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Finovate Blog
Tracking fintech, banking & financial services innovations since 1994
Palo Alto, California-based insurtech Hippo Enterprises has locked in $150 million in new financing and earned a valuation of $1.5 billion. The Series E round featured participation from new investors Dragoneer and Ribbit Capital as well as existing investors Felicis Ventures and Iconiq Capital.
This week’s investment takes the company’s total capital to $359 million.
Hippo will use the funds to expand in the U.S., and to help cover the costs of its acquisition of Spinnaker Insurance, which the company bought last month. According to reporting in BuiltinAustin, Hippo’s expansion plans include building a “new, 310-person campus in Austin.” Company Chief Insurance Officer Rick McCathron credited both the city’s “strong insurance presence” and central time zone positioning as enhancements to Hippo’s ability to serve customers across the U.S.
The funding comes amid a flurry of activity in the insurtech space. On the acquisition front, insurtech company Assurance IO was purchased by Prudential Financial in a deal valued at $2.35 billion. We also learned this week that technology titan Amazon is entering the insurtech business in India. And earlier this month, one of the more widely known insurtechs, Lemonade, went public, earning a $3 billion market cap on its first day of trading.
Hippo, led by CEO Assaf Wand, is planning an IPO of its own as well. Wand said that the terms of the offering had been determined before Lemonade’s IPO, but the onset of the global health crisis forestalled the company’s plans.
Founded in 2015, Hippo currently offers home insurance in 29 states in the U.S. including California, Texas, Illinois, and New Jersey. The company leverages automation to enhance the process of applying for and getting an insurance quote in less than 60 seconds. Hippo also uses machine learning and smart home devices to enable customers to stay updated on liability issues. The enabling technologies also provide consumers with preventative maintenance tips that will help them resolve small issues with their homes before they become major insurance claims.
Small business cash flow solution provider Kabbageunveiled its Kabbage Checking offering today. The new business checking account is designed to give smaller businesses the “capabilities, convenience, and security” of traditional business accounts, while sparing them “monthly fees or friction.”
The accounts charge no opening or maintenance fees, and do not require minimum or daily balances. At present, Kabbage Checking offers 1.10% APY, which is paid out monthly. The company states this is among the highest interest rates available for a business checking account.
Kabbage Checking accounts come with a Kabbage Debit Mastercard, support electronic billpay, and provide access to free ATM access via a 19,000-ATM national network. Account holders also can create up to five e-wallets to help manage spending and savings. The new accounts can be used with other Kabbage solutions such as Kabbage Insights for daily cash flow analyses and forecasts, Kabbage Payments to accelerate settlements and avoid cash flow shortfalls, and Kabbage Funding, which helps account holders avoid accidental overdrafts. Additional features, including wire transfers and mobile remote deposit, are expected to be added later in the year. The accounts are issued by Green Dot Bank, and are insured up to $250,000.
“We believe in the businesses too often left out, overlooked and underestimated,” Kabbage President Kathryn Petralia said. “Kabbage Checking is a new banking service built to give those small businesses an upper hand to earn more, save more, and grow their business faster without sacrificing anything they expect from a bank.”
Kabbage has been one of the more active fintechs in terms of helping small businesses during the current COVID-19 pandemic. The company approved +209,000 small businesses for $5.8 billion as part of the Paycheck Protection Program, making Kabbage the third largest PPP lender in the U.S. by application volume. This feat, according to Kabbage CEO Rob Frohwein, was a large step for the company, and perhaps an even greater one for fintech writ large.
“The PPP validated the criticality of FinTech,” he said in a statement earlier this month. “Most of the small businesses we reached would have been ignored had this crisis taken place just 10 years ago. These businesses can only be served in mass by an automated platform that places need in front of privilege and levels the playing field that has too long been unequal in our financial system.” He added that fintechs increasingly will be the solution provider of choice, as more small businesses migrate toward these newer companies instead traditional banks “when seeking even the most basic financial services.”
Scalable Capitallanded $58 million (€50 million) for its roboadvisory platform this week. The new funds come courtesy of BlackRock, HV Holtzbrinck Ventures, and Tengelmann Ventures.
Today’s round brings Scalable Capital’s total funding to $133 million (€116 million) and boosts the Germany-based company’s valuation to $460 million. Scalable Capital will use the investment to grow in the wealth management and brokerage spaces, and invest in the B2B side of its business.
“In times of COVID-19, our funding round is a powerful signal; it shows that our focused, digital business model is convincing the investors,” said company Co-founder and Co-CEO, Erik Podzuweit. “We will use the additional capital to expand our position as the market leader in digital wealth management and to reach new customer segments with the broker.”
With 80,000 customers across Germany, Austria, the U.K., and Switzerland, Scalable Capital has $2 billion in assets under management. The company offers personalized, fully managed investment portfolios.
Using its risk management technology, Scalable Capital’s B2C offering aims to make investing accessible for everyone by charging simple, transparent fees.
“We established Scalable Capital to make investing easier and better through technology,” said Scalable Capital Co-founder and Co-CEO Florian Prucker. “Not only has our B2C business grown strongly over the last few years, but Scalable Capital’s technology is also used by more and more B2B partners; most recently we launched our partnership with Barclays. With this funding round, we also want to expand our team of currently 130 employees in order to drive our expansion and the further development of our platform.”
The company’s flagship offering is a B2B approach that brings its roboadvisory technology to help banks offer their clients a different flavor of investing. Scalable Capital recently added three additional partners to its roster and now boasts partnerships with firms including Barclays, Gerd Kommer Capital, Raiffeisen Banking Group Austria, ING Deutschland, Siemens Private Finance, Openbank, Targobank, Oskar, and Baader Bank, and others.
It’s been five years since eBay and PayPal split into separate companies – which means the five-year operating agreement that maintained the firms’ payments relationship in the years since the breakup is about to run out.
This week eBay announced that it is now ready to expand the managed payment system that will take PayPal’s place. Developed in partnership with payments provider Adyen, the new payment system is being used by 42,000 sellers – with more than 255,000 additional merchants who the company said will be activated by the end of the year. eBay has processed more than $4.7 billion in volume in the U.S. and Germany via its managed payments offering, and the company reported that sellers using managed payments have saved $17 million in transaction fees. eBay President and CEO Jamie Iannone praised the momentum behind managed payments, and said he expects it to “deliver $2 billion in revenue and $500 million of operating income in 2022.”
eBay is currently managing payments in five countries – the U.S., Canada, Germany, Australia, and the U.K. – and plans to expand the program to all countries where it operates.
For buyers, eBay’s managed payments provides a more flexible checkout experience with more payment options. Sellers benefit from a simplified process – involving one company (eBay) rather than two (eBay + PayPal) – that provides for easier reconciliation, faster service, and more effective support when issues arise. The company quoted one 20-year veteran eBay merchant from Germany who has been using managed payments since the spring. “I don’t care how the payment goes,” she said, “the main thing is that the customer buys and pays and my account fills up.”
VP of Global Payments Alyssa Cutright added that the offering was a win for both buyers and sellers that provides a simpler, more modern managed marketplace. “By managing payments, eBay is taking control of its own destiny,” Cutright wrote. “We are investing in our buyers and sellers, creating an integrated end-to-end platform, and enhancing the eBay experience by breaking down and removing complexities for our customers.”
Adyen, eBay’s payments partner, is based in Amsterdam, The Netherlands, and was founded in 2006. Companies ranging from Facebook and Uber to Microsoft and Singapore Airlines rely on Adyen’s technology to deliver seamless, friction-free payments across mobile, online, and in-person channels. The company, which processed $278 billion (€240 billion) in volume last year, is publicly traded on the Euronext and has a market capitalization of $47 billion.
There aren’t many industries where organisations have so much data about customers for such a long period of time. For example, I have had the same bank for the last 25 years which, by the way, is the same as my father’s.
My bank has been my partner when I wanted to go to university or buy my first apartment. It knows how much I make and where I spend it, but I never truly felt they used that knowledge to either enrich my experience or deliver tailored offers. Why is that?
There is a wealth of value to explore in untapped customers’ financial behaviour and banks are in prime position to reap the benefits, but they need to adapt.
The transformation has already begun with banks introducing more channels, learning best practices from digital native banks and fintechs, and even creating new digital business models to test what works, aiming to later integrate those learnings into the core business.
Still, banks are drowning in data and have very little insight on how to transform it into actionable knowledge to better serve customers, personalise offers, and deliver a consistent customer experience.
Furthermore, through segmentation, banks can use their knowledge about current customers to define campaigns and other initiatives to fulfill one of their main objectives, attract new customers. Their continuous appetite for growth steams from delivering unique and innovative value propositions to current but also future customers which today can be, in many situations, hallenging.
From risk takers, tech-savvy, and hungry for innovation customers to techavoiders that value human touch, banks must accommodate different engagement approaches and insights to differentiate customer profiles. This happens not because they don’t have the data, but because they can’t mine it.
It’s clear that very soon ‘Customer intelligence’ will be the most important predictor of revenue growth and profitability. The use of behavioural analytics will be key to identify customer friction points and there will be a surge in building technological capabilities to get more insight on customers’ needs.
A New Engagement Model for the Digital Age
By nature, financial products are complex and both companies and individuals are deeply affected by their financial choices, so there’s a foreseeable need for contact, ensuring a correct understanding of what is at stake.
Bank tellers, financial advisers, and other resources are key in accommodating customers’ requests and providing value-added and timely information. They benefit first-hand from customer insights, which enable them to provide not only a better service, but also to increase the customer value by offering the best solutions.
In addition to assisted channels, there is the emergence of self-service applications aiming to allow customers to engage on their terms, when they want, going as far as allowing customers to configure product features, including pricing. If, in this case, the human factor is eliminated, the need for accuracy is even greater, otherwise, the sale may fail or the inquiry can go unanswered.
Customer expectations have changed mainly due to the experience from other digital native organisations, coming or not, from the financial sector. The easy interactions, the tailored offers, integration between physical and digital channels or the unmatched service, creates a gap between what many financial institutions can deliver and what customers are getting elsewhere.
Responding to the pressure to change, banks must find a balance between opening but guaranteeing trust continues to be paramount, at all levels. Up to this point, the perspectives presented argued for the need for banks to not only gain insights and knowledge from the data they already have, but also the challenge in adjusting to new customers’ demands and how they choose to engage.
However, the biggest challenge is how to orchestrate these two dimensions and provide customers with experiences that leverage the knowledge banks have delivered in a seamless way, using whatever channel customers choose from.
The holy grail of an enhanced experience in the banking sector is to have an holistic and end-to-end perspective of the customer experience.
Introducing Celfocus Customer Knowledge Augmentation and Activation
Celfocus Customer Knowledge Augmentation and Activation is a modular and integrated framework tailored to leverage banks’ customer knowledge and deliver tailored services.
This framework is anchored in 2 main modules. The first comprises the tools and technologies to augment customer knowledge by activating every single customer through automated AI and Cognitive data insights, and the second aims at delivering tailored experiences that trigger new targets, portfolios, and customer lock.
By encompassing the Customer Value Augmentation and Enhance Customer Experience modules, the solution provides banks’ full control of the customer journey from planning to execution, focusing on building the technology capabilities to get more intelligence about customers’ needs, and how to best serve them.
You’ve probably heard that cryptocurrency exchange platform Coinbase is considering going public later this year or early next year.
But this likely won’t be a traditional fintech IPO. That’s because the California-based company’s culture is rooted in the blockchain, a technology that embraces alternative finance. Furthermore, Coinbase would be the first major U.S. cryptocurrency exchange to go public, and the fintech community will be paying close attention to the outcome.
That said, there are some roadblocks Coinbase may encounter on its journey to Wall Street.
First, in order to go public, the transaction would need to be approved by the U.S. Securities and Exchange Commission (SEC). The hurdle here is that while the SEC has issued guidance on cryptocurrencies, labeling them as securities that are subject to regulation, the organization hasn’t issued guidelines on specific coins, except for a few. In fact, many mainstream financial institutions are wary of cryptocurrencies and see them as a tool for money laundering and illicit activities.
Coinbase will also need to decide how it will be listed. The company can either undergo a traditional IPO that caters to Wall Street investors, take a direct listing approach, or go public via a token offering on the blockchain. While involving the blockchain may be a logical approach for a blockchain-based company, it may cause difficulty, as even a hybrid model would need to be approved by the SEC.
Coinbase must also balance the cryptocurrency market itself. As Laura Shin points out in her podcast Unconfirmed, Coinbase will likely try to time its public debut with the cryptocurrency market, which is known for its volatility. Debuting during a dip in the cryptocurrency market may result in Coinbase receiving a lower-than-expected initial stock price.
These days, you would be hard-pressed to find anyone whose job hasn’t changed because of COVID-19. And since payroll plays a major role in customers’ careers, we wanted to explore the ins-and-outs of how the “new normal” is impacting this subsector of fintech.
Today we caught up with DailyPay Chief Innovation Officer Jeanniey Walden to gain a better understanding of what the payroll and benefits space looks like in 2020.
The recent public health crisis has altered our way of life in many ways. How have you seen it change the employee benefits and payroll space?
Jeanniey Walden: The public health crisis changed everything about life as we knew it, overnight. This impacted every aspect of the workplace, especially in the employee benefits and payroll space. Business leaders had to reimagine, redevelop, and re-engineer how every element of their business works, while simultaneously supporting time-sensitive matters including payroll. The pandemic also drove HR and payroll leaders to leverage technology to design successful remote workforces, leveraging video, virtual coffee dates, mindfulness support and more. They also need to ensure employees were well taken care of, as dynamically and normally as possible, in a new world. On-demand pay is one of the technologies HR and payroll leaders pushed to the forefront in the payroll space supporting not just their employees’ financial needs during the pandemic but also the entire household. Concerns over access and timing of pay were eliminated with the adoption of this new technology.
In fact, DailyPay’s on-demand pay usage has been selected for use by 80% of Fortune 100 companies offering on-demand pay during the wake of the pandemic. And as many Americans became financially insolvent, a recent study indicated a 30% increase of on-demand pay usage relating to an increase in household dependency on a DailyPay user. To exacerbate the problem, unemployment benefits and deferral housing protection are expected to end in July, leaving many people scrambling to find more income.
We expect the changes in payroll and benefits will continue to evolve the hopes of alleviating financial stress as we try to acclimate to our new normal.
In what ways does the traditional payroll process have to reinvent itself to fit into the post-COVID digital era?
Walden: Throughout COVID-19, when and how fast employees get their pay has never been more important. Having access to their own funds has become the lifeline during the pandemic, not just for employees, but for their families as well.
As the pandemic evolved, many new people began using DailyPay to support ever-changing household needs, including their ability to make bulk PPP purchases, purchase data plan extensions on the cell phones, and even enable them to visit the grocery store or pharmacy early, before they became crowded, reducing their chances of getting sick. Today, access to on-demand pay offers families whose significant other has lost their job maintain a sense of normalcy in supporting the household.
The pandemic exemplifies how the current bi-weekly payroll cycle fails to timely and financially cover employees’ necessary and unexpected emergency costs. This is a wake-up call to companies to abandon the traditional payroll process and migrate to a digital, contactless pay solution which provides employees access to their earned pay and eliminates the two-week wait time that employees usually encounter with the traditional payroll process. Speed and safety are prioritized through digitization which ends up saving people valuable time and money.
Let’s talk diversity. How can companies attract a more ethnically diverse workforce?
Walden: Diversity in a company’s leadership and workforce is not just the right thing to do, it’s the smart thing to do. In this current social climate, employees are less inclined to work or apply to a company that is not taking any initiative to create a more diverse workplace. Now more than ever, employers need to take charge to create an inclusive, diverse culture that communicates their corporate values to their staff. Through regular diversity training and open dialogues with employees, companies can consistently reevaluate and update its workforce policies.
To continue to grow, companies need to learn how to retain their diverse employees. This can be easily done by offering employees benefits and opportunities to grow as an individual. Some benefits employers can offer workers are diversity programs, mentorship, inclusive workplace policies, and on-demand pay that provide employees flexibility.
While companies’ attitudes toward diversity can’t change overnight, employers can commit to taking action every day to promote diversity. Businesses need to understand that a “diverse workforce” isn’t a momentary trend and shouldn’t treat it as a tool to simply recruit candidates. It’s a long-term commitment to support and elevate all prospective and current employees.
One of the tricks to curating a diverse workforce is creating the right culture. What are some creative ways that small companies can ensure less turnover during such a volatile time?
Walden: The combination of younger generations in the workplace and the current health crisis has increased the pressure on employers to deliver a better employee experience. Employees expect employers to step up and meet their current needs for personal safety, financial security, and remote work culture amid the pandemic. But they were already pushing for an improved workplace experience before COVID-19 — and those demands haven’t gone away.
While it might feel prudent to put employee experience on the back burner while your organization copes with the pandemic, now’s actually a great opportunity to test how your culture holds up remotely. Because, as you’ll learn in the next point, remote work often goes hand-in-hand with building a better employee experience.
To prevent incurring such high costs and turnover, small businesses can offer their employees financial benefits that are mutually beneficial to the employer and employee. That is why an on-demand pay benefit is gaining so much traction. According to a DailyPay survey, our partners saw a 45% decrease on average in turnover since implementing the solution. In addition to soaring retention rates, employees find their productivity and happiness increase just knowing that they have the option to get their money when they want.
P2P lender and challenger bank Zopa recently formed a partnership with Paylink Solutions to tap into the company’s cloud-based digital income and expenditure product, Embark.
Paylink’s Embark will help Zopa quickly find the most suitable loan product for clients by understanding their affordability. The tool taps into credit report data and leverages open banking technology to offer lenders a 12-month view of customer bank statements. Embark also provides identity verification and document upload technology.
“Teaming up with Paylink Solutions to deploy the Embark tool at this time has enabled us to provide an even better experience for our customers,” said Zopa Chief Customer Officer Clare Gambardella.
The partnership is part of Zopa’s initiative to increase its digital efforts. Embark will enable Zopa’s potential borrowers to use the self-service portal or use an online form with the help of a live customer service agent.
With Embark, Zopa customers also have access to free debt advice. Customers can self-refer to PayPlan, a U.K.-based debt help tool that provides personalized debt management plans.
“From day one, we have seen Zopa’s customers referring themselves to PayPlan; this is in an age where customers want to self-serve more,” said PayPlan’s Head of Partnerships, Andrew Alder. “It’s becoming more important for organizations, solution providers, and debt advice providers to work closely to create innovative ways for customers to still be able to access advice in a frictionless way.”
There may still be a few weeks of summer left, but high-growth vertical payments innovator Flywire is already in back-to-school mode. The company announced today that it has enhanced its digital payment platform to make it easier for educational institutions and student recruitment agents to manage student data and track payments.
“Education agents play a very important role in the relationship between schools and their international students,” Flywire EVP of Education Sharon Butler explained. “Their ability to represent educational institutions locally can make a big difference in how a school is viewed by prospective students.” Butler added that the new enhancements will “streamline the international student recruitment process” and improve the way that agents are able to engage with students and institutions.
A worldwide payment provider for students and educational institutions, Flywire helps schools offer their students a secure and convenient payment process that accelerates the flow of funds, makes reconciliation simpler, and keeps operating costs low. The enhancements to Flywire’s platform will make recruitment agents’ jobs easier by centralizing student data and providing transparency over the payments process. Educational institutions will benefit from this payment transparency and tracking, as well, and are able to use the technology to build custom payment plans to give students more flexibility.
Flywire also announced today that it has forged a strategic partnership with China’s international education industry association, BOSSA. A non-profit, government-supported organization, the Beijing Overseas Study Service Association will get expanded access to Flywire’s cross-border services for Chinese students studying abroad. The partnership leverages Flywire’s extensive experience working with education recruitment agents in China; BOSSA has 300 such member agents who are responsible for recruiting and advising more than 60% of all Chinese students studying overseas each year.
“Flywire offers state-of-the-art technology and services for cross-border payments,” BOSSA spokesperson Jon Santangelo said. “We are pleased to endorse them to Chinese education agencies, and China’s wider international education sector as a whole. The level of integrity they’ve achieved in the higher education field is a big differentiator to Chinese agencies.”
Founded in 2009 as peerTransfer, Flywire has raised more than $263 million in funding from investors including Goldman Sachs, Temasek Holdings, and Bain Capital Ventures. Mike Massaro is CEO.
The round was led by Coatue, and featured participation from both Goldman Sachs and Mastercard. Canaan, B Capital, XYZ Ventures, and angel investors including former Morgan Stanley CEO John Mack were also involved in the round.
“The ongoing global pandemic and renewed focus on societal inequities make Bond’s mission of driving financial innovation and inclusion more important now than ever before,” Bond CEO and co-founder Roy Ng said in a statement. “Opportunity starts with access. We look to lead the industry in enabling banks and innovators across industries to level the playing field for consumers and small business.”
Bond offers banks a suite of developer-focused APIs and SDKs that remove friction from many of the critical processes involved in bank-brand partnerships, such as onboarding, technical integration, and product monitoring. Bond’s AI-enabled technology centralizes and streamlines these processes, and uses automation to provide oversight and ensure compliance.
“Today, more than ever, speed to market with a proven, reliable product is a competitive advantage,” explained Sherri Haymond, EVP, Digital Partnerships, Mastercard. “Bond provides an entirely new approach to help its fintech and bank partners deliver for the end user. We look forward to working with them as they move to this next stage.”
In a blog post discussing the announcement, Ng articulated the challenge facing smaller regional banks and community lenders when they try to forge partnerships with technology companies. He blamed a wide variety of factors – from compliance to operational constraints – for making it difficult for these partnerships to even “get off the ground.” This, Ng said, is where Bond comes in. “Rather than have every app and every bank recreate the wheel for each new partnership, Bond now does the hard work in the middle so banks and brands can each concentrate on what they do best,” he said.
New information has come out this week about Ant Group’s IPO plans.
Instead of listing on the tech-heavy (and U.S.-based) NASDAQ, Ant Group will list concurrently on Hong Kong’s Hang Seng and Shanghai’s Star Market. This comes after Ant’s parent company, Alibaba listed on the New York Stock exchange in 2014.
Analysts suspect that Ant’s listing plan is largely a response to rising geopolitical tensions between the U.S. and China. There are practical reasons, however, for Ant to list in Hong Kong and Shanghai. Hong Kong introduced weighted voting rights in 2018 and Shanghai’s Star Market offers more market-driven pricing than other domestic exchanges.
“The innovative measures implemented by the Shanghai Star Market and the stock exchange of Hong Kong have opened the door for global investors to access leading-edge technology companies from the most dynamic economies in the world,” said Ant’s executive chairman Eric Jing. “and for those companies to have access to the capital markets.”
Ant’s parent company Alibaba still holds the record for the second-largest IPO when it listed on the New York Stock Exchange in 2014 and raised $24 billion. It is too early for Ant to discuss size and timing of the share sales; analysts have valued the company in the range of $210 billion to $218 billion.
What are the challenges of launching a challenger bank in today’s environment? What do these neobanks offer that traditional banks do not? And what will the path forward look like for these newcomers in terms of disruption versus collaboration with both incumbent financial services companies, as well as fintechs?
We caught up with Renaud Laplanche, co-founder and CEO of Upgrade. The San Francisco, California-based neobank, which recently announced a major fundraising, was founded in 2016 and specializes in offering credit solutions rather than savings products to mainstream consumers.
We talked with Renaud about what makes Upgrade different from other challenger banks and what the company has in store for the second half of 2020. We also drew upon his experience as the founder and CEO of LendingClub to discuss the challenges of fintech innovation in times of crisis.
Finovate: Most founders would consider themselves lucky to be responsible for bringing one company to unicorn status. With Upgrade’s most recent fundraising, we can now say that you’ve brought two companies to this level. How big of a deal was the June investment for the company?
Renaud Laplanche: Thank you, David, that was a big deal indeed. Reaching a billion-dollar valuation in just three years was an amazing achievement from the team, but more importantly we secured the backing of a formidable ally with Santander Group, a top 10 global bank, leading the round. We have been growing at a triple-digit rate in the last 12 months, and recently hit $100 million revenue run rate, so we would certainly have commanded a higher valuation from a growth-stage VC fund, but the strategic value of Santander was key to us. We believe this is the first time a top 10 global bank backs a neobank, which is a very positive development for the fintech industry as a whole as it shows that the largest banks in the world see tremendous value in fintech product innovation.
Finovate: One of the aspects about Upgrade that has attracted special attention is the idea of being a neobank “with credit at its heart.” What does that mean and why pursue this route?
Laplanche: Credit represents 70% of banks’ revenue in the U.S. and globally, and obtaining credit is often the number one reason consumers seek a bank relationship to start with. So credit is an essential component of any bank, and particularly a neobank that doesn’t benefit from a branch network and must establish trust and loyalty through other means. A credit relationship achieves that very purpose.
Our ability to deliver a mobile banking experience offering payments and deposit capabilities coupled with loans and credit cards at scale makes us unique in the neobank space. Credit is difficult to scale because it requires billions of dollars of capital, which means either a very large balance sheet and a capital-intensive model that doesn’t generally fit with a fintech framework, or outsourcing that balance sheet to investors, which itself requires a long track record of credit performance. Building the underwriting and servicing infrastructure to handle billions of dollars of credit is also challenging.
We started offering credit products in 2017, and have built the necessary track record, underwriting and servicing infrastructure, delivered billions of dollars of credit to consumers and are now about to roll out our full mobile banking experience.
Finovate: What are the signature offerings from Upgrade? How many users are taking advantage of them and what kind of growth has the company experienced so far?
Laplanche: Our signature offering is Upgrade Card, a credit card that delivers the low cost and responsible credit of installment lending through millions of points of sale. Instead of turning charges into a never-ending revolving balance like traditional credit cards, Upgrade Card turns each monthly balance into an installment plan that consumers pay down in monthly equal installments over 1 to 5 years. This approach encourages the discipline of paying the balance down every month, and eventually lowers the cost of credit for consumers.
Since launching in 2017, we have delivered over $3 billion in credit through both cards and loans. We launched Upgrade Card in October of 2019 and already passed half a billion dollars in annual origination run rate. Even through the crisis over the last several months we continued to record 20%+ monthly growth.
Finovate: One of the investors in Upgrade said that they were excited to support the company in its “next stage of growth.” What does that next stage look like? What are the goals, for example, over the balance of 2020?
Laplanche: We are doubling down on the existing strategy and will be using the new capital to fuel the continued rapid growth of Upgrade Card and launch Upgrade Banking, a full suite of mobile banking products and services. Overall we expect to add approximately $2.5 billion in credit origination this year, and launch what we believe to be the most innovative mobile banking product for mainstream consumers.
Finovate: What has the impact of the global health crisis had on Upgrade – both in terms of your relationships with customers and partners, as well as how Upgrade itself may have had to adjust internally to adapt to the “New Normal”?
Laplanche: With many bank branches being closed over the last few months, a lot of consumers have turned to online banking. This was generally a small adjustment to the “millennial” population, but a much bigger adjustment to the generations that grew up in a world of in-person banking. The COVID-19 crisis accelerated the digitalization of financial services, and gave many consumers an opportunity to discover online banking and online credit for the first time. I believe the corresponding changes in consumer behavior are here to stay.
The crisis also caused us to re-prioritize some of our product development, including the introduction of a contactless version and a mobile-payment version of Upgrade Card in April of 2020, several months ahead of the planned release date. Both features have helped our customers avoid surface contacts during in-store checkouts.
Internally, we made the decision early on to allow all of our San Francisco and Montreal employees to work from home. Everyone has stepped up to the challenge and we’ve seen no loss of productivity as a result.
Finovate: You co-founded LendingClub shortly before the Great Financial Crisis and managed to steer the company through that challenge to great success. Some people have compared our current situation – with the COVID-19 pandemic and growing social unrest worldwide – to that previous crisis environment. From the point of view of someone who has led a fintech company through a major crisis, what advice do you have for fintech entrepreneurs in terms of dealing with this one?
Laplanche: There are similarities and differences between the two situations. The economic crisis caused by COVID-19 is a lot more severe in terms of job losses, and came in more abruptly than the 2008 financial crisis. But the financial health of the U.S. consumer, the banking system and the overall economy immediately prior to the crisis was a lot better than in 2008. The monetary and fiscal policy response has also been stronger, and so far more effective this time around. It is still hard to know the exact economic and social impact of the pandemic, as so much is still in play.
That being said, some parts of the 2008 playbook remain relevant: cut costs early, conserve cash, raise more cash if you can, and always assume the downturn will be longer and more painful than initial estimates would have you believe. A prudent approach is generally rewarded in the early phase of a downturn. There will likely be opportunities toward the end of the downturn and early phases of the recovery, but these opportunities will only be available to those who weathered the storm in the first place.
