Holdings reached (NASDAQ: UPST) has attracted a lot of attention from Wall Street. The share price has climbed over 940% since the company went public in December 2020. And the driving force behind those gains is Upstart’s future growth prospects.
In this Backstage Pass video, which was broadcast September 27, 2021Motley Fool contributor John Bromels discusses how this fintech company is bringing artificial intelligence to the consumer credit industry and how its approach could disrupt traditional lending solutions.
Jean Bromels: Co-founder and CEO, Dave Girouard is the former president of Enterprise Google and co-founder and board member, the former director of global corporate client programs and consumer operations at Google. Why is this important? What does Upstart do? Upstart is an AI-powered lending platform. It uses artificial intelligence, big data and predictive modeling to create an alternative to FICO score to determine a person’s creditworthiness.
You’ve probably all heard a FICO score. A bunch of credit cards will give you a FICO score. You can go to annual credit report.com every year, get your score and your credit report from the various credit bureaus. It’s like a one-time snapshot determining the likelihood of you defaulting on your own or on credit granted to you. The founders of Upstart said what the FICO score does, what it looks at, it looks at your past, it looks at your credit history, it looks at do you have any assets, how many of your assets do you have available for you ? He said, well, it’s backslid. For people who do not have a significant credit history, or for people whose circumstances may have changed and who are looking to secure a loan, the FICO score may not be a good predictor of their risk of default. or not.
He developed this AI-based algorithm to approve these loans. What it does is you go to Upstart, you go to their apps, you basically complete the loan application. It uses its predictive modeling and AI to determine your creditworthiness. Then he does not make the loan himself. It goes through third-party banks and financial institutions to give you the credit. He recently took out auto loans or purchased prodigy software, and there are rumors that he may be looking into the mortgage market as well. This is based on a job posting. The Internet will find everything for these businesses. It’s based on mortgages referenced as job hosting jobs and they said, âAha. If they’re looking for someone who has experience with mortgages, maybe they are considering be to enter the mortgage market. “
CEO Dave Girouard has also expressed interest in disrupting the payday loan industry, which as we know is basically designed. The payday loan industry argues that it has to charge these exorbitant and very high fees because of the high risk of default. Well, Dave Girouard and Upstart are saying well, if our model can more accurately predict who is going to default and who is not, maybe we can be a better alternative for many consumers than a loan on salary. This raises the issue of bias. The trick with artificial intelligence quite often is that it looks for the best efficiency, or the most mathematically perfect number or outcome.
Sometimes, however, it can introduce bias into the system, it can introduce things that we don’t want to be there. Of course, the very famous example of this is when some researchers created artificial intelligence and basically used social media to allow it to examine how people spoke. The algorithm picked up all the objectionable content and started to distort it due to the faulty entry and had to be shut down and reconfigured to resolve this issue. Upstart is really committed to reducing bias in its algorithm because of course you don’t want unconscious bias finding its way into your loans. Because not only is it illegal, it is also really unfair.
Upstart has actually worked with the Consumer Financial Protection Bureau, the government agency responsible for monitoring this, and they have a letter of no action, which is basically how the CFPB says, we have been monitoring this AI, and we are convinced that it does not introduce any illegal bias into the lending process. Again, a very specialized product, a very nice industry but a very good example of how AI, the use of big data, machine learning, and predictive modeling can really disrupt a lot of different industries.
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