Upstart: Can AI Kill The FICO Score? - Forbes

Last December, Upstart launched its IPO and raised about $240 million. On the first-day of trading, the shares jumped 47%.

But this was just the beginning of the gains as the IPO would soon become one of the top for the past year. The return? About 800%.

Then again, the company is a high-growth fintech company that has effectively leveraged the power of AI. It’s focus is on partnering with banks to provide a much better way to score the risks and automate the tedious processes for issuing and managing consumer loans. 

The CEO and cofounder is Dave Girouard, who built the billion-dollar apps business for Google. He had also served as a Product Manager at Apple and an associate in Booz Allen's Information Technology practice.

As for Upstart, Girouard’s main focus is to upend the banking industry’s reliance on the FICO score. 

“The Upstart system uses AI and machine learning models with 1,600 data points and 15 billion cells of data to improve accuracy in terms of identifying and measuring credit risks,” said Phat Le, who is an Associate at Harbor Research. “Some of the variables that Upstart considers are employment history, educational background, banking transactions, cost of living, and loan application interactions.”

For the most part, Upstart is reducing the inefficiency with the traditional FICO approach. After all, about 80% of Americans never default on their loans yet only 48% have access to loans at prime rate. The result is that good borrowers often pay premiums rates while many other borrowers get loans when they should not. 

Granted, when it comes to AI, there can certainly be major issues. There is the potential for bias and discrimination, such as when the data is skewed. Yet Upstart has made great strides in addressing the problems.

“In 2017, the company was the first to receive a No Action Letter from the Consumer Financial Protection Bureau (CFPB), which was renewed in November 2020,” said Mike Raines, who is the owner of Raines Insurance Group. “According to Upstart, ‘the purpose of such letters is to reduce potential regulatory uncertainty for innovative products that may offer significant consumer benefit.’”

Keep in mind that one of Upstart’s banking partners has recently eliminated any minimum FICO requirement for its borrowers. And this is what Girouard had to say about this on his earnings call: “To us, this demonstrates both a commitment on behalf of this bank to a more inclusive lending program, as well as an increasing confidence in Upstart's AI-powered model. While credit scores can be useful, hard cutoffs based on a three-digit number invented 30 years ago leaves far too many creditworthy Americans out in the cold.”

The Upstart strategy has certainly resulted in staggering growth. In the latest quarter, the revenues soared by 1,308% to $194 million and the transaction volume came to $2.80 billion, up 1,605%. The company was even able to generate a net profit of $37.3 million, up from a loss of $6.2 million in the prior year. 

To expand its addressable market, Upstart has acquired Prodigy, which has allowed the company to move into the lucrative auto lending space. Based on the latest earnings report from Upstart, the U.S. personal loan originations are about $84 billion and they are $635 billion for auto loans. 

But interestingly enough, Upstart really does not need to look further than these two categories anyway. As Girouard noted on the earnings call: “[W]e just see a lot of opportunity out there. We don't think credit is a solved problem almost anywhere in terms of people getting rates that makes sense for them based on their true risk. So you will definitely see us move beyond personal loans and auto, but frankly, we have so much uncharted territory, even in those two categories, we're not in a particular rush to do so.”

Tom (@ttaulli) is an advisor/board member to startups and the author of Artificial Intelligence Basics: A Non-Technical Introduction, The Robotic Process Automation Handbook: A Guide to Implementing RPA Systems and Implementing AI Systems: Transform Your Business in 6 Steps. He also has developed various online courses, such as for the COBOL and Python programming languages.

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Upstart: Can AI Kill The FICO Score? - Forbes
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