The online lending platform that Upstart offers banks will soon let them directly pay off customers' existing credit cards.
It sounds like something that should be simple — letting a customer pay off their credit cards with a new personal loan — but it's not, according to Dave Girouard, Upstart's CEO.
“It's a little complicated because you have to know what cards they have and what the outstanding balances are, make sure it all moves at the right time and the cards are paid off, there is some complexity to it,” he said. It also needs to be easy for the consumer to opt into, he said.
Upstart already works with banks like Cross River, Customers Bank and First National Bank of Omaha, which use its platform to make unsecured personal loans. The banks decide parameters like maximum loan size, minimum FICO score, maximum debt, fees and disclosures. Then Upstart’s AI-based model does the pricing and risk assessment. Alternative data is part of this: Upstart uses more than 1,600 data points in its model.
“The personal loan has become the fastest growing form of credit,” Girouard said. “Our goal is to help banks offer this to their customers or new customers and to do it in a way that's scalable and profitable with strong credit performance according to the bank’s guidelines.”
In the enhancement Upstart is announcing Wednesday, its platform will allow a borrower to choose to have loan proceeds go directly to their credit card issuers to pay off their cards.
“So many personal loans are used to consolidate debt, it's generally a step better if you can directly pay off the prior debt as opposed to hoping that the consumer takes the next step themselves,” Girouard said. “You can nudge them toward doing it.”
Otherwise there’s a tendency for people to get a personal loan to pay off their credit card debt, but then just use those funds for other things and make their debt burden bigger.
“Sometimes life just happens or they think maybe I'll just pay them off next month instead,” Girouard said. “It’s better if you can encourage the best behavior for them, which is to pay down their more expensive debt.”
In its experience as an online lender, Upstart has seen that when consumers pay off their credit card, their loans perform better and their credit score improves.
“It's a better consumer outcome for sure, and better-performing loans is of course a better outcome for the bank as well,” Girouard said. “It would be even better if you cut up the credit card altogether.”
In some tests, Upstarts offers a 100-basis-point discount to consumers who opt to have their cards paid off directly.
“Thus far, more than half of the people offered that opportunity are taking it,” Girouard said.
