When the economy goes soft, financial institutions need to seek growth where they can. For Alliant Credit Union, one of the country’s top ten by asset size ($17 billion), this means not only growing the loan portfolio but also its national membership base. Part of that strategy is unfolding through a partnership with Upstart, a digital lending matchmaker driven by artificial intelligence decisionmaking.
A key advantage to working with outside entities (Upstart is one of several fintechs Alliant works with) is the ability to cast a wider net for loans. When Upstart lines up a new borrower for Alliant, the credit union gains not only a new loan but a new member to whom it can cross-sell additional products and services.
The credit union’s arrangement with Upstart relies on a unique arrangement. Underlying the deal is the need to find fresh sources of credit demand. At this point the deal is focused on unsecured personal loans, says Charles Krawitz, SVP, Chief Capital Markets Office and Head of Commercial Lending for Alliant.
Advantages of Tapping a Third-Party Entrant
Upstart, through its Upstart Referral Network, promotes consumer loans to a national online audience. Consumers apply digitally for credit and are first evaluated by the company’s artificial intelligence process for creditworthiness and to receive a rate offer. Then the system matches the applicant’s user profile to the credit criteria and other customer profile factors of participating financial institutions.
Upstart began its network in partnerships with community banks and other commercial banks, but expanded it to include credit unions. Approximately 70 institutions, split about evenly between banks and credit unions, currently use the company’s network, according to Michael Lock, SVP of Lending Partnerships at Upstart.
Personal loans represent the largest portion of the network’s production, according to Lock, and this has had strong appeal for credit unions. Historically they have been more comfortable with personal loans, which were the root service for many. Banks that are hungry for credit have been attracted to the product more recently.
Why a Partnership Is Timely:
Having another organization out there pitching credit to a broader audience than a financial institution might otherwise be able to reach provides fresh opportunities.
“It’s pretty hard these days to go out and find new customers or members in a very crowded world,” says Lock. Increasingly, he adds, consumers are willing to mix and match providers, so being the location of a person’s primary deposit account doesn’t mean they will turn to that bank or credit union automatically for credit.
“In an increasingly digital world,” says Lock, “people are shopping around for everything.”
How a Fintech Works with Banks and Credit Unions
The first experience the potential borrower has is Upstart-branded, typically through their mobile phone. The company’s A.I. carries things through to the pricing point, where the consumer learns what their rate would be if they took the personal loan. At the point where they express interest, the software scans participants for the best matches.
Then the potential lenders are revealed — in some cases, multiple institutions may be offering different loan maturities.
“At that point the experience becomes bank- or credit-union-branded,” says Lock. Generally the automated process goes from inquiry to offer, if an offer is made, in about five minutes. (The company indicates that about two-thirds of applications are approved instantly.) Often the loan proceeds are available in the borrower’s bank or credit union account the next day.
Working With a Credit Matchmaker:
Lenders can pre-select criteria regarding what they want to be considered for. Some institutions, for example, want to be matched only with borrowers in their physical footprint or in certain states or regions.
As mentioned, Alliant seeks a national reach. Other institutions specifically don’t want loans from certain states.
Geography is only part of the matching process. Lock says some institutions seek prime or near-prime borrowers, while others are open to lending to subprime candidates. They can also add in their own filters, such as maximum debt-to-income ratios or minimum FICO scores. Profiles can be adjusted as time goes by, and institutions can tweak the level of involvement they have. Participation can also be paused.
Krawitz explains that Alliant typically aims for relatively high FICO scores and solid credit histories. It began working with Upstart in the first half of 2022 and officially joined the referral network in late summer 2022.
Lock stresses that network loans are not booked first by Upstart, but always by the bank or credit union ultimately chosen by the applicant.
“They don’t just want the loan, they want the chance to have a brand experience with the consumer,” Lock explains. The intent is to provide a foundation for more connections.
Provided, of course, that the institution can present attractive opportunities compared to what the avid digital shopper may be seeing elsewhere on the internet or their mobile apps.
“We’re not SoFi, we’re not Lending Club,” both of which are now banks, says Lock. “We don’t want to be a bank or credit union.”
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The Other Side of the Fintech Coin
Upstart works with both the traditional lending market as well as capital markets sources. Investors receive loans that are riskier than those that banks and credit unions usually take, for a higher return. Again, Upstart is not the lender, but the referrer of the business. In the personal loan area about half of Upstart’s funding comes from banks and credit unions and other half from the capital markets.
Lock notes that markets are tightening up, with some lenders’ appetites for credit lessening or their criteria growing more stringent. He says that the company would like traditional lenders to have full faith in its A.I., “but we’re not all the way there yet. You’re just seeing a lot more conservatism in terms of asset allocation at this point.” Investors are likewise tightening up.
In an August earnings briefing Upstart management acknowledged to analysts that some pauses had been seen and took the unusual step of also issuing a comprehensive blog and a presentation defending the quality of the decisions made by its artificial intelligence and its ability to produce profitable loans.
“Given the unusual uncertainty in the market, our partners are understandably far more worried about potential losses than motivated by potential gains,” the blog stated. “As a result, some of them have paused or reduced their originations in unsecured lending, which has limited our ability to grow.”
The blog added: “However, when there’s less competition among lenders and investors on our platform, as there is right now, we believe there’s a unique opportunity to take conservative positions and yet generate increased profits by adjusting credit and return parameters appropriately.”