Upstart: Notes From CFO Sanjay Datta - Barclays

Notes From Upstart CFO Sanjay Datta at Barclays Emerging Payments and FinTech Forum 2022 - May 17.

Here are my notes from this morning’s fireside chat.

Interviewer: Ramsey El-Assal

The first question was about what Upstart does that makes it different from other companies in the credit industry.

Sanjay said that the company provides a platform that allows more of the population to receive credit and reduces the loss rate which allows all borrowers to pay less. So borrowers are subsidizing less aggregate losses.

He then went on to say that the Upstart platform removes friction from the application process for the borrower.

Next was a discussion around auto lending.

The first product the company has introduced in this space is for refinancing a current auto loan. He explained this is similar to the personal loan product that Upstart has in the market. The personal loan product allows folks to consolidate debt from credit cards by getting an Upstart loan at a lower rate.

The auto refi product allows folks with auto loans to borrow from Upstar at a lower rate and pay off their old auto loan by replacing it with a loan from the Upstart platform.

Sanjay said this auto refi product will see meaningful scaling by the end of this year. The current state of the product has the company still looking at early data.

The next product from Upstart will be for new auto loans.

The corporate deals done with VW and Subaru are partnerships that essentially grease the wheels and in some sense provide corporate branding for Upstart to sell the product to dealerships. This selling to “rooftops” is where Upstart sales people bring new accounts onboard to offer the Upstart product to customers during the auto sales process.

Sanjay hinted that more corporate deals will be coming in the future and the legwork is done at each dealership.

Next the discussion went on to discuss macro headwinds. Sanjay explained that a lot of changes occurred within a 90 day period including the Russian invasion of Ukraine and the Fed raising rates. This all on the heels of the ending of stimulus between November and February.

As a result of the macro the company is taking a conservative outlook for this year’s guidance.

He admitted that the company is a technology provider to a cyclical lending industry and as such this will not be the last time that the lending cycle will have an impact on the company’s business.

Next came a question around the company putting loans on its balance sheet for non-R&D purposes.

Sanjay said the company had to decide whether to reduce the volume of loans in the near-term driven by the fast changes in the credit markets or to try to provide liquidity to the lending process by using its balance sheet. He said the management team decided to take some loans on its balance sheet with the thinking the loans would then be sold once the market had become more stable.

He said the team was surprised by the visceral reaction of the stock market to this approach.

He then went on to say that the team had decided that going forward it would return to its practice of only using the balance sheet to hold loans for R&D purposes knowing that loan volume would take a hit when liquidity contracts in the credit market.

It looks to me like the management team learned a lesson that folks invested in the company want it to be a technology provider to the credit industry and not take on unnecessary credit risk.

The topic of a mortgage product was discussed and Sanjay pointed out how today’s process is very cumbersome for the borrower. He said that better modeling will lead to a more automated process.

The one thing that came across to me is how the company wants to make the application process for all types of loans less cumbersome for borrowers.

A question was asked about using the company’s platform in other countries.

Sanjay said this is something the management team talks about and realizes it is a long way off from where the company’s current focus is. The reason is that you would have to essentially start from scratch in a new country as many do not even use something like a FICO score. You would have to create the model to handle a set of measurements that are different from those that exist in the United States.

He closed by saying that management realizes that fast growing lending platforms are viewed with suspicion. He also went on to say that the current macro shock is a temporary distortion.

Frank - long UPST, see profile for all holdings

108 Likes

Stating the obvious, the mortgage process (or HELOC) is ridiculously cumbersome. Requires providing a large number of paper statements, most or all of which are duplicative, obvious, and also easily faked (with photoshop or whatever). I just did this with my bank (which includes a brokerage house). They required me to provide various paper statements FROM THEM, as if they do not know what assets that THEY HOLD FOR ME.

It is an antiquated, tedious, ridiculous process. It is the perfect example of “well, this is how it has always been done, so just shut up and follow my instructions.” I am thrilled to see UPST beginning to destroy and reinvent this ridiculous process. It can be better, and UPST is making it better.

31 Likes

Next came a question around the company putting loans on its balance sheet for non-R&D purposes.

Sanjay said the company had to decide whether to reduce the volume of loans in the near-term driven by the fast changes in the credit markets or to try to provide liquidity to the lending process by using its balance sheet. He said the management team decided to take some loans on its balance sheet with the thinking the loans would then be sold once the market had become more stable.

He said the team was surprised by the visceral reaction of the stock market to this approach.

He then went on to say that the team had decided that going forward it would return to its practice of only using the balance sheet to hold loans for R&D purposes knowing that loan volume would take a hit when liquidity contracts in the credit market.

It looks to me like the management team learned a lesson that folks invested in the company want it to be a technology provider to the credit industry and not take on unnecessary credit risk

This is what Cramer reamed out the CEO for. He said investors wanted a platform, not a bank. Cramer said they must sell off these loans, and thus prove they are not junk, then investors will come back. The CEO was dumbstruck by Cramer, but seems to have learned his lesson. Also, the CEO tried to convince Cramer they were all R&D loans, clearly that is not the case. I feel better now.

5 Likes

It is amazing to hear leader ship take on this feedback and change course. In the end this is one of the main reasons I sold out entirely. I felt the business model had changed enough to make this essentially a different company. This response is more in line with the kind of management I thought was in place at UPST. This isn’t enough to make me buy back in, but it goes a long way. I still like the story enough to check in on them the next time they report.

4 Likes