Upstart, The Brainchild Of Google Execs, Is Using Fintech To Make Smarter Loans

In the gap between the number of Americans who have access to prime credit and the number of Americans who are a good risk, Dave Girouard found enough room for an entire business.

About 40 to 50 percent of Americans have access to prime credit, yet 83 percent of people who have taken out a loan have never defaulted, said Girouard, the CEO of the San Carlos, California-based lending firm Upstart.

“To us, this is a signal that there’s something strange going on. The models cannot ID enough good people, but clearly the vast majority of people are good quality credit,” Girouard, 51, told Benzinga. “That suggests there’s significant limitations in how credit models work.”

The groups who are often denied by traditional credit models — but aren’t necessarily risky — include millennials with a “thin” credit file, recent immigrants and self-employed people, Girouard said.

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Enter Upstart. Before the company’s founding in 2012, Girouard was president of enterprise at Alphabet Inc GOOG GOOGLThe division grew into a $1 billion cloud business during Girouard’s eight years at the helm.

Together with a team of ex-Googlers, Girouard built a platform that evaluates credit risk by analyzing factors such as borrowers’ education level, geographic location and how they connected with Upstart.

“Any single one of them can be somewhat useful, but in concert using fairly modern statistical technology, you can get much better at predicting risk,” Girouard said.

The peer-to-peer lending product went live in May 2014.

Upstart achieved its first profitable month in July and crossed the $1 billion mark in loan originations this summer, Girouard said, adding that the start-up has quadrupled its revenue since January.

‘The Vast Majority Of Consumer Credit Is Mispriced’

The average size of a loan from Upstart is between $11,000 and $12,000, and the average age of the company’s borrowers is 28, the CEO said.

Loans range between $1,000 and $50,000, with APRs from 7.39 percent to 29.99 percent and three- and five-year terms.

Upstart borrowers must be U.S. citizens or permanent residents and have a FICO score above 620.

Nearly 80 percent of Upstart borrowers report using their loan to refinance credit card balances on which they’re paying an average of 22 percent interest, a number Girouard calls “criminal” in today’s interest rate environment.

“It’s not just about who has access to credit and who doesn’t. It’s really about the price,” Girouard said. “In our view, the vast majority of consumer credit is mispriced.”

Related Link: These Bay Area Fintech Companies Are Revolutionizing The Lending Space 

Bringing AI, Machine Learning To Lending

More than a third of Upstart’s loans are approved instantly — a number that stood at zero less than a year ago.

“At some point, we think 80 to 90 percent of loans will be completely automated,” Girouard said.

If there’s a fintech spectrum, Upstart’s CEO said the company leans toward the technology and data science end.

“Our data scientists are the same type you would see in other industries doing projects like self-driving cars and digital home assistants like Alexa, [but they’re] applying themselves to the problem of measuring credit risk.”

Upstart uses a machine learning model: As loan payments are made — and when some become delinquent — the software learns and adjusts.

At its launch, Upstart would have approved 35 million Americans based on its credit model, according to the company. As of January, Upstart would approve more than 100 million people for a loan.

That’s a radical divergence from the traditional concept of lending, Girouard said.

“The history of lending is a static model that you upgrade very cautiously, perhaps once a year, and that’s completely different from how we do it.”

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