The pandemic proved to be a stress test for economic and social support systems across the global landscape. While certain systems proved resilient, others faced the fruits of long-ignored obsolescence paired with an inability to adapt. The latter proved to be the case for traditional credit scoring models such as FICO. Despite mass unemployment and an increase in private US household debt, the average American saw credit scores increase at the fastest pace in over a decade throughout the pandemic before reaching an all-time high in late 2020.
Such is one of the many issues that fintech Upstart (Nasdaq: UPST) is poised to resolve, as it brings credit risk into the 21st century. Through the use of machine learning algorithms and artificial intelligence, Upstart leverages oft-ignored variables into its credit score calculations in an effort to refine a process that has unnecessarily disenfranchised credible borrowers (while 80% of Americans have never defaulted on a loan, only 48% are permitted to borrow at prime rates).
Of course, several startups have attempted to disrupt the credit scoring industry before; however, few firms have received the level of regulatory backing received by Upstart. Back in 2017, Upstart received a ‘No Action Letter’ from the Consumer Financial Protection Bureau (CFPB), which allowed Upstart to experiment with its AI-based credit scoring model without fear of reprisal from the CFPB in regards to the Equal Credit Opportunity Act (AI has a history of presenting as discriminatory). This letter acts as a barrier to entry for any other firm attempting to utilize AI to revamp credit scoring, providing Upstart with a competitive moat.
Upstart does not directly provide loans to its clients, but rather, the firm has banking partners that utilize Upstart as an origination and credit scoring platform. Year-To-Date (YTD) June 2021, Upstart has been able to fully automate 71% of its loans, facilitating over $3.2 billion in loan volume with 0 human involvement from initial rate request to final funding.Upstart closed the week up 10.9% after a positive Q2 earnings surprise revealed that the company had beat analyst earnings guidance for the quarter by 248%. Upstart’s stock price has been on a tear since its IPO in December 2020, generating over a 1,000% return. Earlier this month, Upstart’s market capitalization eclipsed that of Fair Isaac Corporation (the firm that issues FICO scores).