Upstart, an online lending platform provider that serves 3 million borrowers, is positioning itself for a transformation in the consumer lending industry within a decade.
The company is taking on new consumer credit products, developing agentic AI "interventions" for borrowers on the edge of default and recalibrating its models to accommodate changing macroeconomic conditions.
"Our view is the machinery underneath all of this industry in the next 10 years will be replaced and upgraded by AI – all the origination and servicing and collections and all the pieces and parts of the machinery that make this business go," CEO Dave Girouard said at the company's first investor day, or "AI Day," in New York on Wednesday. "Platforms that host it can make $1 trillion in revenue over that time."
The company, which was profitable at the outset and then challenged during the COVID-19 pandemic, is set to achieve GAAP profitability in the second half of the year, Girouard said.
Improvements the company has made to its models have led to a 50% reduction in acquisition costs since 2019, a 66% reduction in people costs since 2022 and better credit loss management, he said.
The company currently offers small-dollar lending, auto loans, auto loan refinancing and home equity lines of credit. Over time, Girouard expects Upstart to take on all forms of consumer credit, including home loans, and to build lifelong relationships with borrowers.
'Time as a feature'
Upstart has been recalibrating its models and investing in what Chief Technology Officer Paul Gu calls "dynamic macro handling."
"We are giving our models the ability to, in real time, respond to macro changes and giving the model what we call 'time as a feature,' meaning telling our models that not all years are created equal, and that time is something you can actually use in combination with any arbitrary characteristic of loans to understand what's changing about the world," Gu said.
"By doing that and building certain techniques to make our models train and update much faster, we're able to now back-test what would have happened if we had our state-of-the-art systems back when this all played out," he said.
Banks aren't ready to do what Upstart does
An analyst asked Upstart's leaders why they don't offer a white-label version of their platform to banks, rather than running a lending marketplace under Upstart's brand in which Upstart underwrites the loans and sells them to banks and other investors. (Fortress Investment Group
"Waiting for lenders to adopt a technology that itself depends on volume and scale to get better seems like the wrong approach," Girouard said. Today, Upstart can control its destiny and attract consumers, build relationships with them and cross-sell to them, he said.
"The models that learn most quickly are going to win," he said. "So I like taking on customer acquisition, because that's an enormous part of our value process. We acquire far less expensively than others, and acquisition gets better as the conversion gets better." Even if banks were all ready to adopt AI lending like Upstart's and move forward, sitting behind them would make Upstart a very different company, he said.
Gu said, "The typical bank is not fully comfortable with what we do today." They might be comfortable with the 2015 version of the platform, he said.
"The pace at which we're adding new things is generally faster than the pace at which most of the industry is comfortable adapting to these new technologies, especially in a fairly regulated space," Gu said. "There are strong network effects and that means that we would have to constrain the pace of technology rollout to the pace at which traditional financial institutions are willing to adopt them, and that would pretty much be death for the strategy that we chose."
Personalization is the next frontier
Upstart is developing personalized interventions to borrowers that may be at risk of defaulting, to reduce charge-offs and improve revenue.
"Personalization is the new vanguard for us," Girouard said. "This is what we're just starting on. It's something I'm very excited about. You can think of this as Upstart going from predicting outcomes to actually shaping the outcomes and turning more than positive."
It's starting with servicing and collections, he said.
"We help people get through the process, make the whole experience good for them," Girouard said. "But there's another 100 times more we can do to personalize the experience, to help in small ways, either a business or a consumer make a bit smarter decision along the process."
Every borrower who defaults made a bad decision somewhere along the way, he said.
"We're just getting started now, we fundamentally believe that generative AI and agent based technologies are going to be the centerpiece of this. So you should expect to hear a lot from us on this."
