Where Credit’s Due Ep. 12: Diving into Upgrade’s B2C fintech lending strategy, with CEO Renaud Laplanche

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, itʼs tougher to find investors to back loan books. The appetite is now for higher yields and profitability – a complete 180-degree switch from last yearʼs 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, thereʼs less demand for consumer loans, and lenders are tightening their credit books. The ʻcautious approachʼ 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 juryʼs still out. Most havenʼt 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 Upgradeʼs business model in a way that is proving resilient during these turbulent times.

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The following excerpts were edited for clarity.

There's a lot of chatter around an upcoming recession, with many lenders tightening their books. What's happening at Upgrade? Are you taking a more cautious approach? And what does that look like?

R: We have the same information, same data as everybody else. Obviously, the Fed raising rates rapidly, is very likely to slow down the economy over the last few months or quarters. So we're taking a prudent approach, we've tightened the underwriting by about 30%. So about 30% of loans or card applicants that we would have approved last year, we would be declining this year. 

And we're generally giving out smaller credit lines this year than we did last year. At the same time, we're still still growing – we have probably 70% to 75% higher revenue and origination this year compared to last year. So we're not in full crisis mode, just being sort of prudence that where the economy is heading, and really trying to protect the track record of credit performance that we've established over the last few years.

Are the baselines starting to be calculated a bit differently, given the shift in the pandemic? There's just been a lot of fluctuations over the past two years, so I wonder if that also skews a lot of the growth figures?

R: Yeah, I think it probably does. I mean, we should look at our growth last year – we grew 300%, we had 4x 2020 revenue in 2021. We went from $100 million revenue in 2020 to $400 million in 2021. There is a lot of growth there. It was really fueled by a pretty benign credit environment with savings rates being high, a lot of the government subsidies are still working their way through for the economy, a lot of pent up demand post pandemic, low interest rates and so on. 

So the environment shifted considerably. And then we'll string down, tightening credit. In terms of credit performance, I think we saw a sort of normalization of credit defaults. In the two pandemic years, we had lower defaults and delinquencies than pre pandemic, again, due in large part to government subsidies. And then defaults started normalizing to the pre pandemic level about six months ago. And now we've passed that threshold, and we're getting into territory where we were seeing sort of higher risk, and it's gonna get worse before it gets better. That's why we are tightening, and we hope that with the measures we put in place, we preserve probably the same credit performance we had last year. But again, a very, very different environment.

How much does the target customer or use your customer base matter when you're making these decisions? Upgrade decided to focus on customers that are in a good financial position, as opposed to other FinTech companies, or Neo banks, which are focused on younger consumers or underbanked. But you decided to take a different route. So how would this hedge against these upcoming headwinds?

R: I mean, that probably puts us in a better situation. Our customers are very mainstream – generally around 40 years old, people who have 20 years of credit history.,average income is about $100,000, or individual incomes are higher than average, average credit score is about 700. These are generally consumers who are not running behind on their payments and have pretty stable employment. And variants have no particular economic stress. That again, when the economy slows down, all categories or segments become more at risk, so we're tightening as much as we have to, in order to protect the track record. But I agree with you that we were probably in a better situation than those FinTech who focus more on subprime categories, or younger consumers, people who are new to credit, because these segments become quite unstable in a slowing economy.

Considering the competition that exists now in B2C, because it does look different than what it did last year, or even the year before that, what do you think it takes to be successful in the B2C market?

I think there are many paths to success. The one we've chosen that has worked well for us, is really product innovation. We're trying to craft products that bring more value to consumers, responsible products that really put more money in people's pockets. And by helping our customers get into a better financial situation, we believe that this translates into better credit performance and more customer loyalty, referring more friends and colleagues which will come back to us in a positive way. And so we're very attached to making this consumer friendly, responsible product. 

Probably the epitome of that is a new kind of credit card that we believe is more responsible than traditional accounts, it's an installment card – at the end of each month, the balance on the car turns into an installment plan that our customers pay down every month with a fixed rate or fixed monthly payments. So it really comes with a sort of forced discipline of paying down the balance every month – the opposite of what traditional card issuers do, which is trying to keep people in debt as long as possible by requiring a very small monthly minimum payment. 

Instead of that, we're encouraging our customers to use credit when they need it, but have the discipline to pay down every month. And they can choose how quickly they pay, could be a year, two years, three years, based on their budget. But it does have this straight line amortization, that is really better for consumers. It helps them save on the cost of interest, because the balance comes down faster. And generally, I think it helps them sleep better at night, because they are paying down their debt every month and not getting into that sort of ballooning revolving credit card debt that so many people fall into.

How do you get into the mind of a customer to respond to your brand, respond to the product that you've put ahead and create that bridge of trust that you're not here to rip them off like the 99%, you're here to help them out?

It's a lot about messaging, and it's also about facing the reviews and ratings. If you go on the App Store, I think our app has 4.9 stars, the highest rated financial app. If you go to online reviews, we were among the highest rated as well. 

When you experience the product, versus first step of should I even bother dealing with this company, you see the reviews, okay, maybe let's give it a shot. And I think we make the experience as low stress as possible and as helpful as possible. We're trying to push values like responsible credit, that I think a lot of consumers understand or root for them. We provide a lot of tools like credit health, that lets you check your credit score for free, get access to sort of content simulation tools, when you can simulate the impact of financial decisions on your credit score, all that is provided for free. I think all these features really help build trust over time. 

Considering the macro environment, how do you think about scaling the business? What's the scale that Upgrade is comfortable at? Do you have any target scale that you would aim to achieve, while maintaining that balance of underwriting discipline, credit risk, and everything that comes with it?

I think the goal is to keep building up the suite of products, and really be more helpful to more people. We spent a lot of time in the last couple of years really building products that help our customers. 

Rewards checking is the only checking account that provides up to 3% cashback on everyday expenses, we launched a hybrid card that acts both as the equivalent of a debit card where you can use it for everyday purchases and debit the charges directly from your bank account or you can switch it to pay later, there's a pay now and pay later function. 

I think we're also adding products these days that are more about bigger decisions, like savings accounts, helping put more money in our customers' pockets and have them save for the future.