Upstart’s Loan Conversion Rate Jumps 70.3% After Calculation Modification
Artificial intelligence (AI) lending platform now excludes certain loan applications from key metric calculation.
November 12, 2021
Even after losing a third of its value following its most recent earnings announcement, Upstart Holdings (UPST), a cloud-based lending platform that uses AI to automate loan approvals, is still up 503.7% this year. In its latest 10-Q, Upstart revealed it has changed the way it calculates its loan conversion rate, or the number of loans issued divided by the total number of loan applications received:

“Until June 30, 2021, Conversion Rate considered all rate inquiries received on our platform. In the third quarter of 2021, we modified our calculation of Conversion Rate to remove what we believe to be fraudulent loan requests from the total number of rate inquiries received to better reflect actual borrower behavior.”

The change resulted in a significant increase in Upstart’s conversion rate for the quarter and the prior nine months. In the past three months, Upstart’s conversion rate increased to 23%, up 70.37% from the old calculation method. In the past nine months, Upstart’s conversion rate increased to 23.3%, up 31.63% from the old calculation method.

The calculation modification, the company suggests, isn’t a creative way to polish a key metric. Later in the filing, Upstart reveals what prompted the change:

“In the third quarter of 2021, we experienced a large and coordinated fraud attack. While the attack had no significant impact on our financial results, our borrower funnel conversion metrics were distorted by the volume of unsuccessful attempts to access loans. As a result, we modified our calculation of Conversion Rate to remove what we believe to be fraudulent rate inquiries from the total number of rate inquiries received to better reflect actual borrower behavior.”

The risk investors are taking in Upstart— aside from a valuation of approximately 20x next year’s sales— is the adjustment to the company’s algorithm that automates approximately two thirds of loans approved. In response to the fraud attack, Upstart made adjustments that may inadvertently prevent legitimate applicants from receiving loans:

“Additionally, in the third quarter of 2021, we made changes to our AI models in response to an increase in fraudulent activity on our platform. These changes, while effective at preventing fraudulent loans from being transacted, have resulted, and may in the future result in, a decrease in our Conversion Rate.”
Related: SYF, SOFI, WD, COPP, LU, GDOT, SII, LDI, BCOR
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