Assets received ( UPST -2.06% ) attracted considerable Wall Street attention. The stock price has skyrocketed more than 940% since the company went public in December 2020. And driving those gains is Upstart’s future growth prospects.
In this Backstage pass broadcast video September 27, 2021Motley Fool contributor John Bromels discusses how this fintech company is bringing artificial intelligence to the consumer finance industry and how its approach could disrupt traditional lending solutions.
John Bromel: Co-founder and CEO, Dave Girouard is the former president of Enterprise Google and Co-Founder and Councilman, former Head of Global Business Customer 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 the FICO score to determine a person’s creditworthiness.
You’ve probably all heard of 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 credit score and report from the various credit bureaus. It’s like a single snapshot determining the likelihood of you being in default alone or on credit extended to you. The founders of Upstart said, what does the FICO score do, what it looks at, it looks at your past, it looks at your credit history, it looks at if you have, do you have any assets, how much of your assets have you available to you? He said, well, it’s retrospective. For people who don’t have a significant credit history, or for people whose circumstances may have changed and are looking to get a loan, the FICO score may not be a good indicator of their likelihood 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 applications, you basically fill out 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 extend the credit to you. He’s recently taken out car loans or purchased a software prodigy, and rumors are circulating that he may also be looking into the mortgage market. This is based on a job offer. The Internet will find everything for these businesses. It’s based on some kind of job hosting referenced on the mortgage net in job hosting and they said, “Aha. If they’re looking for someone who has experience with mortgages , maybe they are considering entering the mortgage market.”
CEO Dave Girouard has also expressed interest in disrupting the payday loan industry, which as we know is basically engineered. The payday loan industry argues that they have to charge these exorbitant and very high fees due to the high risk of default. Well, Dave Girouard and Upstart say well, if our model can more accurately predict who will default and who will not, we may be a better alternative for many consumers than a payday loan. This raises the issue of bias. The trick with artificial intelligence is often that it looks for the best efficiency, or the most mathematically perfect number or result.
Sometimes, though, it can introduce biases into the system, it can introduce things that we don’t want there. Of course, the very famous example of this is when some researchers created an artificial intelligence and basically used social media to allow it to examine the way people were talking. The algorithm picked up all the objectionable content and started to skew it because of the faulty input and had to be stopped and reconfigured to fix this problem. Upstart is really committed to reducing bias in its algorithm because, of course, you don’t want unconscious bias creeping into your loans. Because not only is it illegal, but it’s also very unfair.
Upstart actually worked with the Consumer Financial Protection Bureau, the government agency responsible for policing this, and they have a no-action letter, which is basically how the CFPB says, we monitored this AI, and we We are confident that it does not in fact introduce any unlawful 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 many different industries.
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