Upstart is going public following successful growth.Upstart uses AI to help lenders better assess consumer creditworthiness, and has reported growing revenues and platform activity despite lenders pulling back amid the pandemic. The alt lender's AI processes more than 1,600 variables, including income fraud, target fee optimization, prepayment, and default prediction, to more accurately assess a borrower's risk, per the prospectus.
Bank partners that use Upstart's platform increase their loan approval rate by as much as 27%, while keeping interest rates low and reducing losses, the Consumer Financial Protection Bureau. The alt lender reports that concerns over the pandemic making consumers riskier borrowers caused its bank partners to pull back on loan originations via its platform.
Yet, Upstart was still able to secure growth: It generated $146.7 million in revenue during the first nine months of 2020, up 44.4% from the same time last year. Loans facilitated through its platform went up 30%, and net income loss decreased from $6.5 million to $5 million. These healthy finances should help attract investors.
However, the IPO's success could hang on Upstart's ability to broaden its client base. Its promising growth is mainly due to just one bank partner: Cross River Bank represented 72% of the loans facilitated on Upstart's platform and accounted for 65% of its revenues for the first nine months of this year, per its prospectus.
Relying on just one of its 10 bank partners for more than half of its revenues could make prospective investors uneasy and less likely to invest, as CRB could decide to use a different AI platform or develop capabilities in-house. To appease potential investor concern ahead of being approved for listing, Upstart should announce a clear plan to reduce its reliance on CRB. The platform should target banks that are looking for ways to increase consumer lending while keeping risks low.
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