In 2019, a group of fintechs with names like Dave and Varo stood poised to disrupt the U.S. banking giants. Built around a digital-first strategy that didn’t require branches and tellers, the upstarts looked like the wave of the future—until then stumbled badly in the face of a shifting economic and regulatory climate. One of these fintechs, or neo-banks if you prefer, found a way to defy this broader trend: Today, the San Francisco-based startup Upgrade is sitting pretty with a diversified line of businesses and a fresh infusion of capital.
On Thursday, Upgrade announced it has raised $165 million in a Series G funding round led by Neuberger Berman Funds, and that it now has 7.5 million customers across its various offerings, which range from checking accounts to loans to buy-now-pay-later service Flexpay.
In an interview with Fortune, founder and CEO Renaud Laplanche explained that Upgrade managed to thrive during a broader reckoning for neo-banks because of product diversification and a focus on loans, which can offer a far greater margin than transaction payments.
One of Upgrade’s most popular products is a loan offering that lets customers refinance credit cards—a useful service for those who fall behind on Visa or Mastercard bills and find themselves repaying at rates well over 20 percent. For Upgrade, the business model entails underrating these loans, and then selling them on to other financial organizations in batches grouped by risk: the company might sell a bucket of safe loans to a community bank, and then sell a risker portfolio to a large private equity firm looking for higher yield.
Upgrade, which has customers in all 50 states, has also found a niche in buy-now-pay-later. Specifically, the company provides its Flex Pay product to the likes of United Airlines and big cruise ship offerings.
These sort of partnership arrangements has also helped Upgrade limit customer acquisition costs since the travel companies serve as a marketing vehicle. At the same time, Upgrade has also found a cheap way to grow by cross-selling customers on its other services. It might, for instance, offer an auto loan to one of its checking account customers.
All of this means that Upgrade has products like loans that perform well when times are good, but also ones like home improvement loans that do well when the economy turns choppy.
“It’s helpful to have products that are not correlated, which is good for different market conditions,” said LaPlanche, who said Upgrade has been cash flow positive over the past three years, and is planning to go public in 12 to 18 months.
Other investors in Upgrade’s Series G fundraising round included LuminArx, and existing shareholders DST Global and Ribbit Capital. On Thursday, the company also announced that Peter Sterling, Head of Specialty Finance at Neuberger, is joining its board of directors.
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