Banking is an entrenched industry. Money is loaned to borrowers through the assessment of their income and assets, with the bank earning an interest rate determined by the quality of that position -- and these fundamentals haven't changed all that much.

But Upstart Holdings (NASDAQ:UPST) is using artificial intelligence to help banks take a different approach, reviewing alternative metrics of the borrower to lend more money with a similar level of risk. And on the payments side of finance, Paysafe (NYSE:PSFE) is leveraging a brand-new industry in the U.S. to grow its platform. The company facilitates payments for digital casinos, sports betting books, and the esports industry, known collectively as iGaming. The segment is injecting rapid growth into the company, and since it's only active in 15 states, there's plenty of potential for further expansion.

1. Upstart

Upstart is an all-digital lending platform that allows borrowers to apply through its website, and then routes the loan to one of its banking partners. It also offers an application programming interface (API) to banks, allowing them to integrate Upstart's credit decisioning technology in their own application processes. Artificial intelligence (AI) is at the company's core, and the results speak for themselves: Upstart claims its model generates 173% more approvals at the same loss rate as traditional banks.

Two people exchange paperwork at a car dealership.

Image source: Getty Images.

The technology accounts for more than 1,000 data points, including nontraditional metrics like the borrower's level of education, where they went to school, and their employment history. 

The company began in the unsecured lending space, targeting personal loans, medical loans, and debt consolidation. Now it's expanding into vehicle finance, emphasized through its recent acquisition of Prodigy, which offers highly successful sales software to car dealerships. The goal is to use Prodigy as an entry point to this lucrative market, where consumers owe an estimated $1.3 trillion. 

Vehicle finance is the biggest lending market Upstart has operated in, and it speaks to the adaptability of its AI-powered decisioning process. The company projects full-year 2021 revenue of $600 million, and if it delivers, it would represent over 1,000% growth since 2017 -- much of which has occurred in the last year. 

Metric

2017

2020

2021 (Projected)

Revenue

$57 million

$233 million

$600 million

Earnings (loss) per share

($0.56)

$0.00

$0.62

Data source: Upstart.

Upstart is already profitable, which is rare for a young technology company operating in a complex industry. The downside is investors are paying a significant premium for the stock based on what we know right now. 

With a $9 billion market cap at recent prices, Upstart trades at 15 times projected revenue, but if the company continues to grow at the current pace, it could begin to look extremely cheap for investors with a five- to 10-year time horizon. Analysts estimate Upstart will generate $800 million in revenue in 2022, and that would drastically shrink the price-to-sales multiple.

2. Paysafe

Paysafe went public in late March via a merger with Foley Trasimene Acquisition II, a special purpose acquisition company (SPAC). It's a payments company based in London that does most of its business outside of the U.S., but with the rapid growth in online gambling, that might be about to change. 

A group of friends at a bar laughing and drinking beer, looking at the sports score

Image source: Getty Images.

Paysafe owns well-known brands like Skrill, a digital wallet provider that recently expanded into cryptocurrency, and Neteller, which is used to transfer money between consumers and merchants. Skrill recently announced a partnership with crypto exchange Coinbase Global, which is offering a white-label solution to Skrill that allows its customers to buy and sell different cryptocurrencies. The Skrill wallet has the option to set the base currency in either U.S. dollars or Bitcoin

The company's digital wallet and eCash segments comprised 55% of total revenue in the first quarter, and each primarily served the online gambling industry. Paysafe's overall revenue of $377 million in the first quarter represented just 5% growth compared to the same period last year, but there's a strong driver emerging from the U.S. expansion. The iGaming segment in America alone -- which is active in 15 states -- grew by 66%.

Metric

2018

2020

2021 (Projected)

Revenue

$1.14 billion

$1.42 billion

$1.54 billion

Earnings (loss) per share

N/A*

($1.01)

$0.06

Data source: Paysafe. *Undisclosed.

Despite Paysafe making losses, analysts expect it will turn a profit this year. Revenue growth should come in at 8% for 2021, and then accelerate to 10% in 2022, according to estimates. 

The stock recently traded at a $7.7 billion market cap, or 5 times sales, but it's also down more than 40% since its peak, so some investor exuberance has deflated. It could make for a great opportunity, given Paysafe expects the U.S. iGaming industry to grow to $47 billion in size by 2025, which is a 55% compound annual growth rate.

The company is well poised to capture some of that growth, particularly through a new partnership with Australian company PointsBet Holdings -- an ambitious $2.5 billion bookmaker that has turned its focus to the lucrative U.S. betting market. Paysafe is bringing its expertise in the global online gambling industry to America, and its timing could not be better. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.