Upstart Just Applied for a National Bank Charter After a Tough Quarter. Could That Change the AI Lending Story?

Upstart Holdings, a fintech company specializing in AI-powered credit evaluation, has submitted an application for a national bank charter in the U.S. The company, which uses machine learning to assess borrowers beyond traditional credit scores, currently operates as a middleman, selling loans to institutional investors after underwriting them through partner banks. By securing a charter, Upstart plans to transition into direct lending, reducing reliance on wholesale loan sales and tapping into cheaper deposit funding while retaining loans for longer to earn interest. The shift could lower Upstart’s funding costs and strengthen its balance sheet, as deposits typically offer banks cheaper capital than loan resales. The company envisions becoming 'the first bank built from the ground up on AI,' embedding its predictive models into core banking operations. However, the move also introduces regulatory hurdles and competition from established digital banks like SoFi Technologies and Nu Holdings, which recently received its own U.S. bank charter using AI-driven credit models. Upstart’s stock has struggled this year, down 33%, partly due to market skepticism over its loan-holding strategy and macroeconomic pressures. The bank charter application signals a pivot toward self-sustained lending, but success depends on navigating regulatory approval and differentiating itself in a crowded digital banking space. Analysts note the move could either revitalize Upstart’s growth narrative or complicate its transition if execution or competition proves challenging. The company’s AI platform has historically attracted investors for its ability to identify high-quality borrowers more accurately than traditional credit scoring. However, its decision to retain some loans on its balance sheet raised concerns, leading to funding rounds like a recent $1.25 billion deal with Fortress Investment Group to offload consumer loans. With the bank charter, Upstart aims to eliminate this dependency, though the path to profitability remains uncertain amid broader economic uncertainty.