The online consumer lender Upstart has laid off 20% of its staff amid persistent struggles to get enough funding from banks and the other purchasers of its loans.
The San Mateo, California, company is cutting about 365 jobs and suspending the development of its small business loan product “until macroeconomic conditions improve,” it said Tuesday in a securities filing.
Upstart is the latest financial technology company to announce layoffs. The fintech industry has been downsizing as interest rates have risen sharply and battered the sector’s model of cheap funding.
At Upstart, the layoffs are the second round of job cuts in two months. The San Mateo, California-based company laid off 140 employees in November. It now has about 1,500 employees, which a spokesman said is similar to where it was a year ago.
“In the current environment, where many lenders and credit investors have significantly reduced or paused originations, our cost basis no longer makes sense,” the spokesman said. “As difficult as this decision was, it was necessary to allow us to return to profitability while continuing to invest in our future growth. We’re extremely grateful for the many contributions of those leaving Upstart.”
Upstart uses artificial intelligence-based underwriting models to make loans — mostly to consumers with lower credit scores who are looking to refinance credit card debt.
In July, the company said it was seeing less demand from loan buyers, as banks and other investors turned more cautious, prompting its loan marketplace to become “funding constrained.” The challenges have continued, and Upstart is working on ways to get longer-term partnerships in place.
The online lender had been “aggressively growing into an increasingly risky environment,” Jefferies analyst John Hecht wrote in a note to clients. “This is the consequence of taking increasing amounts of risk and seeing challenged loan performance.”
Upstart’s main selling point to investors is that its AI models allow it better predict the risk of consumer defaults, which enables it to lend to borrowers whose lower credit scores might otherwise shut them out of affordable loans. But loan delinquencies and charge-offs on the firm’s loans have gone up faster than analysts expected.
The credit deterioration appears to be the result of the end of pandemic-era government stimulus programs and, for some loans, a “weakening of underlying borrower quality,” analysts at the ratings firm KBRA wrote in a research note Tuesday.
Upstart has made changes to its underwriting and raised its pricing, but it is “still too early to determine” the full impact of those adjustments, the KBRA analysts wrote. KBRA reviewed a $192.7 million securitization deal backed by Upstart loans.
Though the layoffs will lead to a financial hit of roughly $15 million, which includes severance costs, Upstart said it expects to realize $57 million in savings over the next 12 months. It also anticipates non-cash savings of roughly $42 million through 2025 tied to stock-based compensation.
The changes are aimed at “returning the company to profitability sooner than its prior trajectory,” Wedbush Securities analyst David Chiaverini wrote in a note to clients. But Upstart’s major challenge is that its “underwriting model has yet to be battle-tested” in a lengthy recession, he wrote.
“We fear that weakening delinquency and loss trends combined with macro-and geopolitical risks is leading to waning appetite from Upstart’s credit buyers and the securitization market,” Chiaverini wrote. “The biggest risk to Upstart, in our view, is its reliance on third-party funding, and this risk is exacerbated during recessions.”