This post has my notes from UPST’s fireside chat with their recently new partner, Abound Credit Union, which was given to a credit union audience, and hosted by NAFCU.
Abound CU was announced as a partner in a press release on October 13, but has been a partner with UPST since July 2021.
BACKGROUND given by the Abound CFO and Chief Lending Officer:
Abound Credit Union was founded in 1950 by 10 civil service employees. Located in central Kentucky. In 2011 reached $1B assets. Today we have $2B assets. 18 branches. We are the largest CU in Kentucky. 115000 members.
Recently went through total rebranding from the name Fort Knox Federal CU to Abound CU in Feb 2020. Long standing tight affiliation and association of many members having a military background. Name change eliminates a perceptual barrier that you have to be military to join us.
Currently our loan portfolio is about 1.25B to 1.3B in size.
Loan portfolio breakdown: 45% in real estate. Indirect auto lending 25%. Branch based direct auto lending 11%. 17% other category (commercial, credit cards, personal loans etc).
WHY DID YOU DECIDE TO PARTNER WITH UPST?
It started from a discussion amongst our senior team in a weekly meeting. We saw our volume of unsecured personal loans wasn’t where we wanted it to be. We changed some things internally and tried targeted marketing and saw a nice increase but as we dug deeper, we saw companies like Upstart had a different model.
We could choose to develop things in house, or take a step back, and admit a third party could do it better. That’s where we landed with Upstart.
To be transparent, we talked to four different fintechs and each said they offered a similar product as Upstart. They all did personal loans, claimed to have AI tech, fast processes, good user experience.
But when we got to Upstart though, things clicked.
Upstart fit well with what we were looking to do: we want to help Kentuckians to really access more affordable personal loans.
As we dug through that, we had our risk, compliance, and legal teams get really deep into it. Compliance was so very impressed with the structure of Upstart! We really liked how we can tweak it to make the program our own and fit exactly with what we want to do and this helped push things through.
It was just a right mix of: right product, right delivery channels that uses tech that we can’t create in-house, and something else we don’t give enough attention to. It was a really really good cultural fit. Upstart’s team felt like an extension of the Abound team. When we know we have a cultural fit, we know we can make it a long term partnership in that we’re trying to achieve the exact same things.
QUESTION TO UPST’s Jeff Keltner:
I know you’ve onboarded a number of CUs this year. This wasn’t how Upstart began [your initial partnerships were only with banks].
What made you guys decide to focus on the CU industry?
We realized credit unions are under same financial pressure as other financial institutions: too much in deposits, lower loan demand, a hunger to implement technologies that drive loan demand, and CUs are noticing the consumer need and desire for personal loans.
I feel bad that we overlooked credit unions and this was a big miss when we began with personal lending. We underappreciated how much more consumer oriented credit unions are, and how much more consumer experience oriented they are – even more so than community banks.
A CU at the same asset size as a community bank will do way more consumer lending!
I noticed recently that whenever we post on linkedin about a new partnership, it’s usually a credit union. It’s exciting to see this momentum and uptick in CU partners.
We think our product brings a very sophisticated risk understanding – lenders fully control their risk appetite but we help them understand the risk of a given credit obligation to a given consumer very precisely; this is hard for most CUs to do the same for the asset category of unsecured loans.
We also help figure out the question of how do we also help find new members to your CU?
We get a pretty solid national flow of members looking for help for personal loans and increasingly, for the auto refi product.
Upstart can serve your current customers and at the same time find new members through a first rate interface, plus serve as many of your members as possible through a highly specific risk understanding.
QUESTION TO ABOUND: So, we had a good experience getting up and running together. We’re not the only fintech partners you’ve had. What’s your advice to CUs about working with fintechs to set themselves up to be ready to take advantage of opportunities that come up?
For us, we first had to make sure our members get a positive experience. We went to your website to see how the process is. We test drove it along with comparing to fintech competitors. I think Jake [Abound’s CFO] has 12 or 13 unsecured loans now!
We also think finding out that you can integrate your brand/logo in the process so members recognize it’s a credit union is important.
And administratively you want to make sure your board of directors is ok with AI partnership/risk analytics. Potential partners need a solid track record of portfolio performance that can quantify the risk.
Very tight net interest margins is a challenge for most CU right now, as mortgage rates, auto rates are low. The net yield of personal loans is much better. You need to understand what your ROI is.
We also prefer to service these loans as opportunities can arise for our marketing teams to offer more products to the new members.
You also want to be reasonable about expectations; setting policy limits that make sense to your overall portfolio/net worth for your CU, and that you can show regulators that you’re mindful of the risk, and limiting exposure until you get a track record going.
QUESTION TO ABOUND: What do you see as key priorities in lending/digital experience point of view to be competitive in next couple years?
We want to completely digitize and maximize convenience of lending for the do-it yourself members. Net interest margins are really tight right now. CUs need find other ways to differentiate since it’s hard to offer interest rates that really distinguish you from others. Need to find added value through increasing convenience and speed of services.
Can Upstart be placed on our website to serve existing customers?
We offer a completely white label all digital experience for any CU. There’s API integrations where we can take your customer info and preopulate a form.
We also have an Upstart referral network where we can channel nationwide demand for loans to target toward our CU partners that meet their membership criteria. It augments CUs by bringing non-members in while expanding your loan portfolio and your membership count.
HOW HAVE UPST LOANS PERFORMED through the pandemic? Does UPST use FICO scores to determine risk tolerances for AI lending?
UPST portfolio loans on all our partners have performed exceptionally well. Everyone in the industry did see much lower than expected levels of loss with government intervention in the pandemic, but if you just for example look at UPST hardships compared to other similar lenders, UPST saw much lower levels of impairments and higher levels of recovery despite having lower FICO averages than others. It turned out we were less riskier. The pandemic has been a great answer to the question of “you don’t know who’s swimming naked until the tide goes out" in that our models have held up really well.
We do use FICO, but minimally. We are data scientists in the purest sense for credit risk prediction. All data points are useful; we shouldn’t through anything away just because we don’t like it, but some data points are more useful than others. A FICO score is just a summary of info in a credit file. We find that each specific detailed piece of info in the credit file, is much much much more useful in determining credit risk than a three digit number that oversimplifies every variable in a summary.
Many of our lenders are actually moving to an environment where they do not have a specific credit score requirement in the credit policy anymore, where they allow Upstart AI models to leverage FICO data point all along with others to determine a risk level that no longer includes something like “FICO must be above 640 or whatever”, which is a smart move to allow UPST to serve more customers.