When we launched our podcast 10 years ago, one of our first guests was a French entrepreneur living in San Francisco. He had a small but upwardly aspirational startup. Renaud Laplanche’s LendingClub ended up becoming a major player in fintech as a public company and a force in the marketplace lending arena.
Now, Laplanche is back for more. He’s the CEO of Upgrade, a new challenger bank that was built with lending at its heart. He joins me on the podcast to talk about the genesis story of Upgrade and how so much of his experience launching and growing LendingClub informs Upgrade’s products and positioning. We discuss how the current COVID-19 crisis is impacting the industry for both incumbents and upstarts and how Upgrade’s new products — a contactless credit card that has built in pay-over-time features — play into today’s market dynamics.
Challengers miss out on credit
Credit is 70 percent of global banking revenues. It’s an essential piece of banking. If you’re going to create a bank — traditional or challenger — you are going to need to build credit products. For revenue purposes and to meet your customers’ expectations. Credit is a lot harder to put together than debit or payments. I think a lot of challenger banks have understandably started from the debit or payments side with plans to go into credit going forward.
Credit is hard, frankly, in terms of underwriting and servicing. But also just in terms of capital. Sourcing the capital to deliver billions of dollars of credit isn’t easy. You either have to build your own large balance sheet, which breaks away from the capital-light fintech model. Or, you need to implement a marketplace lending model. That takes a track record that you can only build over many years. Credit takes time. I’m glad we started with credit. It was also our experience.
How much LendingClub influenced Upgrade
LendingClub informed Upgrade a lot. I learned a lot. The team learned a lot running one of the largest loan providers in the U.S. We were able to ramp up loan products — we’ve done already billions of dollars in loans after two and a half years.
A credit-based banking platform
In terms of targets, when you start with credit, you do a lot more underwriting. You choose your target market differently for that reason. So, you start with customers that are creditworthy. Our customers are probably more mature than other challenger banks. Upgrade customers are 42 years old on average with a 700 credit score and a household income of $130,000.
Unlike other challenger banks, we’re not focused on Millennial customers or other populations that haven’t adopted traditional financial services. We’re focused on more mainstream, mature customers who often bank with Wells Fargo and Bank of America. We offer a better experience, a better deal and more affordable and responsible credit products.
So, credit influences who are customers are and informs how we build products. I think our most innovative product is Upgrade Card. I think it’s everything a credit card should be but hasn’t been for decades. It’s a credit card that can be used at any point of sale, online or in-store. At the end of the month, the balance on the card turns into an installment plan that you can pay back over one, two, or three years at a fixed rate with fixed monthly payments.
It has the flexibility and convenience of a credit card without the high cost, high fees and traps that accompany other credit cards. Credit cards typically come with a 17 percent interest rate, a lot of fees, and the worst feature — if you only pay the monthly minimum payment, it will take 25 years to pay off the balance and you’ll end up paying back 3x what you initially charged on the card. Our card’s rate starts at 6.9 percent to start.
Developing the Upgrade Card
Our mission is to develop affordable and responsible products. A lot of consumer lending products are designed to pay off existing debt. We thought what it would look like so people never need to refinance again. Instead of refinancing credit cards, what if we were replacing credit cards? So we came up with a hybrid between a credit card and a loan.
We were always thinking we’d go contactless at some point. We accelerated that to launch during the COVID-19 pandemic. We also finalized the process with Apply Pay and Google Pay so our customers can register their cards to make mobile payments.
It’s hard to tell. Everything is happening in real time. During every crisis, we learn something new. People are working from home now and I wouldn’t be surprised to see more people end up working from home in the future.
In terms of payments, people have to move away from cash. Bank notes are the worst in terms of transmitting germs. We’ll see a broader adoption of card and mobile payments.
A lot of banks have gone with smaller branches but haven’t really cut down dramatically on the number of their branches. That will happen now. People are getting used to banking without going to a branch. I think that will trigger a long term trend of fully digitalized banking.
Looking toward the future
We’ll continue to roll out new products and penetrate the market with existing products. Upgrade Card launched six months ago and by March, we were at $500 million in annual origination run-rate. We have a goal of $1 billion. We see quick adoption of the card.
We’ll launch the Upgrade Account later this year which is our full mobile banking experience that combines, no fees and a reward program with the access to credit. I think it will be a key development for us as we continue to build a challenger bank that delivers great value and experience online.