By Roy Urrico
San Francisco-based Upgrade, Inc., a fintech company that offers affordable and responsible credit, mobile banking and payment products to mainstream consumers, recently announced that it reached a new milestone with the signing of its 100th credit union partnership. These partnerships let credit unions purchase loans and card receivables originated through Upgrade and enroll new members through Upgrade's online and mobile platform.
Upgrade has partnerships for purchasing any of its facilitated loans, including personal loans, cards and auto refinance loans. "We are thrilled to count so many loyal and valuable partners," said Upgrade co-founder Adelina Grozdanova. "We started working with credit unions shortly after our launch in 2017, and look forward to continuing to deepen our relationships in the space."
Grozdanova explained, “Partnering with credit unions was an actual fit for Upgrade from the very beginning.” She noted Upgrade typically enters into an asset purchase arrangement with credit unions across Upgrade’s personal loan and card products, “if a borrower meets the membership requirements or any other type of credit criteria that the credit union may have.”
Upgrade’s asset purchase program comprises flexibility with custom credit criteria, nationwide or geography-specific capability, requires no minimum commitment, and according to the company, easily incorporates with existing asset and liability management (ALM) strategies.
The Upgrade Decision Process
Potential borrowers must submit a short loan application through Upgrade’s website. During this preliminary process, the candidate supplies their name, address, phone number, and other personally identifiable information needed to pull credit bureau information and verify the individual’s identity. Applicants also provide income and employment details. Upgrade then runs its credit models and instantaneously provides the applicant with either an approved or declined decision. “It all happens within seconds,” Grozdanova noted.
“If it is an approved decision, then we also show them the loan amount and the terms,” said Grozdanova. If the approved customer decides to proceed, Upgrade undertakes a secondary underwriting process that is a deeper dive of information obtained initially. This may involve income, employment and identity verification. “It really depends on our models. We can instantaneously determine if the borrower will meet the membership requirements of a particular credit union (Upgrade calls this “memberizing”) and any other type of credit criteria.”
Once the applicant completes the verification process, the loan gets issued by Fort Lee, N.J. -based Cross River Bank (usually after three business days). “Later it's purchased by us and sold to the credit union,” Grozdanova said.
Partnering With Credit Unions
Grozdanova pointed out the average onboarding for a credit union partnering with Upgrade takes about 30 days. Upgrade has a dedicated team to help with integration and provide comprehensive due diligence materials, which includes Know Your Customer (KYC) controls and principal and interest (P&I) information.
“We get from the credit union all the various memberization requirements they would need so that we can build it into the application flow. We also sign an asset purchase and servicing agreement with them,” Grozdanova explained.
Credit unions provide Upgrade with the targeted amount of loans they wish to purchase. “Typically, credit unions come to us because we offer a very flexible asset purchase program,” Grozdanov said. Credit unions can also determine if they want to be nationwide or geographically specific. “There are no minimum requirements. Not only do (credit unions) acquire a very attractively priced loan where they have a very flexible purchase strategy, but they also get a new member they can cross sell additional assets.” Grozdanov added, “Upgrade lets the loan applicant know they must become a member of a particular credit union to receive this loan. “It is still serviced in Upgrade's name.”
The process operates similar to an auto referral indirect lending program where a consumer buys a car and then applies for financing at the dealership, Grozdanov explained. The major difference, she added, is the borrower deals directly with Upgrade before, during, and after receiving the loan.
Credit unions do have different territories they control. Some have nationwide agreements with Upgrade and some only purchase loans where the borrower resides, even down to specific zip codes.
Upgrade communicates with the credit union system once the loan has been issued, which is usually on a monthly basis, but it can be as frequently as a daily basis. “We push (loan data) from our system to their system via the cloud effectively,” pointed out Grozdanov. “It really depends on the credit union. Typically, the larger ones automate the ingestion of the files, both the membership and loan information. Some have automated just the account opening. And we even have credit unions that do manual ingestion of all the member information, as well as the loan information. It really varies.”
Upgrade recommends that its credit union partners utilize the company’s flexible balance sheet solutions to solve for margin compression, balance sheet diversification, excess liquidity deployment, and fee income replacement.
Credit Union Responses
Grozdanov pointed out that Upgrade started with only a few credit unions, but over the course of the last two years, has grown to over a hundred, with that number continuing to grow. “We do see a very significant interest from credit unions in the space because of the availability of large asset purchase strategies and attractive assets.”
Some of Upgrade’s credit union partners offered some insight:
· The $4.05 billion Philadelphia-based American Heritage Credit Union implemented Upgrade in July 2020 as part of an overall strategic objective to partner with best-in-class fintechs to better serve its members with real-time, personalized lending solutions.
“American Heritage leverages Upgrade’s proprietary platform to provide our members with a real-time, frictionless experience,” said Bryan Eichenbaum, senior vice president of Consumer Lending at the credit union.
Eichenbaum noted through its partnership with Upgrade, “American Heritage has added over 10,000 new members and nearly $200 million in new loan balances. In addition, we are able to partner with smaller asset-sized credit unions to do strategic loan sales that benefit both credit unions. It allows American Heritage an opportunity to participate loans and manage our portfolio, and it offers other credit unions an opportunity to deploy excess liquidity and purchase loan balances from American Heritage.”
· The $3.07 billion Medford, Ore.-based Rogue Credit Union began purchasing Upgrade loans in April 2021. “We started out small and then increased our level of purchases as our experience with the product increased,” said Blake Thurman, chief financial officer at Rogue. For several years prior, Rogue Credit Union explored options to obtain additional outside loan sources. “The urgency related to this effort increased significantly as deposits began to surge in 2020. As we worked with a handful of partners on establishing processes to source loans, Upgrade’s name continued to surface as a fintech ahead of its peers in many regards,” recalled Thurman. Thurman added, “We found this especially true when it came to their understanding of the needs specific to community financial institutions.” This included both how Upgrade’s products structured as well as their understanding of regulatory considerations associated with this type of partnership. “In fact, we have been a part of several brainstorming sessions with Upgrade personnel where it is apparent, they are very interested in learning more about how they can continue to mature their processes to better fit the needs of community financial institutions.” Thurman added that Rogue Credit Union has had success utilizing Upgrade’s products in two main ways. “One, like many credit unions, over the past couple of years we have experienced deposit balances growing at a significantly faster pace than loan balances.” Adding Upgrade loans to the credit union’s balance sheet helped it address this issue. “Two, given our flexible field of membership, we have also been able to sell Upgrade loan participations to other credit unions with more restrictive fields of membership to help them address this same imbalance.” Added Thurman, “Rogue’s partnership with Upgrade has helped us move closer towards our goals related to the percentage of our assets comprised of loans. In addition, our relationship with Upgrade has deepened our understanding of the fintech space including the prospects of continued partnerships in the future.”
Other credit unions have also seen results:
· "Over the past few years, Upgrade and PenFed have developed a very seamless, transparent and efficient process that has produced billions in loans," said Jay Fee, PenFed Credit Union ($35.4 billion, McLean, Va.) vice president, consumer banking. "Our partnership with Upgrade has introduced PenFed and our great rates to even more people."
· "Upgrade has become the partner of choice for credit unions," said Amy Henderson, Chief Consumer Services Officer at GreenState Credit Union ($9.48 billion, North Liberty, Iowa). "Our loan-to-deposit ratios are such that we can all benefit from the type of loans and card receivables Upgrade has to offer, with attractive yield and relatively short duration under two years. With billions in new originations every quarter, it's good to know we can get scale too."
· "I love the fact that there is no black box, all credit decisions are explainable," said Matt Valentine, chief lending officer at Carter Credit Union ($588 million, Springhill, La.) "We understand how the credit underwriting works, and then we can overlay our own credit criteria and even geographic footprint. We also love the fact that we can sign up new members through our Upgrade partnership which continues to drive household growth for our credit union."
· "We really appreciate the flexibility of our partnership with Upgrade," said Curtis Onofri, chief lending officer, at Pathways Financial Credit Union ($600 million, Columbus, Ohio). "There are no minimum purchases or long-term commitments. We know we can make a different decision month over month based on our own needs. This is hugely valuable to us."
Credit Cards, Too
Nilson Report, a respected source of news and analysis of the global card and mobile payment industry, recently recognized Upgrade's flagship product Upgrade Card as the fastest-growing credit card by outstanding balances by in America. In 2021 Upgrade became the first fintech company to ever be listed in the Nilson's top 50 U.S. Visa/Mastercard Credit Card Issuers. Upgrade Card promotes responsible credit by turning every balance into a fixed-rate installment plan, and by paying rewards to cardholders as they pay down their balance. Upgrade recently launched Upgrade Shopping, which offers consumers 5 to 10% cashback rewards at local retailers and national brands.
Upgrade’s growth has accelerated through the last two quarters of 2021, with the company more than doubling its level of outstanding balances (or money owed by accountholders). All told, Upgrade claimed a growth rate of 539.5% year-over-year.
Besides its California-based headquarters, Upgrade also has a service center in Phoenix, and a technology center in Montreal, Canada.