When looking at quarterly results from 2019Q2 to 2021Q2 it can be observed that the ratio ReferralRev/PlatfromRef was <2 until 2020Q2 but from 2020Q3 it changed to >2. Why does this matter?
Well, according to the S1 Upstart charges a 2% platform fee for every loan and a 3-4% referral fee for all loans originated on upstart.com. Consequently, one would expect this ratio to be below 2 by default (as it was until 2020Q2). What are possible explanations that it has changed since?
As per S1/10Q:
We charge three separate usage-based fees, which can be either dollar or percentage based depending on the contractual arrangement.
- A referral fee each time Upstart refers a borrower who obtains a loan. (Banks are paying upstart for borrower acquisition. When Upstart IPOed, they said this was roughly 3% to 4% of the loan principal amount of each borrower)
- A platform fee each time they originate a loan using Upstart’s platform. (Banks are paying Upstart for using their AI underwriting/fraud/veritification models. When Upstart IPOed, they said it was approximately 2% of loan value of each borrower)
- We also charge the holder of the loan (either a bank or institutional investor) an ongoing annualized servicing fee.
I’d like to agree with your conclusion that the explanation is Upstart has increased the referral fee per loan overall, but another concurrent possibility is that average loan sizes have actually decreased over time.
Upstart has either a dollar based or percentage based fee arrangement with each bank.
If it’s a fixed dollar amount per loan and loan sizes have decreased, then the referral fee percent of loan amount transacted will appear larger.
Average loan size in Q2 2021 was $9743. In Q1 2021, it was $10185.
In the Q2 conference call “since certainly the onset of COVID, a pretty clear trend that I think is moderating, but it’s still sort of visible, which is that loan sizes and demand for loans in terms of what’s being requested has moderated downwards in the last 18 months.”
This is definitely a macro headwind for Upstart.
What is still unclear to me at the moment is the split of loans that are originated through upstart.com and loans originated by partner banks directly. I could not verify this number yet but I would assume that the vast majority is still originated by upstart.com (>80%). Anyone has any insights into this?
Per Q2 2021 10Q, and review of KBRA securitized trust documents, we know that:
"In the six months ended June 30, 2020 and 2021, Cross River Bank (CRB) originated approximately 79% and 60%, respectively, of the Transaction Volume, Number of Loans.
CRB also accounts for a large portion of our revenues. In the six months ended June 30, 2020 and 2021, fees received from CRB accounted for 70% and 62%, respectively, of our total revenue.
In the six months ended June 30, 2021, one of our other bank partners [This bank is Finwise, it’s easily deduced from KBRA documents] originated approximately 32% of the Transaction Volume, Number of Loans.
In the six months ended June 30, 2021, the fees received from this bank partner accounted for 23% of our total revenue."
Upstart has 25 bank partners. We can deduce that in the first 6 months of 2021, 15% of Upstart revenue was from loans originated by 23 banks. These loans might have come from upstart.com via the referral network, or from the bank partner website directly.
85% of Upstart revenue was from loans originated by CRB and Finwise.
Both CRB and Finwise are exclusively originating loans to borrowers going directly to upstart.com
If a borrower going to upstart.com meets the minimum criteria of both banks, the way they decide which bank originates the loan is random selection (per KBRA documents)
Many of the other 23 bank partners are part of Upstart’s referral network too. If a borrower meets the minimum criteria of multiple banks simultaneously, I am assuming it is also random selection on how they decide which bank gets to originate the loan to the borrower.
If a borrower makes their way to these 23 bank partners’ website (not via upstart.com) and gets a loan (which uses Upstart’s underwriting platform), then Upstart charges a platform fee but no referral fee. However, Upstart doesn’t have any borrower acquisition costs if this occurs.
These 23 other bank partners are currently slow on the amount of loans they want to originate per month.
Most are looking for only $1-15 million in originations per month, so far (the exception is Customers Bank, who is doing way more than that, and they also sell some loans into trusts too). This is why 23 banks comprise only 15% of Upstart’s revenue.
Meanwhile, Finwise and CRB have the spigot open on full blast and together originated like 700-800M in loans per month last quarter, and sell much of these loans they originate back to Upstart, who then sells them to the 150 institutional investors demanding Upstart’s securitized trusts.
The cost of these funds are definitely higher than the 23 other partners, driven primarily by the institution investors.
As such, CRB and Finwise both charge 8% origination fee, while the other 23 bank partners might not.
The vast majority of the 23 banks prefer to keep loans on their own balance sheet, and the cost of their funds are much lower, likely <1%.
In the long run, if more bank partners use Upstart’s AI platform and these bank partners increase the share of Upstart’s revenues, then Upstart receives better margins and borrowers also will get even lower APRs. It would be a win-win-win. (see, for example, my experience with Associated Bank/Upstart which charged zero origination fee and gave the lowest APR against all competing fintech MPLs. https://discussion.fool.com/upstassociated-bank-vs-competitors-n…)