Renaud Laplanche and his team have a track record in building groundbreaking, credit-based businesses. And, as Upgrade becomes his second to smash unicorn status, he’s using nimble tech to make sure it stays ahead – even in a pandemic
Living within your means is undoubtedly a sensible – if perhaps boring – motto to live your life by. But the COVID-19 pandemic has really driven it home for many consumers who have either lost work or are concerned by the prospect of a falling income.
So, it’s really no surprise that many are cutting up their credit cards or paying down debt. Bank of England data showed that, in April, UK consumers collectively reduced credit card balances by £5billion, smashing a record set only the previous month of £2.4billion.
Meanwhile, in the US, the Federal Reserve said Americans cut their credit card debt by $76billion to $820billion in the second quarter – the highest amount since records began in 2003. Of course, we’re living through unusual times. But there are other options for consumers wanting to reduce their reliance on easy credit, including a new payment products specifically geared to shrinking personal debt – the Upgrade Card.
It was launched in the US in October last year by fintech ‘godfather’ Renaud Laplanche, and it has helped Upgrade, his latest startup bank, achieve unicorn status with a $1billion valuation in three years.
Built on the principles Laplanche developed with his previous unicorn, credit marketplace business Lending Club, the Upgrade Card can be used for both purchases and consolidating existing unsecured debt. But, unlike a credit card, the balance at the end of each month is wrapped up into a repayment plan so borrowers have a clear target for achieving a zero balance, similar to an unsecured loan.No more rolling debt over month after month and incurring endless interest costs.
“We are changing the way people look at consumer debt. The ethos is that spending should be driven more by necessity than impulse,” says Laplanche.
“We help customers really think about their credit, and learn about their finances, so that they make better decisions. That is a complete departure from the way the credit card industry, and much of the lending industry, has operated so far.
“If you look at the make-up of credit card debt, much of it is new purchases, and a lot of that is electronics, and other non-essential purchases. Too many people spend more than they earn and, in the best case, pay their credit card debt off once a year when they get their bonus. But overall, people are accumulating too much high-cost, unsecured debt.”
Laplanche’s crusade against the credit card debt trap began in 2007 with Lending Club, where loans were pitched as vehicles for consolidating and paying down credit card borrowing. He, along with several members of the senior team, left the business in 2016, and began to work almost immediately on creating Upgrade, which has delivered more than $3billion in consumer credit through cards and loans since 2017.
Based in San Francisco with an operations centre in Phoenix, Arizona, and a technology centre in Montreal, Upgrade’s loan funding is sourced by Cross River Bank, which also originates loans for Lending Club. Customers of the Upgrade Card can borrow from $500 to $20,000 to fund purchases or have the cash transferred to a bank account. Debt is repaid over terms from 24 to 60 months with no early redemption fees.
A prudent approach
Since April, the card has been contactless, and exists in digital forms via Apple Pay and Google Pay to help reduce physical contact at the payment terminal amid the COVID-19 pandemic. Interest rates start at around 6.5 per cent and Laplanche says the bank’s net promoter score of 79 is proof that customers really buy into the claim that Upgrade Card is a credit card that’s good for you.
In June, a $40million investment as part of its Series D round led by Santander InnoVentures, the venture capital fund of Santander Group, was made based
on a $1billion valuation of the business – Upgrade had become a unicorn. Existing investors, including Union Square Ventures, Ribbit, Vy Capital and Silicon Valley Bank, and new investors Ventura Capital and Uncorrelated Ventures, also participated in the round, bringing total funding since launch to $200million.
Laplanche that focussing the business on credit products ensured monetisation of customers from the start. So far, it offers loans, the Upgrade Card and credit score and financial health tools. Current and savings accounts will launch later this year.
“A lot of neobanks around the world have started from deposits, trading, robo-advisory, payments products, and have a plan to move into credit later,” says Laplanche.
“Our path is more similar to Nubank in Brazil – it started with credit to draw in millions of users, then went into other banking products. We think that’s the better way because credit makes up 70 per cent of banking’s revenue globally, and in the US it’s the number one reason consumers seek a relationship with a bank. We also get the monetisation upfront, so don’t need as much capital to build a large brand.”
That strategy is verified by the relatively modest investment rounds – Laplanche says though Upgrade’s valuation has grown quickly, it is still setting fundraising targets of $50million rather than $500million.
“Part of the reason for the size of our funding rounds is that we are a bit more conservative and I don’t like spending money. But it’s also because we’re building a neobank anchored in credit.
“I like this business model better than spending money opening accounts then wondering how to monetise them. That said, credit is hard. Don’t underestimate how long it takes to build a credit underwriting and servicing infrastructure, and how much capital it takes to move billions of dollars of credit every year.
“Either you build your own balance sheet and you lose the fast-growing, capital-light appeal of a fintech firm, or you adopt a marketplace model, where you sell those credit balances to banks and investors. The second option requires you to build a track record of credit performance, which takes years. But we’ve built that track record and now we’re rolling out the other banking products.”
Having once before created a credit-based, multi-billion-dollar company, Laplanche and his team not only drew on their experience of credit markets, but also the nuts and bolts of IT. Though his ventures have never been weighed down by what we traditionally understand as legacy banking infrastructure, Laplanche admits much of what Lending Club was using in 2007 would now be very much out of date.
For that reason, Upgrade Bank has a modular infrastructure, based on microservices, where each service is self-contained and can be improved, reused, redeployed, or ripped out. He says: “Even a first-generation fintech company now ends up running on legacy software. Starting just three years ago with a modular infrastructure allowed us to develop, test and launch products faster.
“That’s because the codebase is identical. So, between our first product of loans, and our second product, the Upgrade Card, the experience for consumers is radically different yet the codebase is 70 per cent identical. That’s one of the benefits of a microservice-based architecture.
“Another is that it’s not a monolith, there’s no large architecture base you need to throw away 10 years later because it’s outdated. Components can be swapped out without major redevelopment.”
Such nimbleness is an asset, especially for a business launching major products during a global pandemic. Caution has been a watchword, says Laplanche, and Upgrade has tightened its credit policy to reflect the huge unemployment surge in the US. He says: “July’s report showed there were 16 million Americans unemployed, so we need to protect our customers, give them additional time to make payments and provide increased flexibility.
“The launch of our banking products will help us to amass more data to improve our knowledge for underwriting. There’s more demand than ever before and overall business trends are good.”