Online lender Upstart is gaining efficiency and better quality originations using AI. 

“We as a company, we’ve been working on this particular type of AI relevant to credit, relevant to consumer finance for over 10 years now,” co-founder and Chief Executive Paul Gusaid during Upstart’s second-quarter earnings call on Aug 4. “We expect to compound wins across technology and marketing as we drive growth in core personal loans and profitability in secured loans.” 

Nearly 91% of the loans it funded in Q2 were originated end-to-end through AI with no human involvement, according to Upstart’s earnings report. Certain loan types, such as home equity lines of credit, require manual steps to fund in certain jurisdictions, it stated.

The company is not only able to originate more, but also drive a better quality of originations through AI, Gu said. 

Proprietary model 

Upstart also disclosed a new figure for what it calls “predictive accuracy captured”: Its AI underwriting model can predict origination outcomes 2.74 times more accurately compared to traditional underwriting models. 

The company uses metrics including cash flow analysis, regular payment history and a mix of traditional credit reporting for its underwriting model, according to the earnings report. 

“We’re pretty confident that, at least in the foreseeable future, our models are going to keep getting better, they’re going to keep increasing separation and therefore we’re going to be able to keep differentiating on our value prop to the customer and ultimately win more of them,” Gu said. 

The Upstart Macro Index, the company’s estimate of how the economy is affecting borrower credit losses, rose 9% during the quarter to 1.50 as of Aug. 3, according to the company. 

Chief Financial Officer Andrea Blankmeyer said during the call that the rising index was a factor behind origination growth slowing to 34% year over year in July on a dollar cost basis, compared to a 50% jump in the second quarter. 

National bank charter application  

Upstart in July received conditional approval from the Office of the Comptroller of the Currency for its national bank charter application “following a rigorous review of our credit compliance and business practices,” Gu said. 

The firm  submitted its application to the OCC and the Federal Deposit Insurance Corp. in March. 

“The bank does not change our strategy of funding loans primarily with third-party capital, but we expect it to unlock major operational and regulatory efficiencies which will contribute to our financial goals over the coming years,” he said. 

BY THE NUMBERS: In Q2, Upstart reported: 

• Originations of $4.2 billion, up 50% year over year; 

• Total revenue reached $365 million, up 42% YoY; and 

• Net income was $16.5 million, up 195% YoY. 

Shares of Upstart [Nasdaq: UPST] were trading at $30.20 at market close today, down 0.4% from market open. Upstart has a market capitalization of $2.9 billion. 

Register here for the FinAi Lending Summit, set for Oct. 7-8 in Las Vegas. This inaugural event will include speakers from Fifth Third and Capital One as well as a fireside chat with Piermont Bank founder and Chief Executive Wendy Cai-Lee.