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Upstart's $1.4 Trillion Market Opportunity

By Matthew Frankel, CFP® - Apr 12, 2021 at 6:41AM

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This fintech giant is eyeing a giant market that is just begging to be disrupted.

Upstart Holdings (UPST -6.68%) has primarily been a personal lender so far, but with the recent acquisition of automotive shopping platform Prodigy Software, the company could be getting ready to make an aggressive push into the $1.4 trillion auto loan industry. In this Fool Live video clip, recorded on April 5, contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why Upstart could have some exciting years ahead of it. 

Jason Moser: Yeah, I mean why do you think that is that the auto market is so different? It seems to me and I guess the last time I took out an auto loan was, well, it was I bought an Explorer probably five, close to like five and a half years ago or something, and the dealership gave me 0% financing and that was it. Period. It was like I'm not going to find a rate better than that unless they're willing to actually give me money. Why do you feel like the auto market is so open for that competition? Is it the nature of what they're selling? Is it the idea that this thing that you're buying, once you drive it off the lot, it loses so much value? Adjusted that transfer ownership? Is it an asset thing? Do they not make it as attractive an opportunity because of the competition and set it there for the dealerships in the car companies themselves?

Matthew Frankel: Well, that is a lot of it. Like you said, you got 0% financing when you bought your car. The legacy lenders, which I would include traditional banks like Wells Fargo who my auto loan is through, and the actual car companies that have financing arms, they do a really great job of financing for the prime borrowers. I don't know Jason's credit score, but I assume it's pretty good.

Moser: It's pretty good. 

Frankel: The legacy lenders do a great job with guys like Jason. They don't do a great job with subprime borrowers, which is Upstart's bread and butter for its personal lending business. The average interest rate for a borrower with, say, a 600 credit score is in the 18-19% ballpark on an auto loan. It's because the traditional lenders really don't know how to analyze risk in that side of the market. Upstart has proven that it's really good at analyzing subprime risk in the personal lending markets. They cut down on bank losses. They approve more applicants than otherwise would without increasing losses. If they can translate that to the auto industry, which a lot like even the Fintech lenders don't know how to tackle the subprime market. That's really where Upstart's trying to add value, and if they can do that with the auto industry, that's a big chunk of that $1.4 trillion auto market that is really not being well served.

Moser: Yeah. I think you're right and I think that going back to the conversation that we had in January. You noted that one of their biggest competitive advantages, if not the biggest, was really the proprietary technology. This AI that allows them to assess risk and ultimately make better loans. It's very similar to what we talked about with companies like Square, I think, PayPal to an extent now. A lot of these companies are doing a better job of utilizing data in order to make better financial decisions, underwriting decisions when it comes to lending. I think we're seeing the same thing with really well-run insurers, too. I guess it goes back to that idea that data is the new oil as they've said. It really is becoming perhaps the most important commodity around the globe at this point because you can do so much with it.

Frankel: Yeah. As Upstart gets bigger and bigger, their competitive advantage there just gets better and better. The more data they have, the better they'll be able to assess risk. If a customer has defaulted on auto loans six years ago and things have changed in their situation, they got a new job, they got out of debt, things like that. It's really tough to quantify that by just looking at the FICO score, which is what most auto lenders do. Upstart uses a ton of data points to really kind of get a big-picture view and really accurately predict who's going to default on their loans, and so far, it's working. It's a very promising system. Like you said, data is king and Upstart, they're building a data library and they have a really big head start over anyone else who wants to join this space.

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