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The Federal Reserve is widely expected to cut the federal funds rate on Wednesday. If, and when, a rate cut occurs, one fintech stock is uniquely positioned to benefit from it – Upstart Holdings (Nasdaq: UPST).

Upstart is a fintech that deploys AI to handle loan requests. Upstart’s AI technology uses more than 1,000 data points to assess a loan application. It also features risk-based pricing, so those requests considered to be lower risks will pay lower rates. Most of its loan requests are approved instantly, without the need for human intervention, saving the customer time and the company money.

Upstart offers this platform-as-a-service to banks, credit unions, and other financial services firms to streamline and automate their loan processing. These bank customers pay Upstart fees for the platform and servicing the loans.

Here’s why rate cuts will benefit Upstart.

The benefits of lower rates for Upstart

Upstart is generally sensitive to macroeconomic forces and high interest rates in general. Because it is not a lender, Upstart does not generate interest on its loans, like traditional banks. Its revenue comes almost entirely from fees.

So, when interest rates are higher, loan activity tends to slow down. That can be okay for a traditional bank, because even though loan activity may be slowing, the bank is making more interest on its loans. But that’s not good for Upstart.

Upstart thrives on higher loan activity, because each loan that is made on its platform generates fee revenue. So lower interest rates will likely lead to more consumers and businesses taking out loans, which is good for the economy, and for Upstart.

Lower rates could also lead to new clients for Upstart. Some of its customers are fintechs or non-traditional banks that rely on third party lenders. But when rates are high, fintechs are less likely to enter into third-party loan agreements because the higher rates squeeze their profit margins. But with lower rates, conditions are more favorable for fintechs, and they, in turn, may benefit from a service like Upstart’s.

Crazy volatility

Upstart has had a wild ride since it went public in late 2020. It enjoyed crazy growth in the post-COVID technology rally, fueled by its innovative AI model Its share price soared to around $400 per share.

But then it burst along with the tech bubble and when the Fed started raising rates, its business slowed. By the spring of 2022, it was trading at around $15 per share.

Since then, its business has slowly stabilized and returned to profitability. In the most recent quarter, Upstart generated net income of $5.6 million, up from a $55 million net loss in the same quarter a year ago.

This year, Upstart stock is up a solid 9% and it has a median price target of $81.50 per share, suggesting 21% upside. With a return to profitability and the likelihood of lower rates, Upstart is in a great position to grow.

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