Two years ago I started SIC in large part because of one major inspiration, Renaud Laplanche. He more than anyone sparked a whole new generation of lenders that are reimagining the way we lend in a post-08 financial crisis world.
That is not to say that the journey has been all rosy or that we now have all the answers. However, with Renaud Laplanche at it again building Upgrade, leveraging the principles he dubs Online Lending 2.0, you can be sure that the future is bright for the lending markets.
What I love most about what Renaud and his team are building at Upgrade is that he literally has taken all of the opportunities for improvement that were identified at LendingClub, and is finding ways to make them strengths in version 2.0! From better ways of managing customers financial health with free resources Credit Health and Credit Health Insights, to sourcing more affordable capital, Upgrade seems poised for immense success. Hear more about Renaud’s journey and what he and his team are up to at Upgrade below!
CL: Renaud, if we could take a step back for a moment, your journey into the Fintech world is quite unique. You started out studying law and business at universities in France, and then transitioned from working as a lawyer to becoming a tech entrepreneur. What drew you to the tech space, and why do you keep coming back to it?
RL: The thing I'm most passionate about is solving problems, and finding new solutions to issues that impact our world. That passion is really what prompted me to start my first company. I was working as a lawyer at the time, and I was spending too much time doing research by myself at night, long after the paralegals had gone home. It was difficult to find the documents I was looking for, so I started thinking about better ways to search a filing system.
This was right about the time when Google was tackling the same problem on the Internet. They had a much bigger problem on their hands, but it was still easier to find information on the internet than on our local filing system. So, I started thinking about how to tackle that problem and eventually met with technologists who helped me build my first company, MatchPoint, which was later acquired by Oracle. From there I found myself really intrigued by building companies to solve bigger problems.
CL: You founded LendingClub in 2006 and, in doing so, reshaped the direction of the financial lending markets. What was it like to build your company, especially throughout the '08 financial crisis?
RL: It was really interesting to me. I think the '08 financial crisis was both a blessing and a curse for LendingClub, as well as our industry in general. In one way it validated a lot of what we had said about the financial system being dysfunctional. It highlighted the need for alternative sources of credit as the banks abruptly pulled back their credit supply to consumers and businesses. That was helpful to us in one way.
On the other hand, our potential investors were witnessing mounting consumer defaults particularly in the mortgage sector, and I’d imagine that probably slowed us down on the investor side. But as soon as we gained enough of a track record on our own and showed that we were able to underwrite and properly service loans with good returns, investors gained confidence. Our business really began taking off around 2010 and 2011.
CL: After a very challenging 2016 you came back and decided to continue innovating in the lending space. How has your experience been this second time around, and why did you decide to found Upgrade?
RL: After LendingClub, I found that I had a sense of unfinished business. I had a lot of product ideas I thought could be truly helpful to consumers. With LendingClub, we really only scratched the surface in terms of how meaningful of an impact we could have on the industry and on the lives of millions of people. We had a significant impact as we were able to refinance the credit card debt of two million people and help them save hundreds of millions of dollars, but that’s only a drop in the bucket in the grand scale of consumer credit.
But there are another two hundred million people who would benefit from this same type of service, and another trillion dollars of credit card financing still out there carrying interest at an average of 17%. Outside of credit card debt, there are a lot of other problems to fix in terms of mortgages, auto loans, and student debt. I believe there are a lot more ways we can continue to be helpful.
CL: For those that don't know, how do you define Upgrade and what differentiates it from other online lending solutions?
RL: One of our founding principles is that we want to do more than just make loans. We want to really invite our customers into a long term relationship where they can learn about credit, take charge of their finances by making good credit decisions, and ultimately lower the cost of their credit. We want to help them succeed.
With Upgrade, customers buy into an ongoing relationship as opposed to just a one-time transaction. Another principle we abide by is that, in terms of credit products, we want to expand our services to include a lot more than just personal loans. Today is actually the one-year anniversary of our launch, and we’re already launching our second product. My goal is to launch one new consumer product every year. We think we can be more helpful with auto loans, mortgages, and student loans too.
CL: How did you come up with the name Upgrade? Where did it come from?
RL: It's really about our customers. We want to help them upgrade their credit and, in doing so, upgrade their life. We want to empower our customers to get a financial upgrade.
CL: You've raised a significant $60 million Series A in 2016. How have you deployed that capital to date and can you speak to some of the positive growth signals that you've seen?
RL: A lot of capital has been used to build the infrastructure to support a large scale. We grew pretty quickly from zero a year ago to about 100 million dollars in monthly loan origination. That's a level we reached at LendingClub after six and a half years.
So we’re currently in what you might call an accelerated growth phase, which is not cost efficient because we need to build a lot of infrastructure now that we would otherwise need many years down the road. We are also deeply investing in new product development with our Personal Credit Line that we announced today. We’ve also invested a lot of capital in building automation, compliance, analytics, and risk management. All of these things set us apart. We are very focused on preventing any compliance issues in the future.
CL: From a customer’s standpoint, one knock on marketplace lending solutions has been the lack of affordable channels for customer acquisition. How is Upgrade managing to keep costs low in order to drive future profitability?
RL: In the end, I think it all comes down to building great customer products that people love. When was the last time someone told you they loved their bank? As in they enthusiastically recommended it to a friend or colleague? Outside of finance, recommendations like that happen all the time in areas like customer electronics.
Our goal is to get to that level of customer enthusiasm. We want people to love our product so much that they share it with their friends and family members. At that point, customer acquisition becomes much more cost efficient. We’re already seeing encouraging signs down that path – Upgrade was rated the #1 personal loan by LendingTree based on customer reviews in Q4 2017. Lending Club was already successful in that area as we kept marketing costs at a fairly reasonable level. Contribution margins at Lending Club were close to 50%, which was pretty cost efficient and got us to profitability at the time.
CL: What kind of investors is Upgrade working with to buy the loans off the books of Upgrade, and will you keep skin in the game in order to keep all party interests aligned?
RL: Yes, that’s another thing we learned from the market. Investors really appreciate the fact that we have our own balance sheet and can retain some of the risk. Most of the loans are sold to institutional investors, so we don't have the retail piece we once had at Lending Club.
–I think this is partly due to the fact that there are now better ways for retail investors to participate: there are now funds like Stone Ridge that have been very successful at aggregating retail investors , so platforms like Upgrade don’t need to develop their own retail offering. We can let asset managers be asset managers, so we can focus on our main role of underwriting and servicing: making good loans to customers who can pay them back. As a result, all of our investors are institutional. The only institution we've disclosed publicly is Jefferies because they were the first to step in, but I can say that we currently have about a dozen institutional investors.
CL: In shifting the online lending model to be less about peer to peer and more about efficient capital, have you seen any benefits develop for customers looking to obtain loans on the platform?
RL: Certainly; some institutional investors have a lower return hurdle than retail investors, so we can make loans at lower rates to borrowers.
CL: As you mentioned before, Upgrade also offers a set of educational tools and credit monitoring as well. What has driven you to develop these product features, and how do they help Upgrade accomplish its mission?
RL: Our tools help us create meaningful, ongoing relationships with our users as opposed to purely transactional relationships. In short, we can be useful to customers throughout their lives. As a testament to our mission’s success, we actually have people who signed up for our Credit Health product only, without even applying for a loan.
Anyone can receive access to our credit monitoring and educational tools without applying for a loan and that’s great! I think that’s really what sets us apart, the usefulness of our services outside of our core loan products.
CL: You recently announced that Upgrade will be launching a personal line of credit offering for customers. Can you talk about the genesis of that product and what you hope it accomplishes for your customers?
RL: There are really only two consumer products on the market today if the average person wants to borrow money on an unsecured basis: installment loans or credit cards. They both have their pros and cons, but an installment loan can actually be a very responsible product. An installment loan has a low cost with a fixed rate. It also forces you into the discipline of paying down principal and interest every month.
Personal loans, however, don’t have the flexibility and convenience of a credit card. On the flip side, credit cards are almost too convenient and flexible: you can use the exact amount of credit you need at any point in time, but they have very high interest rates coupled with higher fees. Unlike personal loans, credit cards can quickly become irresponsible credit products when people decide to continue to only pay their monthly minimums, in which case it can take over 20 years to pay it all back and cost exorbitant interest. .
I think our new Personal Credit Line combines the benefits of personal loans and credit cards: it combines the responsible aspects of personal loans (each advance comes with a fixed rate and monthly payments of principal) with the flexibility of a credit line (you can request advances at any time as long as you remain in good standing) .
CL: What purposes do you believe people will use a line of credit for?
RL: I think personal loans are great for singular expenses, like refinancing an existing credit card balance, attending to a large medical bill, or financing a large purchase. The Personal Credit Line is a better product if you're going to be incurring multiple expenses over several months. For example, let’s say you're moving to a new home and need to outfit it with furniture, or maybe you're completing a small renovation project on your current home.
You think it might cost you ten to twenty thousand dollars over six months. You can’t predict how much exactly it will cost in the end, and you don’t need the money all at once, so why would you want to pay interest on the full amount upfront? In this case, you can open a line of credit and use it as you need it.
CL: Are there any plans to raise more capital and, if so, how would you plan to deploy it?
RL: We'll probably raise more capital at some point in the future. There's a lot of interest from equity investors in creating a mainstream customer credit platform.
CL: From an industry perspective, large banks like Goldman Sachs are rolling out online money solutions like a Marcus for Goldman. Do you think that this movement is a sign of things to come? And if so, how do new lenders like yourself continue to compete with the top big banks?
RL: In general, banks like Goldman Sachs have a lot going for them. Most notably, they have a very low cost of capital. But they also usually have a high cost of operations and haven’t been great at providing their customers with innovative products and great experiences. In order to compete, I think we have to focus on what we do well: we have a low cost of operations and the ability to develop innovative products that our consumers love. I think if we continue to do that well, the rest will take care of itself.
CL: With all of your experience, if you could provide one lesson or piece of advice to someone considering building their own start-up, what would it be and why?
RL: Don't do it! I'm joking. Well, it's probably obvious, but I think the number one thing to focus on is building your team internally. At the end of the day it doesn't matter how smart you are or how good the idea is, everything is about execution. The team is what drives execution, so surrounding yourself with great people is probably the best thing to spend time on initially.
Creating the mainstream customer credit platform is a pretty lofty goal because credit is inherently complex, often misunderstood, and can quickly become a weapon rather than a tool for people’s financial lives if not utilized correctly.
Seeing the evolution of marketplace lending over the past 4 years has been fascinating to watch. In so many ways, Upgrade is the epitome of taking a customer-centric approach in order to build a more successful and profitable business. By optimizing for lower cost of capital, enhancing the educational features to empower customers, and rolling out more flexible credit products, Upgrade is becoming the full suite of affordable and intelligent credit tools that customers need to succeed in their financial lives.
I love Renaud’s tireless pursuit of reimagining the consumer credit markets and I think he serves as the face of a brighter financial market. It was such a pleasure to sit down with you Renaud and hear more about your story.
Thank you to you and the entire team for investing in truly Simple.Innovative.Change