The Secrets Behind Upstart's IPO

The fintech lender has walked a unique path.

Number of the Week: $20 billion (explanation below)

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The Secrets Behind Upstart’s IPO

The IPO market in December has exploded, to the point where companies are postponing their public offerings because they fear leaving money on the table. As of Sunday, though, it still looks like fintech lender Upstart will debut trading on Wednesday December 16.

Upstart is one of the leading firms claiming to harness artificial intelligence to loan money more effectively and fairly than traditional banks and other lenders. It gathers alternative information about customers—including information about education and employment history—and says that its methods can both make credit available to those who would otherwise be denied, and track who will repay better than credit scores do. And rather than replace banks, it seeks to partner with them, and boasts that its platform has enabled 620,000 loans to date.

I imagine Upstart’s IPO will be a smashing success. But the path the company has been highly unusual in at least two ways. The issue of who to lend to at what cost and using which criteria is one that the federal government examines very carefully. Upstart and similar lenders are well aware that their methods might, from a regulatory angle, look like discrimination. And so in 2017, Upstart asked the Consumer Finance Protection Bureau (CFPB) for a “no action” letter, essentially a guarantee that if Upstart behaved in the way it described to the Bureau, it would not be subject to any penalties.

Upstart’s plea was a longshot; when it applied, the CFPB had never granted a no-action letter before. But CFPB provided the letter, and has treated Upstart as a kind of lending laboratory since. (A renewal letter was granted to Upstart a few weeks ago, and it remains the only company to receive this blessing from the CFPB.) It’s very hard to think of another arena of government regulation—financial or otherwise—that functions this way. That’s not a criticism of CFPB: what we’re witnessing is a new government agency trying to keep pace with an industry that is changing at a rocket-fueled pace.

According to the CFPB, Upstart’s claims hold up: the company’s “model approves 27% more applicants than the traditional model, and yields 16% lower average APRs for approved loans.” In addition, the CFPB says:

  • "Near prime" consumers with FICO scores from 620 to 660 are approved approximately twice as frequently. 

  • Applicants under 25 years of age are 32% more likely to be approved.

  • Consumers with incomes under $50,000 are 13% more likely to be approved.

That is a ringing endorsement, and no other company can claim to have a similar regulatory stamp of approval. But not everyone sees it that way. In February, the Student Borrower Protection Center (SBPC) issued a report on “educational redlining,” alleging that Upstart and other lenders discriminate against people who attend predominantly Black and Latino colleges. That report led Kamala Harris and four other US Senators to write to Upstart’s founder and request details about its lending models. The company seems to have made peace with its critics; earlier this month, the SBPC and the NAACP Legal Defense and Educational Fund announced an agreement with Upstart to monitor its lending practices and interest rates.

None of this is likely to interfere with Upstart’s IPO. But the company’s unique history illustrates just how thorny fintech claims about fair lending can be.

(Upstart, which is in its pre-IPO quiet period, declined to comment.)

China Shows Off Digital Currency

This week the G-7 finance ministers and central bankers held a virtual meeting and loudly asserted the need for state control over digital currencies; German finance minister Olaf Scholz went so far as to say: “We must do everything possible to make sure the currency monopoly remains in the hands of states.”

For those countries, a state-run digital currency is still largely theoretical yet, literally while this meeting was occurring, China was showing off what a state-run digital currency can accomplish. In the eastern Chinese city Suzhou, just west of Shanghai, a lottery was held in which 100,000 residents each received 200 renminbi (about $30) via a digital wallet. To get the money, users are asked to link their digital wallet to a card from one of China’s five biggest banks (someone from Suzhou sent screenshots to the China-tech focused Web site TechNode). The money can only be spent at a handful of outlets, including the online marketplace and Didi, which has 90% of China’s ride-hailing market. (The app also apparently has a button allowing users to pay dues to the Communist Party.) The digital cash can’t be transferred to anyone else. And to make sure that the money gets spent, China’s central bank put a deadline on the currency; if it’s not spent by December 27, it disappears.

Nationwide adaptation of the digital yuan is still a long way off, but the implications of a central bank digital currency are profound, particularly for cross-border transactions. China’s desire to use its massive Belt and Road Initiative to promote global use of the yuan is well-known, and some experts say that the digital yuan is a central part of China’s efforts to displace the US dollar as the world’s leading currency.

As with many technological developments in China, there are serious privacy concerns with giving personal financial information to Chinese authorities. But that just throws the challenge back onto Western governments and companies to develop a digital currency that is both suited to everyday use and confidential.

A Strange Fintech Rebirth

Last week’s FIN discussed the regulation of stablecoins as a security, and if you didn’t click on a link in that item, you missed the reference to the 2018 shutdown of Basis. Basis was designed as a stablecoin whose value would be controlled by auctioning “bond” and “share” tokens, and Basis would intervene in an attempt to minimize volatility. Basis did not lack ambition—its stated goal was “creating a better monetary system: one that would be resistant to hyperinflation, free from centralized control, and more stable and robust than the monetary systems that came before it.”

The company raised a whopping $135 million from a broad group of investors, including Andreessen Horowitz, Bain Capital Ventures, Lightspeed and several others. But it barely got off the ground; exactly two years ago (December 13, 2018) Basis founder Nader Al-Naji told the world that the company’s attorneys had determined that the Securities and Exchange Commission (SEC) was leaning toward treating Basis tokens as securities, which would severely curtail Basis’s ability to operate. Basis shut down and returned its capital to its investors.

It turns out, though, that Basis isn’t entirely dead. An anonymously created spinoff project called Basis Cash—its Twitter account calls itself Basis “but without the SEC, VCs, or Bullshit”—recently began trading. According to The Defiant newsletter, in the early days of trading, the Basis coin was selling for $900, despite being pegged 1:1 to the dollar. You can see why the SEC might look askance at such things.

Join Us on December 17!

More than 440 FIN fans have already registered for what promises to be an exciting conversation between myself and Jim McKelvey, cofounder of fintech legend Square. Join us for this free, live podcast on the future of fintech.


🦈Number of the Week: Reuters reported this week that controversial trading app Robinhood is preparing for an IPO, with a possible $20 billion valuation.

🦈For all the success that Starling, Monzo and Revolut have had, a surprising number of Brits don’t trust neobanks. Only 10%, for example, said in a survey that they trust neobanks to protect their data.

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