This idea has probably been raised, but I had trouble searching on this board, so apologies if I missed the discussion:
Upstart is targeting millions of low-hanging fruit – those solid citizens without traditional sources of income or assets. I.e. Millennials.
I read an article by Tim Denning (see link below) that beautifully captures the essence of being a millennial in a legacy-bound world. In the process, he opened my eyes as to why Upstart may be less about AI right now (although AI is critical) and more about common sense. Few of today’s younger generation FIT THE FICO mold. Why? Because they make their money online, not offline through SEO and web design and network marketing and blog posting, and so on. Millennials don’t have traditional assets like real estate and cars not just because they are early in their income-producing years but because they don’t care about those things the way boomers do. They are gig workers and contractors and freelancers, at a much higher percentage than they are cubicle kings and factory workers. To the banks, they represent millions of “unsteady by any traditional paycheque measure” loan risks that fall outside traditional FICO. Yet the majority seem to be paying their bills (for the most part) just as often as boomers do. But they get little credit for it (pun intended). I think SOFI and other so-called millennial banks realize this, and soon the legacy banks will as well. But they still need AI to make it work best (just as SOFI does).
Apologies again if this is old hat.
Here is the link. What a read!
https://medium.com/swlh/millennials-already-know-how-to-get-…
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This is profound and connects so many dots for me personally. All should take time read this article I am late 40’s and have many employees that are now young enough to be my kids. The vast majority of them are like this - their clothes, their cars, their lack of home purchasing, their lack of debt. They simply do not fit the model of what my FICO score says I am or what it says they should be.
Honestly, even though many of their salaries are far less than those that have been in the workforce for much longer, you can just see that they do not spend it. Many have side gigs. All invest. It is a whole new world and there is no doubt that this is much of the fringe that UPST is going after.
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This report gives us an idea of who the bowers are.
Thanks to tolgadiz for posting this report earlier and highlighting important points
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3937438
Caveats from the report
Our dataset begins in 2014 and ends in the first quarter of 2021
Analytic sample is restricted to 770,523 loans for which the traditional
credit score is available.
Quotes are from the report
Page 9
“The average contract is characterized by an APR of 22% with a four-year
maturity. Borrowers tend to have an average credit score of 653 at origination. That even the top
quartile exhibits a score barely above 680 shows Upstart’s focus to be on other than the individuals traditionally regarded as most creditworthy. Most borrowers are between 28 and 46 years old, with
a median age of 37 years.”
Me: Another tidbit not directly related to age but I thought it interesting
Page 12
“According to Fair Isaac Corporation, the company that owns the FICO algorithm,
28 million Americans have files with insufficient data to generate credit scores and 25 million
Americans have no credit file at all. These unscorable populations likely include many potentially
creditworthy individuals.”
Me: This pool of 53 million potential bowers could be best served by Upstart and still we have the pool of sub-prime borrowers that would benefit as well.
Long Upstart
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This may have some credence the real world but I think this take is inaccurate in regards to Upstart’s customers. If a person doesn’t care about material possessions why are they taking out a personal loan?
I think Upstart is focusing on people with limited credit history more so than an individual that is less interested in material possessions.
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Credit is not only used for buying worldly possessions, it is sometimes important to smooth income and revenue from gigs, or to meet monthly obligations immediately adjacent to big expenses.
There are many reasons why those who are short on credit history or who rely on funding from work that is piece rate and not steady would need short term loans, even if they do not buy or want possessions beyond a bare minimum.
An experience can cost 80% of a purchase. A vacation several times a year can cost as much or more than the difference between an econobox car and a Mercedes.
Loans. They have many uses.
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