Moving Beyond the Traditional Credit Model

Big Data may be among the buzziest of buzzwords (OK, it’s actually two words) when it comes to credit risk assessment. Upstart, a funding platform launched three years ago by a cadre of former Google professionals, has been using Big Data, analytics and a series of less-conventional metrics to bring loans to young consumers and small businesses. PYMNTS spoke with Dave Girouard, founder and CEO of Upstart, to gain insight into how creditworthiness may be entering a new era.  

Upstart is an online lending platform that uses data to bring together borrowers and investors. Could you tell us what kind of data is used and how it’s collected?

DG: We’re a marketplace funded that makes loans to consumers and we were formed by a bunch of folks who left Google — including me — to focus on younger people that have a hard time getting loans elsewhere, because they lack a long credit history.

So we basically came up with the concept of using other types of data, principally education-based data, such as where somebody went to school, what they studied, how they performed, in order to understand their ability and propensity to pay back a loan.

The space you are entering now is a pretty hot one going out for younger consumers, and entrepreneurs like yourself that are entering on lending space, and you’re banking on technology to deliver more streamlined application and approval process. What type of specific innovations are you guys banking on?

DG: A whole bunch of different innovations. We are a very technically oriented team, given our backgrounds, generally our probably most famous part of what we do is, again, using educational data to price credit.

Virtually all other lenders out there use – consumer lenders I should say – use similar approach. That’s to look at somebody’s credit bureau data, look at how much income they have, and by looking at their past performance on credit, assume they will be the same going forward.

We’ve said that if you are young and you don’t have credit history, you need to take a different approach.

We borrowed from the Google hiring process, which is a process that was very data driven, and what we’re trying to tease out is somebody’s underlying employability, because the reason most people default on credit cards, or loans, or mortgages, et cetera tends to be because they become unemployed and can’t service the debt.

We’re trying to understand not just what somebody is working at today and what their cash load may look like today, but what their underlying employability looks like over the term of the loan.

Looking back to when Upstart was first introduced in 2012, what are some of the trends you’ve observed changing in online lending?

DG: Back in 2012 there were just a couple of players, guys like Lending Club and Prosper, and they were really pioneering things and went through some really challenging times to do so.

In 2012 really most of the money that was funding these loans was coming from individuals, people who were literally putting $100 here, $50 there to fund loans. If you fast forward to 2015 one of the big things that’s changed is a high fraction of the money that is funding these loans actually comes from different types of institutions — hedge funds, banks, other types of institutions — and consumers are still funding loans but it tends to be a smaller fraction of it.

There’s also many more lenders now. There’s probably several hundred startups doing lending across the U.S., maybe some to small business, some to consumers, et cetera, so there’s an enormous number of them. Realistically very few are going to make it over the hump in terms of getting critical mass, having solid models, originating loans and servicing loans. There’s a lot of things you have to do right.

There’s not a lot of clarity around regulation in the online lending sector, so how can small businesses really know how to pick the right product and know they’re paying the right amount?

DG: It’s a little different for me — we are consumer lenders – and my expertise is a little more in the consumer side, but generally you’re right. There are some unsettled areas of regulation and that is almost always the case when new things evolve and arrive.

I think the highest quality lenders that have evolved in these days are ones that tend to be very pro-business or pro-consumer, Their terms are favorable, relative to the choices that either a small business or a consumer has, they’re very transparent about who they are, how their business runs and who’s funding them.

They’ve also seen a certain amount of size and success, so generally I think if you are a consumer or a small business trying to evaluate where to get a loan, you really want to know who’s on the other side of it. You want to make sure it’s a reputable party, and [do] a little bit of research, just Googling them, or learning a bit about who they are, checking out places like Credit Karma, where there’s reviews of loans…there’s a lot of ways you can do your research, and I think it does make sense to make sure that it’s a really reputable party that you’re getting a loan from.