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.