Twelve years ago, LendingClub Founder Renaud Laplanche built a business to help consumers manage the $800 million in outstanding credit card debt. That product was an unsecured personal loan that consolidated the debt into a lower interest option with fixed monthly payments.
Today (Oct. 10), with the launch of the Upgrade Card (issued by Upgrade, a consumer credit platform founded by Laplanche in 2017 that offers affordable personal loans and cards, with credit monitoring and education tools that help consumers better understand their credit), Laplanche has set his sights on disrupting the industry that LendingClub disrupted more than a decade ago. The Upgrade Card is tied to a line of credit that can be used everywhere that Visa cards are accepted.
However, unlike traditional credit cards, the Upgrade Card turns outstanding balances at the end of each month into installment payments that help consumers pay off those balances over a fixed period of time. Rather than reward consumers for spending, they are rewarded for making payments — 1 percent for each payment made. Interest rates on the Upgrade Card range from 6.49 percent APR to 29.99 percent APR.
“Issuers want the customer who keeps their balance high, and who keeps paying interest on that balance for decades,” Laplanche told Karen Webster shortly before the launch announcement. “[They] are not really [incentivized] to do much about this, and, in fact, reward people for spending money — sometimes money that they can ill-afford to spend, and could struggle to repay in full.”
The traditional weapon of choice for consumers to get out from under that debt load has been the low-cost installment loans, which remain the bread and butter of the LendingClub business. By some measures, the introduction of installment lending has been a resounding success. Between LendingClub and Upgrade, Laplanche has founded firms that have refinanced over $50 billion in consumer credit card debt.
A solid-enough-sounding number, Laplanche told Webster, until one realizes the tiny drop in the bucket it is compared with the vast ocean of outstanding credit card debt in the U.S. The $800 million target in 2007 has swelled to more than $1 trillion — buoyed today by a confident and employed consumer, and a strong economy.
“This problem has literally gotten $250 billion worse than where it was when I set out to solve this problem,” Laplanche said.
Building The Best Of Both Worlds
Laplanche explained that the world of mainstream consumer credit is largely divided between two products: credit cards and installment loans.
General-purpose credit cards are extremely easy to use, whenever and however one wants to use them — there are very few places in the world where a card is not an option. The downside is that they can also trap users into an extended cycle of debt through minimum payment options that finance balances at a high interest rate.
Installment loans, as they are being offered today, encourage more responsible consumer behavior. Decisions about creditworthiness are based on affordability, and repayment options are spread over a fixed period of time. So, instead of letting a buyer pay down a minimum balance every month that gives the illusion of making progress in paying off their debt, installment loans are structured so that purchases are paid off in three, six or 12 months. The downside here, Laplanche noted, is that they aren’t that convenient to use when consumers are out and about doing their shopping, particularly when the customer must reapply for a new loan every time they want to buy something.
“The question we asked ourselves at Upgrade is how we could come up with the best of both products,” Laplanche said. “That’s when we realized we wanted to reinvent the credit card.”
The Upgrade Card
For the consumer, the Upgrade Card will work much like any other Visa-branded card in their wallet. A credit line will be given to the customer, who will use it to pay for their purchases at the physical or virtual point of sale. Payment credentials are fully tokenized, and can be used in either the Apple Pay or Google Pay wallets.
Behind the scenes, the Upgrade Card acts as an installment loan product. At the end of each month, outstanding balances are converted to monthly installment payments. That term could be as short as six months or as long as 36 months, depending on the balance. As each payment is made, the consumer’s credit line is increased by that amount.
There are no late fees or origination charges, and there is no uncertainty about how much interest is accruing month to month. If a consumer wants to pay the balance in full at the end of the month, that’s great. If they want to pay off a six-month installment loan four months early, that’s great, too. The only thing they can’t do is not pay — and to incentivize repayment behavior, Laplanche said consumers are given a cash-back reward each time a payment is made.
“There are no rewards for spending, or spending more in certain categories. Instead, we give a customer 1 percent cash back every time they make an on-time payment,” Laplanche explained. “Our question is always, ‘How do we encourage people to do what is good for them — get out of debt, keep their balances paid down?’ No one needs to be encouraged to spend money. Spending money is easy and fun. Spending it responsibly — that takes some pushing.”
Pushing, but not pain. After seeing many consumers turn to LendingClub, and later to Upgrade, to refinance the credit card debt that got away from them, Laplanche said a new financial management tool was needed. It shouldn’t be the case that consumers are forced to choose between continually refinancing their debt every few years or be stuck paying off a $1,500 sofa over eight years at a high interest rate.
Telling people that they need to be better and more responsible hasn’t really worked either. Better than the advice people already know they should take are the tools that make it easy for them to live a financially responsible life. The bet Laplanche is making with the Upgrade Card is that giving consumers the functionality of a credit card when spending, and the functionality of an installment loan when repaying, will create more financially healthy consumers.
“Our initial idea went from how do we help people refinance their card balance to how do we just replace that card entirely,” Laplanche said. “And we think the way to do that is with a low-cost responsible product that they can use at any point of sale.”