The pandemic has changed all kinds of things about consumers.
They’re more concerned for protecting their health, they’re working remotely, they’ve relocated most of their commerce lives online and on mobile — the list goes on and on. But perhaps the most interesting shift, Upgrade CEO and Co-founder Renaud Laplanche told Karen Webster, is how much more focused they’ve become about being financially responsible in these uncertain times.
“You’ve seen very responsible behavior from consumers since the start of the crisis — the rise of credit debt being paid down,” Laplanche said. “We’ve seen a lot of prepayments, credit default rates coming down and savings rates going up quite a bit. Yes, there have been a lot of government incentives that have enabled this, but we easily could have seen that money move differently. Subsidies often go toward more spending, not savings.”
And that newfound love of saving and spending more responsibility has been good for Upgrade, a neobank that offers qualified consumers access to loans and Visa card products that carry low-interest rates (currently about 6.6 percent) and are designed differently from the average piece of plastic.
The Upgrade card isn’t a revolving credit product like most of its competitors. Instead, it offers installment-style payments — equal amounts paid monthly over a set term, usually 24 months.
And, as of this week, Upgrade is rolling out its first rewards program. But like the card that it’s attached to, the program offers consumers incentives to spend responsibly rather than just spend more money.
“Our goal is to bring a product that truly develops and continues to encourage a more responsible use of credit where you don’t get rewarded for spending more,” Laplanche said. “You get rewarded for doing what is good for you, and what you should be doing in any case — [paying down] your balance regularly.”
Serving A Changing Consumer Need
While many firms in the lending and cards business have suffered in 2020, Laplanche said Upgrade has actually had a great year, with 100 percent growth over the past 12 months.
He admitted some of that is luck tied to Upgrade’s customer base. It’s mostly white-collar bridge millennials — a group not generally hit hard by the economic chaos the pandemic has unleashed on entrepreneurs and blue-collar/service workers.
The average Upgrade customer is around 42 years old, earns $95,000 to $132,000 a year, has a mortgage, a credit score of 700, maybe a car loan and one or two other credit cards in their wallet.
“We tend to be very underrepresented among the hourly workers in some of the hardest-hit industries and people are earning less than $40,000 annually,” Laplanche said. “They’ve been economically impacted a lot more than others, [but] we don’t see a lot of that population in our customer rolls.”
But Webster pointed out that even though Upgrade’s clients haven’t generally been hit the way other consumers have, a shock as big as COVID-19 is going to change consumer behaviors more broadly.
Laplanche agreed and said that’s why Upgrade is rolling out its new rewards offering. The program gives consumers 1.5 percent cash back on purchases, paid out as customers progress through their installment payments.
“We’re rewarding our customers for doing what’s good for them — paying down their balance,” he said.
Expanding Installment Loans’ Footprint
Installment loans and financing like what Upgrade offers are often written about like they’re a new idea, but Laplanche said they really aren’t.
In fact, he said that a lot of consumer-lending products started out as installment loans designed to help customers better manage household finances.
“But then the credit cards came around and convinced people to get on that revolving credit treadmill that never stops,” Laplanche said.
However, he said consumers have been increasing catching on to the fact that they often wind up on a treadmill of debt and are looking for ways to get off (or not step on in the first place). That has powered installment lending’s steady growth worldwide over the past few years.
Laplanche said Upgrade sees its offering as an improvement to the model, attaching it to a Visa-branded card so that installment payments become an option that consumers can use pretty much anywhere they want to shop.
And it’s an option that Laplanche said consumers are tapping into more and more. While a previous Upgrade use case revolved around customer using the product for big-ticket purchases, that’s now shifting.
Laplanche said consumers are putting more of their everyday spend onto the neobank’s cards and folding it into their installment payments. They’re using the cards more often, and for a much wider array of goods.
Laplanche said that speaks to the fact that changes we’re seeing across the board might have started as responses to the pandemic but are increasingly transforming into the new normal.
He said he believes employees will go back to offices someday, but that work from home will become a much more standard part of everyone’s workweek. Similarly, Laplanche said he expects shopping digitally instead of physically will likely take root among many more customers.
Lastly, he said he thinks the idea of consumers better controlling their spending and financial lives will be more than a flash in the pan brought on by today’s extreme economic situation.
“I think we’re building a better industry with what we are doing to make installment payments more widely available, and I think it’s going to be a trend that continues to pick up steam,” Laplanche said.