Alt lender Upstart is filing for an IPO after seeing successful growth

  • AI-powered consumer lending platform Upstart is going public following successful growth.
  • But it should secure additional bank partnerships to diversify its revenue streams and promote investor confidence. 
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The US-based alt lender has filed for an IPO, per Businesswire. It first aimed to go public in March but delayed due to the market volatility and expected increase in consumer credit default rates caused by the pandemic. Launched in 2012, Upstart's platform has been used by consumers to access over 620,000 personal loans from its 10 bank partners.

Upstart is going public following successful growth.Insider Intelligence

Upstart uses AI to help lenders better assess consumer creditworthiness, and has reported growing revenues and platform activity despite lenders pulling back amid the pandemic. The alt lender's AI processes more than 1,600 variables, including income fraud, target fee optimization, prepayment, and default prediction, to more accurately assess a borrower's risk, per the prospectus.

Bank partners that use Upstart's platform increase their loan approval rate by as much as 27%, while keeping interest rates low and reducing losses, per the Consumer Financial Protection Bureau. The alt lender reports that concerns over the pandemic making consumers riskier borrowers caused its bank partners to pull back on loan originations via its platform.

Yet, Upstart was still able to secure growth: It generated $146.7 million in revenue during the first nine months of 2020, up 44.4% from the same time last year. Loans facilitated through its platform went up 30%, and net income loss decreased from $6.5 million to $5 million. These healthy finances should help attract investors.

However, the IPO's success could hang on Upstart's ability to broaden its client base. Its promising growth is mainly due to just one bank partner: Cross River Bank (CRB) represented 72% of the loans facilitated on Upstart's platform and accounted for 65% of its revenues for the first nine months of this year, per its prospectus.

Relying on just one of its 10 bank partners for more than half of its revenues could make prospective investors uneasy and less likely to invest, as CRB could decide to use a different AI platform or develop capabilities in-house. To appease potential investor concern ahead of being approved for listing, Upstart should announce a clear plan to reduce its reliance on CRB. The platform should target banks that are looking for ways to increase consumer lending while keeping risks low. 

Bank of America, for example, has decreased its loan loss reserves amid fewer deferrals, suggesting it's gaining more confidence in borrowers' ongoing ability to repay loans. Yet coronavirus cases are spiking in some areas of the country, which could impact consumers' ability to repay loans and lead to more defaults later this year. Upstart can market its AI solution as a way for banks to balance offering loans with navigating ongoing risks, in order to form more partnerships.

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