As others go, Upgrade enters lending market

Financial technology company Upgrade recently moved into the shifting market of auto lending.

Upgrade's new lending product sources capital from 220 partners ranging from small community banks to asset managers, CEO Renaud Laplanche said. The company uses that capital to serve customers with credit scores that range from 580 to 850, while other banks tighten financing on even prime customers, he said.

"Having all these different sources of capital will pretty much guarantee that we can always find the best pricing or at least very competitive pricing for every type of customer," Laplanche said.

Upgrade enters the field as lenders such as Citizens, KeyBank and Mechanics Bank recently exited. High interest rates and inflation have strained the industry as more electric vehicles debut, inventory shortages continue and the UAW strike disrupts a previously predictable market, TransUnion Senior Vice President Satyan Merchant told Automotive News.

"The crisis from earlier in the year with the failures of Signature Bank and Silicon Valley Bank was a wakeup call," Merchant said. "It made banks take a hard look at what is generating the most profits."

Nevertheless, the exit of these lenders creates an opportunity for captive lenders, credit unions or even a new entrant to "soak up their market share," Merchant said. Laplanche believes Upgrade will weather the headwinds because of its marketplace strategy.

"Upgrade has been able to drive down the cost of capital," Laplanche said. Even if the company experiences "slightly higher losses, Upgrade is still OK because of our costs model."

The forward flow model has been around for decades but is being optimized today with advanced data usage, Merchant said. Companies "have much more data available at their fingertips," and "they are taking advantage of their proficiency with using data and creating more sophisticated models," he said.

The company's operational costs also are lower than a typical bank because it relies on a technology platform instead of many branches, Laplanche said.

Upgrade's auto lending product was designed by a team led by Scott Raymer, who Laplanche described as a "veteran of the auto lending market." The team wanted the product to be optimized by both technology and statistical models, but also grounded by a human element that can "explain every decision," Laplanche said.

"As soon as the underwriting of the decision to approve or decline a loan is based purely on [artificial intelligence] models, it becomes a blank box," he said.

The auto lending product launched with 30 dealers, and the company hopes to expand to about 300 stores by the end of this year. Laplanche said dealers can access Upgrade's product on Dealertrack and it will be available on RouteOne soon.