Rising interest rates mean that Upstart is “limited with financing”

Out of the chain

You probably had one better Friday than Google’s Corey duBrowa, whose Twitter account spent most of the day claiming the communications director was a Doodles community manager. “Well, it’s been an interesting last 24 hours on this app. My account was hacked / hijacked by some NFT scammers,” he wrote after gaining access. Not fun, especially when the beat reporters notice. Sorry that happened, Corey, but what we really want to know is if Elon Musk took your account into account when he sent the ugly rhyme about robots to Twitter.

– Owen Thomas (e-mail | twitter)

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The change in interest rates is here. For fintech companies that have spent the last few years strengthened by cheap funds and strong consumption costs, it means that they suddenly wake up to a world where everything looks different. Lender of personal loans online Upstart saw the share price plummet on Friday after reporting preliminary earnings.

Inflation, fears of recession and rising interest rates have put “banks and capital markets on a cautious footing”. said CEO Dave Girouard, a former Google chief who founded Upstart a decade ago. The company published a preview of earnings ahead of the entire August release – which often serves as a red flag for investors.

• Upstart now expects significantly worse results than previously predicted. The company expects $ 228 million in revenue in the second quarter, a decrease of more than 20% from the lowest guidance in May and a decrease of 26% from revenue in the first quarter.
• Upstart expects to lose between $ 27 million and $ 31 million for the quarter, instead of its previous expectation of losing no more than $ 4 million.
• Sometimes it helps to come out in front of bad news – not the case here. Upstart’s share price closed down around 20% on Friday, to 27.09 dollars, and has lost 80% of its value since the beginning of the year.

Upstart was also hit by a downgrade. JMP Securities analysts warned that “with macroeconomic concerns driving interest rates higher and causing capital market partners to tighten lending standards, Upstart’s marketplace is limited in funding.”

• By using AI for veterinary applicants, Upstart largely makes money on fees from matching lenders with borrowers, many of whom have poor or no credit history. The company securities many of these loans. About 80% of the $ 12 billion loans financed through Upstart last year were bought by institutional investors.
• When demand from the loan investor side failed to keep pace with consumer appetite for personal loans at the beginning of the year, Upstart parked between $ 100 million and $ 150 million in unsolicited loans on its own balance sheet. Wall Street investors failed this change in strategy when the company revealed it during the first quarter results in May. Shortly afterwards, an Upstart leader told the Wall Street Journal that they no longer wanted the loans.
• But these loans were, not surprisingly, sold at a loss. On the positive side, Upstart said that their existing loans are still working as expected for investors, and that the company has around $ 800 million in cash.

Fintech as a whole feels the pressure, especially on the consumer-focused side. Consumer sentiment is falling, giving investors in businesses offering direct loans or services such as “buy now, pay later”.

• Cathie Woods ARK Fintech Innovation ETF is down around 60% from the beginning of the year. Pay-later provider Affirm’s share price is down 75% from the beginning of the year, while Block, whose business includes the pay-later service Afterpay, is down 60%. Klarna on Monday announced new financing for a private valuation of 6.7 billion dollars, a decrease of 85% from a year ago. “We are not immune to a 75-90% decline in public peers,” co-founder and CEO Sebastian Siemiatkowski so.
• Many of the fintech companies that are active today emerged after the financial crisis and have never been tested in a recession, noted Ted Rossman, senior analyst for Bankrate. (That does not count the rapid economic crash and recovery at the beginning of the pandemic, he added.)
• “Unemployment is as low as it has been in 50 years, and increasingly there is a sense that there is only one way for it and for delays to go, which is up,” Rossman said. “Some of these companies benefit from a really big tailwind of low interest rates, a strong labor market [and] spending and a lot of it is starting to erode. “

Upcoming also meets regulatory headwinds. In 2017, Upstart was the first company to receive a non-action letter from the Consumer Financial Protection Bureau, promising that CFPB would not pursue a fair lending action against the company. Upstart requested that the letter be closed after the CFPB said it would require a lengthy review to approve any changes to Upstart’s modeling – something Upstart said they had to do quickly to respond to changing circumstances. The CFPB under Rohit Chopra has taken a much more aggressive approach to scrutinizing things like AI in lending and the “buy now, pay later” industry as a whole, including by invoking authority to investigate non-banking entities. While Upstart left CFPB’s program on its own, it’s a good reminder of the potential double shock that lies ahead of the industry. Fintech may be hurting on Wall Street, but that’s not going to stop the investigation in Washington.

– Ryan Deffenbaugh (e-mail | twitter)

On the money

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