Reached ( UPST -10.12% ) has taken the lending industry by storm with a platform that helps make affordable credit accessible to more Americans. The company’s product primarily competes with the FICO credit score, which, while historically essential to lenders, is a flawed method of determining a person’s creditworthiness. As a 2019 study by Upstart found, 80% of Americans have never defaulted on debt, yet only 50% of Americans have access to prime credit based on their FICO scores.
The flaws in these simple credit score formulas have left a large swath of the American population without access to credit at affordable interest rates.
Upstart is trying to change that. Its artificial intelligence platform considers more than 1,500 variables to make lending decisions on each individual borrower. This generates a more global vision of solvency. Primarily, its determination system has been used by its lending clients to make personal loan decisions, but in April 2021, Upstart purchased Prodigy – an automotive retail software company – to accelerate its expansion into the personal loan niche. car loans. This seems like a major opportunity for fintech.
Customers register left and right
Like the traditional personal loan, the auto financing system has many flaws. More than $1 trillion in cars are purchased from dealerships in the United States each year, and most of them are financed, but only 1% of buyers say they are satisfied with the process. Since closing the Prodigy acquisition, Upstart has been striving to do better and has increased the number of dealerships using its platform by 106% to 410.
The number of banks partnering with Upstart to offer car loans has also increased: it now has 10 partner banks on its car platform. If the growth rate of its personal lending business is any indication, the number of banks using Upstart to make car loan decisions could grow at a rapid pace: By the end of the third quarter, the company had 31 banking partners. By the end of the fourth quarter, that number had increased by 35% to 42.
Upstart created a retail solution — where car buyers can navigate through the entire car buying experience — to help grow its auto loan segment. This retail site connects all aspects of its business: it has partnered with manufacturers like Subaru and volkswagen (VWAGY -1.19% ) offer cars, which can then be purchased through its dealership partners, while its bank customers finance the purchases.
It is important to note that Upstart does not take any loan risk. He simply gets paid for every application determination he makes, a business model that provides a stable and consistent revenue stream.
Optimism for the future
During the company’s fourth quarter conference call, CEO David Girouard noted that “automotive [refinancing] funnel performance is now on par with our personal loan funnel in 2019.” For reference, the number of loans facilitated with Upstart’s AI engine increased 527% from Q4 2019 to Q4 2021, so there could be a lot of growth to come.
By the end of 2022, management expects its auto loan transaction volume to reach $1.5 billion, which is incredible considering it launched its first auto loan at the end of 2020. The company also generated over $135 million in net income and $153 million in free cash. flows in 2021 – funds that could be reinvested to fuel this growth.
What is the opportunity?
Upstart Auto works in a huge market: The auto loan origination opportunity is worth $727 billion a year, so the company’s $1.5 billion loan volume forecast is peanuts compared to its potential.
It’s a young company with a lot to prove, but with the best system it’s built on the back of artificial intelligence and machine learning, it looks set to take advantage of a huge opportunity. If Upstart lives up to its potential over the next decade, investors could see Upstart Auto become one of the company’s biggest revenue generators.
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