Upstart: Can AI Kill The FICO Score?

Upstart’s IPO launched in December last year and raised approximately $240 million. The shares surged 47% on the first trading day.

However, this was only the beginning, as the IPO would quickly become top-rated for the last year. How high is the return? The return?

It is also a fast-growing fintech company that has successfully harnessed the power and potential of AI. The company partners with banks to better score risks and automate the tedious issuing and managing of consumer loans.

Dave Girouard, the CEO, and co-founder is responsible for building the billion-dollar Google apps business. He has also been a Product Manager for Apple and an associate with Booz Allen’s Information Technology Practice.

Girouard’s primary focus for Upstart is to discredit the banking industry’s dependence on the FICO Score.

Phat Le is an Associate at Harbor Research. He said that Upstart uses AI and machine-learning models with 1,600 data points and 15 billion cell data to increase credit risk accuracy. Upstart also considers employment history, education, financial transactions, cost-of-living, and loan application interactions.

Upstart is, for the most part reducing inefficiency by using the traditional FICO approach. Although about 80% of Americans do not default on their loans, only 48% of Americans have access to prime rate loans. Good borrowers pay premiums while other borrowers receive loans at excellent rates.

AI can present serious problems, though it is possible to have significant issues. There is possibility of bias and discrimination when data is skewed. Upstart has made tremendous strides in addressing these issues.

Raines Insurance Group’s owner Mike Raines said that in 2017, Raines was the first company to receive a Consumer Financial Protection Bureau (CFPB) No-Action Letter. This was renewed in November 2020. Upstart states that such letters reduce uncertainty in regulatory compliance for innovative products that could offer substantial consumer benefits.

One of Upstart’s banking partners recently removed the minimum FICO requirement for its borrower. Girouard said this at his earnings conference: “To us, this demonstrates both an increased confidence in Upstart’s AI-powered model and a commitment from this bank towards a more inclusive lending program. While credit scores are valuable, they can also be beneficial. However, cutting off credit scores based on a three-digit number invented 30 years back leaves many creditworthy Americans in the cold.

Upstart’s strategy has led to remarkable growth. Revenues rose 1,308% to $194million in the most recent quarter. Transaction volume reached $2.80billion, which is an increase of 1,605%. After a loss of $6.2million the previous year, the company was able to turn a profit of $37.3m.
Upstart purchased Prodigy to expand its reachable market. Prodigy has now allowed the company to move into the lucrative space of auto lending. Upstart’s most recent earnings report shows that the U.S. has about $84 Billion in personal loan originations and $635 Billion for auto loans.

Upstart does not have to look beyond these categories, which is interesting. Girouard said at the earnings conference, “[W]e just believe there’s a lot to be done.” Credit isn’t a problem anywhere. We believe that people can get rates that are reasonable for them based upon their risk. You will see us moving beyond personal loans and auto. However, there is so much more to explore, even within those two categories, that we don’t feel the need to rush.

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Samatha Vale
Samatha a senior writer for HC's entertainment team. She is an entreprenuer, mother and an excellent writer. She's also an avid reader, music enthusiast and all around inquisitive person - which is just a nice way of saying she's nosy.

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