Upgrade, the San Francisco-based online lender and card issuer founded by Renaud Laplanche, is launching a mobile app, checking account and debit card.
The new account comes with 2% cash-back rewards on most debit charges, no fees, reimbursement of ATM fees charged by other banks and 20% lower rates on Upgrade loans. Cross River Bank in Teaneck, N.J., provides banking services for the new accounts as well as for Upgrade’s loans.
The 2% cash-back rewards on a debit card is unusual. “Credit cards typically offer 1% to 2%, but debit cards don’t because merchants pay a lower interchange fee to card issuers on debit cards than on credit cards,” Laplanche said ahead of the company's new-products announcement Thursday.
But Upgrade doesn't rely on interchange income for revenue. It makes money through the loans and credit cards it offers.
“We're in this unique position where we don't need to make money with mobile banking,” said Laplanche, who was the founder of LendingClub. “It's a way to onboard new customers and increase loyalty.”
Having customers’ bank accounts will also allow Upgrade to see in a more detailed way the income they are receiving and the purchases they’re making.
“We can use that to lower our risk on the credit,” Laplanche said. “So we can approve more customers or give them better pricing.”
Upgrade considers customers’ cash flow and “free cash flow” — income minus expenses — when deciding which potential borrowers to approve.
“This is very helpful because it helps us differentiate between customers who live in very high-cost-of-living areas from those in low-cost areas,” Laplanche said. “We also take into account local and state taxes.”
All the underwriting is done in partnership with Upgrade’s bank partner, the $11.8 billion-asset Cross River.
Upgrade had a surprisingly good 2020. “In March and April, we thought it was going to be a really tough year,” Laplanche said. “The unemployment numbers were still going up. Then with all the government subsidies, credit performance ended up being fine.”
Upgrade says it made $160 million in revenue in 2020 and started to be profitable. All told, it’s made $4 billion in loans. The average loan rate is between 12% and 13%.
The startup’s loan products are unusual. A credit card launched in October gives customers 1.5% cash back when they pay down their debt, rather than when they spend, encouraging them to limit the amount of credit they revolve.
Upgrade also offers a product that’s a cross between a credit card and an installment loan. As soon as a user makes a purchase, the balance on the card turns into an installment plan in which the customer has to pay the money back within one, two, three or five years. It’s meant to enforce discipline.
The company is getting 1 million loan applications a month, Laplanche said.
Most of the lending process is automated, but Upgrade has also hired 120 people over the past year, about a third in customer service. It now has 420 employees.
“Our customers do like to have customer service to talk to people on the phone,” he said.
Hiring and supporting that many new employees remotely has been a challenge, Laplanche acknowledged.
“It’s harder to get them up to speed and help them be efficient and get to know their coworkers,” he said.
