Lending Briefing: Upgrade CEO Renaud Laplanche on fintech lending in a tight market
- Today, there's less demand for consumer loans, and lenders are tightening their credit books. The 'cautious approach' narrative prevails in many interviews and conference calls.
- I sat down with Renaud Laplanche, CEO at Upgrade, one of the main direct-to-consumer fintech lenders in the US. We discussed the macro environment, and how he designed Upgrade's business model in a way that is proving resilient during these turbulent times.
With a recession looming, consumer spending and overall financial health is under pressure, creating a tricky environment for B2C fintech lenders.
Moreover, in this highly inflationary environment paired with rising interest rates, it's tougher to find investors to back loan books. The appetite is now for higher yields and profitability – a complete 180-degree switch from last year's focus on growth at all costs.
Most fintech lenders finance themselves with securitization, hedge funds, or banks, and reports started to surface on various fintech lenders finding it hard to sell their loans.
Today, there's less demand for consumer loans, and lenders are tightening their credit books. The 'cautious approach' narrative prevails in many interviews and conference calls.
But not every fintech lender is the same. There are many business models currently on the market – some more successful than others – and on most of them, the jury's still out. Most haven't been tested yet by a down market, which is one of the biggest hurdles to overcome for any lender.
In this context, I sat down with Renaud Laplanche, CEO at Upgrade, one of the main direct-to-consumer fintech lenders in the US. We discussed the macro environment, and how he designed Upgrade's business model in a way that is proving resilient during these turbulent times.
Upgrade built a network of funding sources. The company gradually set up a network of around 200 small banks and credit unions specifically to avoid the volatility of securitization markets, capital markets, and hedge funds, Laplanche said.
"This allowed us to continue to take market share, although we're not growing as fast this year compared to last year. This year, our growth rate is between 70% and 75% year-over-year, and that's really in large part because of the stability of funding sources," he said.
Working with small banks and credit unions has two benefits. The first is that they come with a lower cost of capital – particularly credit unions, which have lower return on asset targets.
The second benefit is that they tend to be a lot more stable and predictable as a funding source, which is an asset in turbulent times. They have their own deposit base that they use to buy loans and credit card receivables from Upgrade. And if the loan buyers ever run out of deposits, the fintech has the ability to give them more deposits.
As part of its mobile banking service, Upgrade collects deposits through its custodial bank partner, Cross River Bank. The fintech can ask CRB to sweep these deposits out overnight to banks and credit unions, which in turn use these deposits to buy loans from Upgrade.
"We basically have the best of both worlds, where we're still not a bank – we're still very nimble, very capital-light, growing fast. But we have the ability to raise deposits and indirectly use the deposits for lending. It’s almost like we created a more distributed banking system where, instead of matching assets and liabilities within our own balance sheet, like a bank would, we are matching assets and liabilities at a network level in a distributed manner across hundreds of banks and credit unions," Laplanche said.
In terms of customers, Upgrade focuses on the demographic that's generally in a better economic situation. This segment of the market buys more financial products, spends more on their credit cards, and has the ability to borrow larger amounts, which is generally more profitable for a lender.
"Our customers are more mature compared to other fintech companies or neobanks that are focused more on younger consumers, and sometimes on underbanked categories. These are probably easier to acquire in the first place, but may be harder to monetize," Laplanche told Tearsheet.
So far, it seems to be working – since launching in 2017, the Upgrade Card has been one of the fastest-growing credit cards in the market, growing threefold just last year. This year, it was in the top 25 US credit card issuers by outstanding balance.
Laplanche also noted that the company wants to do what's good for the consumer in the long run, because they believe that educated consumers who are in a good financial situation will be better customers. They are less likely to default on their loans and more likely to be loyal to the brands.
"That's how we've decided to run our business, but clearly not everyone is doing the same thing. For other large credit card issuers, like JPMorgan Chase, to help customers pay down their debt faster and make the decision to start amortizing billions of dollars in balances down also means kissing away a large part of their quarterly profit. It's a tough decision to make," he added.
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