Upstart is 'applying artificial intelligence to the problem of consumer lending,' CEO explains

Upstart CEO Dave Girouard joins Yahoo Finance Live to breakdown the AI platform's strategy to help consult consumers on their credit scores and lending habits.

Video Transcript

ALEXIS CHRISTOFOROUS: Here's a sobering statistic for you. Less than half of Americans have access to credit, yet 80% of them have never defaulted on a loan. The fintech platform Upstart is looking to fill that gap for consumers. And joining me now is upstart CEO, Dave Girouard. Dave, good to see you. I know that your lending platform uses artificial intelligence. Tell us how you are working with the banks to expand access to credit for more people.

DAVE GIROUARD: Yeah, thanks, Alexis. So, yeah, we are a fintech company that is applying artificial intelligence to the problem of consumer lending, more accurate models that can improve more people at lower rates. We've chosen a path to actually partner with banks and help them originate credit to their customers and also bring them new customers, as opposed to actually becoming a bank ourselves and competing with them.

ALEXIS CHRISTOFOROUS: Is this sort of the age old problem, the quandary, where, you know, somebody can't get credit because they have no credit history. But how are you supposed to get a credit history if nobody gives you credit? Are you sort of trying to solve that problem with Upstart?

DAVE GIROUARD: Yeah, that's, I think, one of the many problems is you can't get credit until you have credit. But it sort of goes far beyond that. Really relying on a three-digit number, a credit score, something invented three decades ago in 2021 is a little bit archaic. And it really leaves millions of people out of the system. They don't have access to affordable credit through no fault of their own. Or even if they get access to credit, they're paying too much. So a more accurate model that more accurately identifies the risk can actually, on the whole, provide much more affordable credit to more people, which is the core mission of our company.

ALEXIS CHRISTOFOROUS: So talk to me about the metrics you're using to help banks assess risk, because I think what you're talking about here is you want to try to get rid of those FICO scores, right, and things like that. So how are you specifically looking to do that? And I know you also want the banks to white label your technology. Can you share with us who some of your clients are?

DAVE GIROUARD: Yeah, so the idea generally is, when you use a credit score or credit data, you're sort of looking at a person through one single lens, which is the historic use of credit. But there's a lot of other information out there, and our system is always looking to find new ways to prove credit worthiness. It could be, for example, the company you work for or the industry you work in. If you work in nursing, for example, very, very low levels of unemployment, almost never a situation where a nurse can't find a job. That's just to give you an example-- the educational background that you have.

So a lot of things, more of a 360 degree view of who the consumer is, all processed by very sophisticated software so we can give you the very, very best loan possible. And so we're working with more than 30 different banks and credit unions across the country, a lot of different ones and diverse ones.

You know, if you're in New York City, you probably know Apple Bank, one of our really core customers there, serves the Boroughs of New York City incredibly well. [INAUDIBLE] is a credit union out here in northern California. So there's a lot of diverse partners that we have. We're bringing on more all the time. We have three times the number of banks and credit unions on our platform that we had just a year ago.

ALEXIS CHRISTOFOROUS: Yeah, I mean, growth has been pretty incredible. And I know you were out with your third quarter earnings recently, growth of 250% on both the top and bottom line. Yet, you know, I'm looking at the way Wall Street's been reacting to the stock, and they've actually been pounding you guys. So is Wall Street-- where's the disconnect here right now? Is Wall Street just not understanding the Upstart story? Do they think that maybe there's an overvaluation there, and they're trying to bring that in line?

DAVE GIROUARD: Yeah, I mean, it's a little hard to say. We were a little surprised at the reaction. But look, we went public in December of last year, less than a year ago, at $20 a share, and we're trading over $200 a share. So a 10x improvement in the years is not something to be displeased with. But certainly, there's a lot of volatility, a lot of craziness in the market. But, you know, we've proven ourselves in the market in our first four quarters as a public company. I think we're going to continue to do so in 2022. And we're quite confident that the stock will take care of itself.

ALEXIS CHRISTOFOROUS: You say or you claim to be able to improve loan default rates at banks by 75%. That's a pretty hefty number and a pretty big promise. Tell us specifically ways that you are able to do that.

DAVE GIROUARD: Yeah, really, again, having a much more-- having a modern system built on artificial intelligence, which means billions of training cells, training algorithms, to predict more accurately who's going to default and when they're going to default, and so that loans are priced more appropriately. Banks have a lot of choices, how they turn the knobs and dials in our system. They can actually keep the same loss rate and maybe approve two or three times as many people at that loss rate. Or if they wanted to keep their approval rate the same, as you suggested, they could pretty dramatically cut their losses.

So it's a fairly straightforward calculation. When the system is more accurately able to separate good risk from bad risk, price loans more accurately, particularly in a very noisy environment like we've seen in the last couple of years-- COVID's been kind of taking the economy all over the place-- that is a huge advantage to the lender. Banks can be more inclusive. They can approve more people. But they can also be more profitable and more responsive to a very dynamic environment. And that's all sort of the benefits we bring to bear.

ALEXIS CHRISTOFOROUS: And talk to me a little bit about the future, where you're guiding investors right now. And also, do you see higher interest rates from the Federal Reserve in the next-- oh, I don't know-- six or 12 months-- depends on who you talk to-- as a possible challenge for a company like yours?

DAVE GIROUARD: Yeah, so we believe artificial intelligence applied to lending, which is this wholesale, a trillion dollar industry, just in the US and even bigger beyond that, we believe artificial intelligence will be central to credit decisioning around the world in almost every category of lending within a decade. So we are there to be the leading provider of that technology to banks and other types of lenders. So it's going to go across categories.

We are just launching into auto lending. You know, there's millions of people paying far too much for auto loans because the system does not understand their credit worthiness well enough. We said in our earnings call last week, we're actually going to get into small business lending, where we think there's an opportunity to have fast, immediate access to affordable installment loans to small business owners across the US, and eventually into mortgages, where we think there's also a huge opportunity. So our intentions are really to take this technology broad and wide.

With respect to interest rates, and we certainly expect, based on inflation, we're seeing interest rates still near all-time lows. They are going to go up. But that's not necessarily directly impactful on our business. We really look at the spread between what somebody could get in a sort of traditional FICO centric place and what a more accurate system can enable. And that's sort of a universal construct. So we're not particularly an interest rate sensitive business.

ALEXIS CHRISTOFOROUS: All right, Upstart CEO Dave Girouard, thanks so much for stopping by.