Upstart uses bank partnerships for its next leg of lending growth

It's not easy growing a lender. Borrower acquisition is typically the hardest and most expensive piece of the business. Upstart has found a lending as a service model that enables it to continue growing by enabling bank partners to scale their own digital lending business.

Upstart launched its first bank partnership with BankMobile at the end of 2017. Now, the San Francisco-based bank has signed three more “Powered by Upstart” partnership agreements: First National Bank of Omaha, First Federal Bank of Kansas City and Accion Chicago.

"Powered by Upstart" partnerships are essentially technology licensing agreements where banks leverage Upstart's white-labeled lending as a service by integrating it into their websites and mobile apps. The banks originate loans under their own bank charters.

"The banks can determine their own credit policies, loan terms, disclosures, and fee structures while taking advance of Upstart's technology for acquisition, credit pricing and decisioning, verification, and servicing," said Dave Girouard, Upstart co-founder and CEO and former president of Google Enterprise.

Upstart's lending as a service agreements can take from six months to one year to complete. Agreements like Upstart's face a variety of hurdles to get over. First, Upstart needs to provide the efficacy and soundness of its risk models, including fraud, verification, and credit decision. Banks also need to see if the partnership with fly with their regulators.

But beyond the technical parts of creating a lending partnership, Upstart needs to engender trust in its technology. "Another hurdle is generating confidence and understanding of the safety and soundness of the resulting lending program, including model governance," Girouard said.

There are a variety of competitors vying to power banks' digital lending programs. TD Bank recently signed with Amount, Avant's lending as a service product. What set Upstart apart for its new partners is its technology.

"We needed to find a way to use machine learning and artificial intelligence to underwrite our current credit monitoring process, and found Upstart, who was already doing this," said Marc Butterfield, svp, digital and payment solutions of First National Bank of Omaha. "Upstart has mastered the entire concept of modernizing credit, so we chose to partner with them in an effort to enhance our offerings and improve customer experience."

First National Bank of Omaha also participated in a $50 million investment that included Progressive Investment Company and Healthcare of Ontario Pension Plan. Upstart loans will be available through Progressive's website in the near future.

Upstart will work with new partner Accion Chicago to reach more local entrepreneurs with low-cost microloans to minority- and women-owned businesses. “We believe that partnering with Upstart is the most creative, careful, and cost-effective way to lend to these inspirational small business owners that other lenders overlook,” said Brad McConnell, CEO of Accion Chicago.

Upstart has originated more than $3.3B in loans in the last five years. Thus far in 2019, more than 60 percent of Upstart originations were entirely automated and approved in real time, according to the company. Upstart grew revenues by about 80 percent in 2018 and reached profitability in the second half of the year.