that really continued to sustain us in a year that was otherwise difficult from a credit standpoint.
Penny Crosman (09:05):
And you also rolled out a secured card pretty recent last month, I think. How are you able to roll out products so quickly? It seems like you're able to develop and bring new products to market quite quickly, sorry, where a number of fintechs, as you mentioned, are still kind of focused on one or two products. What do you think is the key to being able to quickly bring new products to market?
Renaud Laplanche (09:37):
Yeah, I think part of it is technology. So that's a technology advantage we talked about earlier compared to banks and certainly in the case of second generation FinTech companies like Upgrade, where we benefited from all base of improvements in technology. And I mean the entire of technology architecture is very modular, so it's all based on microservices that can be rearranged in different ways to create new products. So for example, between the personal loan and the credit card are very different experience from a consumer standpoint, yet their code base is 70% identical. So we're able to reuse a lot of the same code. So that's one benefit. We also have built out of trust with loan buyers. So when we have a new product, it's always hard to launch a new credit product because you don't have a track record. But we've done a good job in maintaining a nurturing that track record.
(10:48):
So loan buyers give us the benefit of the doubt with new products. And I think more waiting to invest in busier product, knowing we will be underwriting and servicing them along the same same way we've done in the past. So I think there are a lot of synergies that way you have that emerge between the new products and I think, so a large customer base now 5 million customers and the high satisfaction rate where we have an NPS net promoter score of 77. So that really is encourages existing customers to take advantage of new products as well. So when we launch a new product, we know there's going to be artistic core base of customers that will be excited about it. But I think all that is helpful in continuing to expand the product line, be more diversified, also just create more opportunities to be helpful to our customers and be their financial partner in many occasions in their lives.
Penny Crosman (11:58):
So that's interesting that you give a lot of credit to your technologists and you say that so much of the code base of these products is shared. Are you doing all of this in-House or are there certain tech partners that are helping you with these projects?
Renaud Laplanche (12:20):
So yeah, all the course of engineering is all done in house. We have engineers in San Francisco, we have a lot of engineers in Canada and B Engineering center in Montreal and quite a few folks in Toronto, in Vancouver. So I mean obviously use third party solutions here and there, but the core of engineering platform continues to be developed and maintained inhouse.
Penny Crosman (12:55):
Are there any third parties you'd want to give a shout out to for their help?
Renaud Laplanche (13:01):
Yeah, I mean, so yeah, for example, we payment all the payment processing goes. Who marketed out? It's been a great partner. Cross River Bank is our main issuing bank. And so yeah, we use Workday forms for HR solutions, Amazon web services for cloud, that storage and all that. So yeah, I mean there are a few infrastructure players, some specialized solutions here and there. I think we just onboarded fair play we talk about I think later. So yeah, I mean it takes a village as you know.
Penny Crosman (13:44):
And can you say how many technologists you have, how many developers, how many product designers and so forth?
Renaud Laplanche (13:52):
Yeah, product and engineering is about 400 people,
Penny Crosman (13:56):
So that's a pretty good chunk of about a quarter of your overall employee base. Sounds like that's something that's helping you with these quick rollouts. Can you tell us a little bit about what the typical Upgrade customer looks like in terms of income level credit score, level aid, ethnicity and so forth?
Renaud Laplanche (14:23):
So we try to be helpful to as many people as possible. So when we design new products and we price 'em really try to build products, database or bonus appeals, and that's reflected in our average customer metrics. So the average FICO score is 700, the average of age is early forties without population average. If you look at the US population, that's all the metrics you would find. I think one metric where we index higher than average is income where we get close to $100,000 in individual income. That's just a function of our underwriting and the ways different parts of the underwriting works, that sort drives average income a bit higher. But other than that, it's really trying to be appealing to a broad set of customers with different products, having their own niche so to speak. So home improvement financing, obviously we attract more homeowners to a higher, higher fco, higher incomes while credit cards and mobile banking, we'll be gathering two of younger population, lower income, lower asset base, especially now to your point, we launched two new credit cards recently. One is a of entry levels of credit builder cards. The other is a secured credit card. So both of 'em are already designed for a lower income younger population that has no or very little credit history that will be able to qualify more easily for these products. And then this products can help them build up their credit and graduate into these the main upgrade car. So I think the different products cater to different population, but overall we're trying to keep a board opinion.
Penny Crosman (16:46):
So speaking of underwriting credit, you very recently launched a partnership with fFairPlay, which is an interesting fintech that has what I think they call embedded fairness where they do things like check an algorithmic lending model for any kind of sign of something that would impact any group adversely. They also do second looks at loan decisions to make sure that there's nothing that would, if there is anything that would have a disparate impact on any group that can be addressed before the final approval is given. What got you interested in this technology and which products are you hoping to apply it to and what do you think it will accomplish for you?
Renaud Laplanche (17:45):
Yeah, so over time it's really applicable. All of our credit products with its accomplishing for us is really making sure we are fair and compliant and make appropriate credit decisions that don't have disparity impact on any protected category or generality minorities. I think, I mean that's always been a concern and it's rate B sort replies to all of our credit. I think what we gain with Fairplay is a few things. I mean one, it's very customizable, but two, it's also it's real time. So I think that's where it gets both more effective and simpler to use as opposed to doing periodic audits and shipping data to third parties and then getting the results back so few weeks or month later. Here you have this continuous service that's always running that can pick up signals very quickly, can help us make adjustments very, very quickly. So we like the fact that it's, as you said, it's embedded and it's not a batch process. It's something where we continuously can get a read and there's always a drift in the population. These parameters always change. So I think all that in real time is super useful.
Penny Crosman (19:40):
And when the banks buy loans from you, are they starting to look for this kind of thing? Like some sort of proof that all fair lending, ECOA requirements are being met?
Renaud Laplanche (19:55):
Yeah, for sure. We have obviously our own compliance requirements, cross River Bank and then so any of our issuing bank would add another layer of monitoring and compliance. And then the loan buyers. So when we sell the loans to banks or credit unions, they have their own compliance and reporting requirements and monitoring. So there are several layers of compliance reporting monitoring and that applies to, it starts with us obviously, but that's the issuing bags and the loan buyers who will also have their own requirements.
Penny Crosman (20:46):
So just going back to who your customers are, one thing I was wondering was how do people typically find out about upgrade? Are you doing a lot of aggressive marketing?
Renaud Laplanche (20:59):
I wouldn't call it aggressive? No, it's actually pretty targeted in general. We work a lot with online partners that credit or lending tree or bank rates depending on the product. We do a lot of online, online of display ads and S-E-M-S-E-O. We are doing some TV ads, especially for card couple of upgrade card TV commercials and are performing really well. Mobile banking has its own channels where also testing some YouTube, YouTube video and events of TikTok and Instagram. And so all that is the direct to consumer part of the business. Then for the merchant networks, so travels, omnipro and auto, that's all about expanding the size of the merchant network and just setting up more dealers, contractors, airlines, and the cruise lines. And what else?
Penny Crosman (22:17):
And what would you say is the leading product, if there is one, the product that most people are joining you first to get applying for first when they start with the upgrade?
Renaud Laplanche (22:31):
So I like the fact that it's pretty balanced. There's big one products, no single entry points. Multiple entry points. So depending on the needs, our customers would get a bank accounts credit card or loan first, and if we do a good job, we will earn the rights to introduce 'em to other products. I think with one card also dual credit and debit use, it's sort of two or three points at once where you get both the checking account and the credit card. But all other than that, it's really, there are multiple pathways and then customer journey based on where they started. I think that the key obviously is again, it's customer satisfaction and making sure customers are happy with their first product and then they'll get more from us.
Penny Crosman (23:40):
And I know we've talked about the one card in the past, but what do you think is the key benefit for customers to having their debit and credit in one product and is there any specific way or specific type of use case they're using this for?
Renaud Laplanche (23:57):
Yeah, so I mean the number one benefit is really simplifying your financial life and you have a single card that you can use for every payment, whether it's everyday small expense that you typically pay with a debit card, you can do that with one card and it's going to be debited from your bank account on negative day or larger purchases, expenses that you would typically use a credit card for. If you want to keep it on the credit line, then you can do that with one card as well. So it's simpler that way. You have a single statement, single card in your wallet, your wallet ads on your phone. You're also getting the one card is at its core, it's a credit card, so we get really credit card type of rewards. So it's two or 3% cash back depending on the category, which is something you would never get with a debit card. So that's having a bit benefit. And also being a credit card, you get all base of insurance and protection, fraud protection that you typically get with a credit card. So it sort of combines a lot of the benefits of debits and credit into a single card.
Penny Crosman (25:26):
Can you share any sort of hints about your product plans for the coming year or business plans for the coming year?
Renaud Laplanche (25:35):
Yeah, so me again, 2023 was I think a big year for us in terms of product launch, the new product release. So we had these three entirely new set of products, home improvement, auto and travel. And we launched a couple of credit cards that help bridge mobile banking and credit cards and help sometimes provide the first credit card for that mobile banking population that's younger and lower income doesn't have as much credit history. And also we help 'em with that first step into credit and then provide some graduations capabilities. So it's a lot of new stuff. It's happened last year, so I think this year there's not going to be as many new products. I think we're going to be focusing on taking some new businesses to scale and continuing to make mobile banking credit card and personal loan work better together for our customers and generate as much value as possible for our customers.
Penny Crosman (26:51):
And if you had to predict how 2024 will play out for fintechs in general, do you think they can expect a better year?
Renaud Laplanche (27:00):
I think so. I mean rates have already stabilized anybody's guess as to if and when they start coming down, but I think could be March, could be June, anytime. But I think there's a good sense that rates would start coming down. So I think that's generally helpful. And then credit performance concerns still exist, but it feels like it's all going to get resolved one way or another within the next six to nine months. We'll find out if it's a hard or soft landing, but either way, if we're going to land somewhere, if it's a hard landing, the Fed will portray faster. If it's a soft landing, then such credit concerns will be resolved faster. So it feels like either way there's going to be some improvement in the environment in 2024 for upgrade specifically, I think we're looking at growing about 50% this year from 2023. A lot of that is just fueled by some new products that are getting to scale this year. We're not planning on loosening credit underwriting at all, but certainly if the environment improves then that would make it easier and probably add to that goals.
Penny Crosman (28:31):
Alright, well that all sounds quite hopeful and optimistic. Well, thank you so much for joining us today and to all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Kelly Malone y. Special thanks this week to Reno Laplanche at Upgrade. Rate us. Review us and subscribe to our content at www.americanbanker.com/subscribe. From American Banker, I'm Penny Crosman and thanks for listening.