Upstart, who just launched their p2p lending platform a couple of months ago, has made some very interesting changes today for investors. One of the complaints I hear from investors in Lending Club and Prosper is that when a loan defaults it is the investors, not the platforms that take the hit. With the changes made today, Upstart is addressing that issue head on.
Investors Will be Refunded Origination Fees if a Loan Defaults
This is the really big news for investors and the change that I am most excited about at Upstart. The industry standard today is this: if a loan defaults the investors will lose their outstanding principal. Meanwhile, Lending Club and Prosper keep the origination fees they made by issuing the loan and lose nothing. This has always felt like a misalignment of goals to me.
Upstart is taking a different approach. Now, if a loan defaults at any time over the course of the three-year loan term (all Upstart loans are currently three-year terms) then Upstart will take the revenue they earned from the origination fees and refund the money to investors.
Now, like the other platforms, Upstart has a sliding scale of origination fees ranging from 1% up to 6%. So, we could be talking a significant credit to investors in the case of a default. And I confirmed that there is no time limit on this refund. So, in theory a borrower could default in month 32 of a 36-month loan term and investors will receive the full credit for the origination fee.
No More Service Fees for Investors
That is not the only change at Upstart today. They are also doing away with investor service fees completely. Most platforms charge a 1% service fee for investors on every borrower payment, reducing investor returns. Upstart have decided that they will be foregoing this revenue now and providing 100% of borrower payments to investors.
Why Make These Changes?
When I spoke with Dave Girouard, Upstart CEO, last week about these changes he said that in his opinion this is just a fairer system for investors. It completely aligns the goals of the platform with the goals of the investors. When I asked about the hit to their income, particularly around the investor service fee, he said that Upstart will be increasing their origination fees moderately to pay for these changes. You can see their table of origination fees on their Borrower page.
Reading between the lines it is clear that Upstart is looking for more investor money. Because this is certainly a way for them to differentiate themselves from Lending Club and Prosper. Investors are going to love the refunded origination fees and I could see plenty of new investors coming into Upstart on that change alone. Combine that with no service fees and you have a more compelling offer for investors. Keep in mind, though, at this time Upstart is still only open to accredited investors.
I think this is a great change and one I hope will stir up the industry. While I don’t see Lending Club and Prosper matching this change any time soon (or ever) I like that a new platform is coming out aggressively for investors. I will be following Upstart’s progress with interest in coming months. I have just opened my own Upstart account and will be reporting back on my progress here.
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.