Rising interest rates mean Upstart is ‘funding constrained’

Hello and welcome to Protocol Fintech. This Monday: The Change in Interest Rate Mood, Lael Brainard on Crypto Risk, and Sam Bankman-Fried Sees Bottom.

out of the chain

You probably had a better friday than Google’s Corey duBrowa, whose Twitter account spent most of the day claiming the vice president of communications was a Doodles community manager. “Well the last 24 hours have been interesting on this app. My account was hacked/hijacked by NFT scammers,” he wrote after regaining access. Not funny, especially when the beating of reporters notice. Sorry this happened, Corey, but what we really want to know is if Elon Musk took your account into account when he sent that bot nastygram to Twitter.

—Owen Thomas (E-mail | Twitter)


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This trimester is not graded yet

The change in mood for interest rates is here. For fintech companies that have spent the past few years spurred on by cheap funds and heavy consumer spending, that means suddenly waking up to a world where everything looks different. Online personal lender Upstart saw its share price fall on Friday after announcing its preliminary results.

Inflation, fears of a recession and rising interest rates have put “banks and capital markets on a cautious footing”, said CEO Dave Girouard, a former Google executive who founded Upstart a decade ago. The company released an earnings preview ahead of the full August release, which often serves as a wake-up call to investors.

  • Upstart now expects results much worse than expected. The company expects second-quarter revenue of $228 million, down more than 20% from its low-end forecast in May and down 26% from sales. first quarter business.
  • Upstart expects to lose between $27 million and $31 million for the quarter, rather than its previous expectation of losing no more than $4 million.
  • Sometimes it helps to get ahead of bad news – that’s not the case here. Upstart’s stock price closed Friday down about 20%, at $27.09, and has lost 80% of its value since the start of the year.

Upstart was also hit by a downgrade. Analysts at JMP Securities warned that “with macro concerns pushing interest rates higher and forcing capital market partners to tighten lending standards, Upstart’s market is funding constrained.”

  • By using AI to vet applicants, Upstart primarily makes money from the fees of matching lenders with borrowers, many of whom have poor or no credit histories. The company securitizes many of these loans. About 80% of the $12 billion in loans funded by Upstart last year were purchased by institutional investors.
  • When investor demand for loans failed to keep up with consumer appetite for personal loans earlier this year, Upstart parked between $100 million and $150 million in unwanted loans on its own balance sheet. . Wall Street investors balked at the change in strategy when the company revealed it during first-quarter earnings in May. Shortly after, an Upstart executive told the Wall Street Journal that he would no longer hold the loans.
  • But these loans were, unsurprisingly, sold at a loss. On the bright side, Upstart said its existing loans are still working as expected for investors and the company has approximately $800 million in cash on hand.

Fintech as a whole is feeling the pressure, especially from the consumer side. Consumer confidence is plummeting, reassuring investors about companies offering direct loans or services such as “buy now, pay later”.

  • Cathie Wood’s ARK Fintech Innovation ETF is down about 60% year-to-date. The share price of afterpay provider Affirm is down 75% year-to-date, while Block, whose business includes afterpay service Afterpay, is down 60%. Klarna on Monday announced new funding at a private valuation of $6.7 billion, down 85% from a year ago. “We are not immune to a 75-90% decline in our public peers,” co-founder and CEO Sebastian Siemiatkowski said.
  • Many fintech companies active today emerged after the financial crisis and were never tested by the recession, noted Ted Rossman, principal analyst for Bankrate. (That’s not counting the rapid economic crash and recovery at the start of the pandemic, he added.)
  • “The unemployment rate is as low as it has been in 50 years and more and more there is a feeling that there is only one way for him and for the defaulters, which is to increase,” Rossman said. “Some of these companies are benefiting from a very large tailwind of low interest rates, a strong labor market [and] spending and a lot of those things are starting to erode.”

Upstart also faces regulatory headwinds. In 2017, Upstart was the first company to receive a no-action letter from the Consumer Financial Protection Bureau, promising that the CFPB would not pursue fair lending action against the company. Upstart called for the letter to be terminated after the CFPB said it would take a lengthy review to approve any changes to Upstart’s modeling – something Upstart said it needed to do quickly to meet changing conditions . The CFPB under Rohit Chopra has taken a much more aggressive approach in looking at things like AI in lending and the “buy now, pay later” industry as a whole, including invoking authority to review entities. non-banks. While Upstart left the CFPB program alone, it’s a good reminder of the potential double whammy for the industry. Fintech may be struggling on Wall Street, but that won’t stop the scrutiny in Washington.

—Ryan Defenbaugh (E-mail | Twitter)

on the money

On protocol: Federal Reserve Vice Chairman Lael Brainard highlighted an “urgent” need for crypto regulation, citing the crypto crash as an example of how consumers need to be better protected from conflicts of interest or manipulation undisclosed.

Zip closes its Pocketbook application. The ‘buy now, pay later’ company purchased the app in 2016. It plans to eventually introduce similar money management features into its core app, as many businesses want to pay later to create cool financial apps.

Celsius reportedly allocated $530 million to KeyFi to invest, suffering losses of $350 million. According to on-chain analytics reviewed by Arkham Intelligence, KeyFi has engaged in high-risk trading strategies. KeyFi is suing Celsius.

Blockchain.com faces $270 million in losses from 3AC. Blockchain.com CEO Peter Smith detailed in a letter to shareholders the company’s exposure to Three Arrows Capital’s insolvency.

Binance scored a regulatory victory in Spain. Continuing its European expansion, Binance managed to list on the Spanish crypto ledger, securing another regulatory victory in addition to those in France and Italy.

US diplomats have called on Japan’s crypto exchanges to sever ties with Russia. The request was reportedly made to 31 licensed crypto exchanges in Japan that still operate in Russia, the Japanese financial services agency also reportedly renewed requests for the exchanges to do so.


Salvadoran President Nayib Bukele is not satisfied with the last New York Times story on how his big bitcoin bet is turning out. “Clearly they’re scared, #Bitcoin is inevitable. By the way, they’re saying we’re headed for default. Will they issue an apology once we’ve paid everything on time?” Bukele tweeted.

FTX CEO Sam Bankman Fried seems optimistic about the future of Web3 despite the crypto crash, implying that there is no other way to go but upwards. “I don’t see any particular reason why we couldn’t be at the bottom, and I’m not trying to say we’re definitely at the bottom. But I think the denouement that was supposed to happen has happened,” he said in a interview.

Eight US senators have written to seven of the biggest banks behind the payment system Zelleasserting that the absence of safeguards against fraud “makes the platform a ‘fraudster’s favourite’ because consumers don’t have the ability to cancel a transaction even moments after authorizing it.”


FTT DeFi 2022 is scheduled for Tuesday. The conference will be held in Westminster, London, with speakers from Fireblocks, Chainalysis, Cardano and beyond.

JP Morgan Chase and Morgan Stanley earnings calls are on Thursday. JPM’s estimated average EPS is $2.80, an increase of 6% from the prior quarter. MS’ estimated average EPS is $1.62, down 21% from the prior quarter.

Earnings calls from BlackRock and Citigroup are scheduled for Friday. BLK’s estimated average EPS is $9.12, down 4% from the prior quarter. C’s estimated average EPS is $1.63, down 19% from the prior quarter.

Goldman Sachs’ earnings call is scheduled for next Monday. GS’s estimated average EPS is $7.45, down 31% from the prior quarter.


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