banking and lending in the us: a market overview

Banking Industry OverviewSectors, trends, and disruptionsAugust 2015

Banking Overview

S&P 500 Breakdown

S&P 500 Finance0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Consumer

Energy

Finance

Health Care

Industrials

Information Technology

Materials TelecomUtilities

Banks

Capital Markets

Consumer Finance

Diversified Financial Services

Insurance

Real Estate

19.4 T 7.3 T

Source: Fidelity Investments 2015

The financial industry enables capital to flow through the economy. Banks are the largest industry within the finance sector – which comprises around 20% of the S&P 500 by market capitalization.

3

Role of BanksBanks serve an essential role as middlemen between those who have money (lenders) and those who need money (borrowers).

Fund SourcesLenders and savers with

funds to invest

Businesses

Households

Government

Foreigners

Uses of Funds

Businesses

Households

Government

Foreigners

Borrowers and spenders in need of fundsPrimary route to transfer funds from lenders to borrowers

Financial Intermediaries

Financial IntermediariesBanks, S&L Associations, Credit Unions,

Finance Companies

Loans

Investments

Consumer Lending Business Lending

Stocks Bonds

Securities Foreign Currencies

Credit Cards Education Finance

Mortgage LendingPurchase Finance

Foreign Currencies

BondsSecurities

Credit Cards Purchase Finance

Business Loans

4

Categories of Banks

Full-Service Banks Community Banks

Direct Banks

Community banks specialize in serving specific communities with under $1 billion of aggregate assets. Community banks have a limited product offering and do not fall under the same federal regulations as full-service banks. Community banks therefore are able to supply loans to lower account value customers.

Direct banks offer products and services through online and telephone banking. Regulations vary depending on the business model of the virtual bank (e.g. peer-to-peer lending, savings accounts, consumer credit). Cost efficiencies due to their lack of physical branches are typically passed onto consumers through lower interest rates and fees.

Credit Unions

Traditional full-service banks comprise 85% of the market by assets. Full-service banks can be segmented into large banks and mid-sized banks. Large banks typically offer both commercial banking and investment banking services. While full-service banks benefit from economies of scale, the costs to underwrite loans are notably high – resulting in banks focusing heavily on high value opportunities.

Credit unions are member-owned depository and lending services organizations. Credit unions vary in size and geographic reach. Credit unions have less expansive product lines and offer limited online/mobile services when compared to full-service banks. Credit unions are non-profit organizations that seek to provide credit at competitive rates.

5

Banking Landscape – Banks by Size

0 500 1,000 1,500 2,000 2,500 3,0000

200

400

600

800

1,000

1,200

1,400

Assets ($B)

Depo

sits

($B)

The graph below displays the 30 largest US Banks by assets and deposits. Although there are about 6,400 chartered banks in the US, the top 4 institutions control roughly 50% of the assets held by banks.

Around 30% of the total assets held by banks are held by the next 25 largest banking institutions in the United States.

Sources: FDIC, Wall Street Journal 6

JP Morgan Chase

Founded 1799 Market Cap $253 B

Headquarters New York, New York Chief Executive Officer Jamie Dimon

Geographic Locations 60 countries Employees 241,145

1990 1995 2000 2005 2010 2015

1991 Manufacturers Hanover Corp. merged with Chemical Banking Corp

1995First Chicago Corp. merged with NBD Bancorp., forming First Chicago NBD

1996The Chase Manhattan Corp. merged with Chemical Banking Corp.

1998Banc One Corp. merged with First Chicago NBD

2000J.P. Morgan & Co. merged with The Chase Manhattan Corp.

2004Bank One Corp. merged with J.P. Morgan Chase & Co

2008JPMorgan Chase & Co. acquired The Bear Stearns Companies Inc.

2008JPMorgan Chase & Co. acquired the deposits, assets and certain liabilities of Washington Mutual's banking operations

2010J.P. Morgan acquired full ownership of its U.K. joint venture, J.P. Morgan Cazenove

J.P. Morgan and The Chase Manhattan group merged in 2000, creating JP Morgan Chase. JP Morgan Chase is the largest bank in the United States by assets, surpassing Bank of America in 2011. The Company provides services in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing and asset management.

7

Bank of America


Headquarters Charlotte, North Carolina Chief Executive Officer Brian Moynihan

Geographic Locations 40+ countries Employees 233,000

1990 1995 2000 2005 2010 2015

1992 BankAmerica acquires Security Pacific Corporation

1994BankAmerica acquires Continental Illinois National Bank

1997BankAmerica acquires Robertson Stephens

1997NationsBank purchases BankAmerica; merged bank takes name of Bank of America

2004Bank of America purchases FleetBoston Financial

2005Bank of America purchases MBNA

2006Bank of America acquires The United States Trust Company

2007Bank of America acquires LaSalle Bank

2008Bank of America purchases Countrywide Financial

2009Bank of America purchases Merrill Lynch

2014Bank of America sells 2 dozen branches to Huntington Bancshares and begins downsizing retail banking branches

Bank of America is the second largest bank in the United States. Between 2004 and 2009, Bank of America vastly increased in size through a series of acquisitions – most notably the purchase of Merrill Lynch during the financial crisis. The bank provides individual consumers and businesses a full range of banking, investing, asset management and other financial and risk management products and services.

8

Citigroup


Headquarters New York, New York Chief Executive Officer Michael Corbat


1995 2000 2005 2010 2015

1997 Travelers Group purchases Solomon Brothers

1998Travelers Group and Citicorp merge, creating Citigroup

2000Citigroup purchases Associates First Capital Corporation

2001Citigroup acquires European American Bank

2001Citigroup acquires Banamex

2002Citigroup spins off Travelers Property and Casualty Insurance

Citigroup was formed through the merger of Travelers Group and Citicorp in 1998. The company is a financial services holding company offering consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services, and wealth management. Citigroup experienced significant financial difficulties during the 2008 subprime mortgage crisis, and remained unprofitable until 2010. In 2012 and 2014 Citigroup failed its Federal Reserve stress tests.

9

Wells Fargo


Headquarters San Francisco, California Chief Executive Officer John Stumpf


1996 Wells Faro acquires First Interstate Bancorp

1998Wells Fargo merges with Norwest Corp

2000Wells Fargo acquires National Bank of Alaska

1995 2000 2005 2010 2015

2000Wells Fargo acquires First Security Corporation

2001Wells Fargo acquires H.D. Vest Financial Services

2007Wells Fargo acquires CIT Construction

2007Wells Fargo acquires Placer Sierra Bank

2007Wells Fargo acquires Greater Bay Bancorp

2008Wells Fargo acquires United Bancorporation of Wyoming

2008Wells Fargo acquires Century Bancshares of Texas

2008Wells Fargo acquires Wachovia Corporation

2009Wells Fargo acquires North Coast Surety Insurance Services

2012Wells Faro acquires Merlin Securities

Wells Fargo is the fourth largest bank by assets and the largest bank by market capitalization. The company is a financial and bank holding company with three operating segments: Community Banking, Wholesale Banking and Wealth and Brokerage and Retirement.

10

Financial Stability Oversight Council (FSCOC)

Federal Reserve Board (FRB)

Office of the Comptroller of the Currency (OCC)

Federal Deposit Insurance Corporation (FDIC)

Securities Exchange Commission (SEC)

Commodities Futures Trading Commission (CFTC)

Consumer Financial Protection Bureau (CFPB)

Other

Supervises and regulates the Federal Reserve Banks, is responsible for the US’ payment system, administers many of the US laws regarding consumer credit protection, and supervises banking institutions and banking activities

Major Regulatory Bodies Identifies risks to US financial stability, promotes market discipline, and responds to emerging threats to the stability of the US

financial system

Independent office of the US Department of the Treasury that charters, regulates and supervises all national banks and supervises the federal branches and agencies of foreign banks

Independent federal agency created by Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits at banks, examining and supervising insured institutions for safety, soundness and consumer protection issues, and managing receivership of failed or failing depository institutions

Federal agency created to administer the Securities Exchange Act (1933 & 1934), the Investment Company Act (1940), and the Investment Advisers Act (1940)

Regulates the commodity futures and options markets in the US and is responsible for the regulation of securities futures

An independent bureau that assumed regulatory and supervisory authority over most federal consumer protection laws

National Credit Union Administration, Federal Housing Finance Agency, Office of Financial Research, Federal Insurance Office (FIO)

11

Major Banking Legislation

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

The Act implemented changes affecting the oversight and supervision of financial institutions. It also provided the FDIC with new resolution powers for large financial companies, created a new agency (the Consumer Financial Protection Bureau), introduced or codified more stringent regulatory capital requirements, and set forth significant changes in the regulation of derivatives, credit ratings, corporate governance, executive compensation, and the securitization market.

Sarbanes-Oxley Act (2002)

Sarbanes-Oxley established the Public Company Accounting Oversight Board to regulate public accounting firms that audit publicly traded companies. The Act authorized the Securities and Exchange Commission (SEC) to issue rules governing audits and to mandate various studies. The SEC mandated a study of the involvement of investment banks and financial advisors in the bookkeeping and recordkeeping scandals that motivated enactment of the legislation.

Financial Services Regulatory Relief Act (2006)

Authorized interest payments on balances held at Federal Reserve Banks, increased the flexibility of the Federal Reserve to set institution reserve ratios, extended the examination cycle for certain depository institutions, reduced the reporting requirements for financial institutions related to insider lending, and expanded enforcement and removal authority of the federal banking agencies, such as the FDIC.

Fair and Accurate Credit Transactions (2003)

The Fair and Accurate Credit Transactions (FACT) Act contains amendments to the Fair Credit Reporting Act designed to improve the accuracy and transparency of the national credit reporting system, to prevent identity theft, and to assist victims.

Truth in Lending Act (1968)

The Truth in Lending Act requires full disclosure of terms and conditions of extended credit. In 2011, authority to implement the act was transferred from the Federal Reserve Board to The Consumer Financial Protection Bureau. A majority of the requirements imposed by the Truth in Lending Act are implemented by Regulation Z, which requires lenders to disclose all the specific terms of a loan.

Basel III (2010)

A global regulatory framework for capital adequacy, stress testing, and market liquidity risk. In 2011, the US Federal Reserve announced that it would implement Basel III guidelines.

The financial crisis highlighted the need for greater regulation of financial institutions. Recent legislation has focused on increased government oversight and more stringent capital requirements.

Source: FDIC12

Drivers of Change in the Banking Industry

Regulation Consumer Preferences

Technology Economy

Automation of services has increased the lending capabilities of financial institutions

Companies are spending larger portions of their budget on IT, with the hopes that reductions in operational costs will follow

The overall health of the economy has a profound effect on the financial industry, as the demand for capital is directly impacted

Monetary policies are designed to incentivize consumer behavior given the goals of the Federal Reserve

Increased regulation has increased the need for banks to be able to aggregate and analyze data across the organization in a timely manner

Elimination of certain lending practices has shifted the product mix of the market

The influx of millennials into the market has increased the demand for mobile and web based lending platforms

Consumers are demanding increased flexibility and visibility into managing their finances

Drivers for Change Evolving Banking Landscape

Number of Banks in the Industry

Unbundling of Services

Increased regulation has put additional pressures on companies unable to scale and achieve operational efficiency – leading to a reduction in the number of players in the industry

Jan-84 Jan-94 Jan-04 Jan-140

5,000

10,000

15,000

Regulation has created opportunities for companies that do not qualify as banks

Companies specializing in specific segments of the market are leading to the unbundling of services in financial institutions

Deposits

Money Transfer

Wealth Management

Payroll

Credit Decisioning

Loan Origination

13

American Express

JP Morgan

Bank of America

Capital One

Citi

Discover

US Bank

Other

Advance America

Check 'N Go

Check Into Cash

ACE Cash ExpressCash AmericaQC Holdings

Dollar FinancialEZCORP

Other

Ally

Wells Fargo

JP Morgan

Capital OneToyota FSFord MCC

Honda FinanceBank of America

Other

JP Morgan

Bank of America

Wells Fargo

US Bank

Citi

Capital One

Other

Sallie MaeWells Fargo

Citi

Other

Government

Wells Fargo

US Bank

JP Morgan

Bank of America

Quicken

Other

SMB CreditEducation Finance

Banking Landscape – Market Share by Industry Sector

Consumer CreditReal Estate Purchase Finance Payday Lending

Banking

Source: Thomvest Research Estimates 14

Banking Landscape – Industry Sector Magnitude by Annual Loan Volume

15

SMB CreditEducation Finance Consumer CreditReal Estate Purchase Finance Payday Lending

Wells Fargo

US Bank

JP Morgan

Bank of America

Quicken

Other

$1.8 T

Other

GovernmentJP Morgan

Bank of AmericaWells Fargo

US BankCiti

Other

$143 B

$400 B

$173 B

$547 B

$27 B

Banking Landscape – Industry Sector Magnitude by Debt Outstanding

16

SMB CreditEducation Finance Consumer CreditReal Estate Purchase Finance Payday Lending

Wells Fargo

US Bank

JP Morgan

Bank of America

Quicken

Other

Government Other

JP MorganBank of AmericaWells Fargo

Other

American ExpressJP Morgan

Bank of America

Other

$10.8 T

$1.1 T $924 M$889 M $594 M

$30 M

LendingReal Estate – Residential Mortgages

Residential Mortgages Overview

Annual Loan Volume

Dec-99

Dec-05

Dec-11

Dec-17

Dec-23

Dec-29

Dec-35

Dec-41

Dec-47

Dec-53

Dec-59

Dec-65

Dec-71

Dec-77

Dec-83

Dec-89

Dec-95

Dec-01

Dec-07

Dec-13

$0

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

$14,000,000,000

Outstanding Single Family Mortgage Debt Multifamily residence outstanding mortage debt

Outstanding Mortgage Debt

Debt Outstanding $10.8 T

63%Regular or home equity mortgages

Reverse mortgages1% 36% Owned free

and clear

Customer Base

U.S. Under 35 35-44 45-54 55-64 65+0%

20%

40%

60%

80%

100%

Homeownership Rates

750+57%

700-74926%

621-65913%

Under 6204%

Chart TitleClosed Loans by Credit Score

Home ownership rates have remained relatively stable over the past 20 years

There has recently been a dip in homeownership among millennials – potentially due to the burden of student loan debt

Gen Y comprises the largest share of home buyers (31%), followed by Gen X (30%)

76% of first-time buyers are Gen Y 88% of recent home buyers sought

financing. Nearly all (97%) of Gen Y buyers get financing

66% of home buyers are married couples 44% of people buying a home previously

rented an apartment or house

Source: US Census Bureau 2015

Source: Freddie Mae Source: National Association of Realtors 2014

Source: US Census Bureau 2015

Source: Federal Reserve 2015

$1.8 T1

1. Projected based on New York Fed 2013 Q4 data

Source: New York Fed 2013, Federal Reserve 2015

Industry Size

Housing is the number one expense in the United States. Homes are the largest individual purchase most Americans will make in their lifetime. Mortgage financing increases the liquidity of the market through providing consumers with funding options.

18

Residential Mortgages – Trends in the Industry

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-130

2

4

6

8

10

12

Freddie Mac Loan Originations (M) Unemployment Rate (%)

1

2

3

4

Fintech Startups

1

2

3

4

Demographics drive demand

Interest rates impact affordability

Government can incentivize homeownership

Real estate prices follow the economy

Age, income, immigration, and culture drive distinct needs in real estate demand

Interest rates affect the cost of financing real estate – increasing or decreasing the availability of capital

Through taxes and subsidies the government can alter the opportunity costs of investing in real estate and encourage or discourage homeownership

Real estate prices are determined by the macro and local economies. Spikes in unemployment and dips in GDP increase supply and lower demand for real estate

Job growth is having a larger impact on housing prices than before

Real estate prices rebounded and have slowed in growth

Construction of single-family homes has been slow to recover

New houses are staying on the market for less time

Across the 100 largest metro areas, the correlation between job growth and home prices is strong and growing, at .56 in 2015 compared to .25 in 2012

New single-family home construction remains at about 50% of pre-bubble levels and will take around a decade to recover given current growth rates

Strong gains in home prices in 2012 and 2013 have since slowed, as the supply of lower-priced foreclosures has declined

A new house currently stays on the market for less than 5 months, down from nearly 15 months in 2009

San Francisco, CA

Series C

Online real estate lending platform matches borrowers and investors through its marketplace – utilizing technology to speed up the process and drive data supported credit decisioning and pricing.

Sources: Federal Reserve St. Louis 2015, Freddie Mac 2014, Bureau of Labor Statistics 2015

Sources: Wall Street Journal 2015, Trulia 2015

TrendsKey Concepts

Realty Mogul is a marketplace for accredited investors to pool money online and buy shares of pre-vetted investment properties.

Los Angeles, CA

Series B

Realty Mogul

19

LendingEducation Finance

Education Financing Overview

Federal Loans Private Loans

83%Outstanding Debt

is Government Owned

0%100%200%300%400%500%600%700%800%900%

1000%

CPI Gasoline Healthcare College

Since the 1980’s, the cost of higher education has risen over 1000%

More people are attending college than ever before, and the cost of education is higher than ever before.

21,000,000College Students

Average Tuition of $19,339/Year

Average Debt of $29,400/Borrower

Federal LoansStafford and Perkin Loans Loans made directly to students

regardless of credit history No payments while enrolled Subject to loan forgiveness under the

Higher Education Opportunity Act of 2008

PLUS Loans Loans made to parents – higher limits,

payments start immediately, credit history considered

Parents liable for repayment of loan

Private LoansSchool-Channel Loans Loans ‘certified’ by the school and

disbursed through the school

Direct-to-Consumer Private Loans Student provides enrollment

verification to the lender and the loan is disbursed to the student

Higher interest rates than federal loans

Dependent on credit score

Subject to origination fees Terms vary lender-by-lender

Loans and grants are the two primary sources of financial aid for higher education. Grants however, are not a full substitute for loans – as graduates who received Pell Grants are much more likely to borrow. 70% of graduates from public and non-profit institutions currently graduate with debt.

Industry Size

Annual Loan Volume Debt Outstanding

Sources: Institution of Education Sciences 2014, College Board 2014

Source: Center for American Progress 2012

Source: American Progress 2012

$1.1 T$143 B1

1. Thomvest Estimate: (number of college students) / 4 * average debt per borrower

Industry Size Products

21

Private Education Financing – Trends in the Industry

Private Loan Originations ($B) Trends

Fintech Startups

Total Loan Originations

Sallie Mae Wells Fargo Citi Bank of America

JP Morgan Other

72.7

21.0

10.75.9

4.9 3.5

26.7

Private loan volume is increasing Around 50% of borrowers could be using more affordable federal loans Since 2008, lenders have rapidly increased the share of loans with co-signers Most states are funding schools less than before the recession Marketplace lending has gained some traction due to lower interest rates

than traditional private loans Cumulative defaults on private student loans exceed $8 billion, and

represent over 850,000 distinct loans

SoFi utilizes a social finance business model in which investors finance school-specific funds. SoFi considers employment history, income, credit rating, and education when determining rates for refinancing – enabling the company to provide interest rates below those of federal loans.

Upstart is a peer-to-peer lending platform that offers income sharing agreements and traditional 3-year loans. Upstart uses an income-prediction model which considers students’ college, major, GPA, and standardized test scores to predict students’ ability to repay.

Regulation

CFPB oversees the loan servicing of large banks and has proposed rules to for the organization to supervise any nonbank student loan servicer that handles more than 1 million borrower accounts

CFPB states borrower concerns include: Confusion regarding the terms of the loans and conflicting instructions

from loan servicers Inadequate servicing where borrowers are transferred to multiple

departments and the staff lacks knowledge regarding the loan products Inadequate processing of payments and paperwork leading to errors

and fees

San Francisco, CA

Series D

Palo Alto, CA

Series C

Private loans traditionally had higher interest rates and less favorable terms than government loans, although this is changing with the advent of recent online lenders.

Source: Consumer Financial Protection Bureau 2012Source: FinAid 2009

22

LendingPurchase Finance – Auto Lending

Auto Loan Overview

Industry Size Customer Base

$924 B

Wells Fargo

Ally

Capital O

neChase

Toyota FS

Ford MCC

Honda Finance

Nissan In

finiti FS

Chrysler C

apital

Santander0%

2%

4%

6% 5.8%

5.0%

4.3% 4.3% 4.1%

3.3%3.0%

2.5%

1.9%1.7%

The top 10 lenders make up over 35% of the market; the top 20 lenders represent over 46% of all loans

Market Share of the Top 10 Retail Loan Lenders

$400 B

Source: Experian 2014

Sources: Federal Reserve, New York Federal Reserve, Forbes


New Car Loans Used Car Loans

35.8

10.2

18.5

9.4

17.9

12.4

10.1

12.0

2.8

10.2

Super Prime Prime Nonprime Subprime Deep subprime

Average Monthly Payment

85%

53.8%

Percent of Cars with Loans by Credit Score

Subprime and deep subprime borrowers make up 19.7% of the open auto loans

Average Credit Score 711 (new cars)644 (used cars)

$407

Average Loan $27,429 (new cars)$18,258 (used cars)

Average Term 35 months



Auto finance is the third largest consumer loan market after mortgages and student loans. After housing, transportation is the second largest household expense.

24

Auto Loans – Trends in the IndustryCharge-off Rate by Risk Segment

Deep subprime

Subprime Nonprime Prime Superprime Total

-1%

0%

1%

2%

3%

4% 3.8%

2.8%

1.6%

0.8%

0.1%0.6%

3.8%

2.5%

1.4%

0.7%

0.2%

1.0%

New Cars Used Cars

Vehicles with negative history (crashes, etc.) are 1.46 times more likely to be charged-off


Deep subprime Subprime Nonprime Prime Superprime

-5%

0%

5%

10%

15%

20%

25%

30%

1%5%

9% 8%12%

4%

2%

1% 0%

0%

1%

4%

6%6%

11%

1%

2%

5%4%

5%

5%

6%

2%

1%

1%

Bank BHPH Captive Credit Union Finance

Relative to market share, BHPH and Finance companies have a disproportionate number of deep subprime and subprime loans

Market Share by Risk Segment

Regulation

Toronto, ONSeries A

Austin, TXSeries A

DriverUp is the first online auto lending marketplace – enabling investors to directly participate in auto financing.

Financeit is a online lending platform that provides point-of-sale financing. Financeit offers flexible payment plans which help merchants increase close rates and transaction sizes.

Fintech Startups

In 2010 the Dodd-Frank Act created the Consumer Financial Protection Bureau, giving it power to overlook bank and credit union car lending. While the FTC and states have historically been responsible for regulating non-bank auto financing, little regulation had resulted. In September 2014, the CFPB issued proposed regulation to monitor nonbank institutions.

25

LendingConsumer Credit

Consumer Credit Overview

Industry Size

Credit cards are widely used across the United States. While growth in the number of credit cardholders has remained relatively stable, annual purchase volume has grown significantly over the past decade.

Cardholders (M) Purchase Volume ($B) Debt Outsanding ($B)0

500

1000

1500

2000

2500

159

$1,242

$680

156

$1,944

$886

160

$2,378

$870

2000 2009 2012*

Card-Issuing Bank: Issues the credit card to the consumer. Bank bears risk of fraudulent use and consumer default

Acquiring Bank: Accepts credit card payments on behalf of the merchant. Provides the merchant a line of credit to exchange funds with the issuing bank

Credit Card Association: Network of issuing and acquiring banks which handle payment processing

501 420 206 187 165 119 109

American Express JP Morgan Bank of America Capital One Citigroup DiscoverUS Bancorp

Credit Card Purchase Volume ($B) in 2013

$889 B

of Americans have at least 1 credit card

70%

Millennials Generation X

Baby Boomers Seniors

1.57 cards/person

$2,682 balance/card

37%utilization

66%of all in-person sales are made with a credit card

7.5%of all consumer debt is

credit card debt

2.66 cards/person

$5,347 balance/card

30%utilization

1.9 cards/person

$3,044 balance/card

16%utilization

2.13 cards/person

$5,342balance/card

37%utilization


Source: Forbes 2014

Source: U.S. Census Bureau 2012

Sources: Census Bureau 2014, Javelin Strategy 2012, Nerdwallet 2015

1. Thomvest Estimate: debt outstanding * ( growth rate + 1/ estimated average life of line of credit)

$173 B1

* Projected value


Source: Philadelphia Federal Reserve 2014

Key Actors in the Industry

The multiple card issuer model is the most widely used framework in the credit card industry. It relies on a network of banks to facilitate payments. Some companies, such as American Express, act as both credit card associations and card issuers.

Customer Base

27

Consumer Credit – Trends in the Industry

Regulatory power over credit cards resides in many distinct organizations. The table below summarizes the responsibilities of the various regulatory bodies.

Federal Reserve Regulates credit cards issued by state banks that are members of the Federal Reserve System

Comptroller of the Currency

Regulates credit cards issued by banks with “national” in the name or “N.A.” after the name

Federal Deposit Insurance

CorporationRegulates credit cards issued by state banks that are not members of the Federal Reserve System

Office of Thrift Supervision

Regulates credit cards issued by federal savings and loan associations and federal savings banks

National Credit Union Administration

Regulates credit cards associated with federal credit unions

Federal Trade Commission

Regulates credit cards issued by finance companies or stores, and matters related to auto dealers, mortgage companies, and credit bureaus

The Credit CARD Act of 2009 is the most noted regulation of credit cards – which “establish[es] fair and transparent practices relating to the extension of credit under an open end consumer credit plan.”

Customers must be given

adequate time to pay bills

Companies must give 45

day notice when terms

change

Payments must be applied to the highest interest rate balances first

Restricts fees on low-balance

cards sold to borrowers with

bad credit

Eliminates excessive

marketing to persons under the age of 21

Mobile Payments

Integrated Circuit Credit Cards (Smart Cards)

Mobile payments appear to be poised to grow significantly. Mobile wallets store credit card information and reference the data when making a payment. A noted downside for credit card companies is the reduction of brand reinforcement through declining physical use of the card.

Integrated circuit cards are used to authenticate credit card transactions. Integrated circuit cards have increased security that pushes more of the liability of fraudulent purchases onto the merchant.

Fintech Startups

CoinSan Francisco, CA

Series A

Coin is a connected card that stores users credit, debit, gift, loyalty, and membership cards, eliminating the need to carry multiple cards

San Francisco, CASeries D

Stripe enables both individuals and companies to accept and process payments without setting up a merchant account with an acquiring bank

Regulation Trends

28

LendingSMB Lending

Small Business Lending Overview



SBA Loan

Business Credit Card

Merchant Cash

Advance

Government-backed loans to small businesses from private lenders

Revolving line of credit for business use

Cash advance in exchange for a percentage of future monthly sales

Providers: banks, credit unions, community banks, authorized lenders

Interest Rates: 6-8.5% (13% microloan)

Providers: banks, credit unions Interest Rates: 10-25%

Providers: specialty finance companies, community banks, card processors/ISOs

Interest Rates: 18-36%

Sources: Lendio, Thomvest Research

Accounts Receivable Factoring

The collateralization of accounts receivables as a basis for short-term loans Providers: specialty finance companies Interest Rates: 10-15%

1. Thomvest Estimate: outstanding debt * weighted average expected life of small business loans by amount2. Only considers business loans that have a state balance of $1M or less

594 B2

Source: FDIC 2015

547 B1

Business

Loan

Friends a

nd Family

Business

Credit Card

Personal L

oan

Personal C

redit Card

Supplier C

redit

Equpiment L

easing

Factorin

gOther

No Financing

0%

10%

20%

30%

40%

Firm Size (Employees) Number of Firms* Sales ($T)

<20 5,410,367 $4.0

20-99 532,391 $3.8

100-499 88,586 $3.6

500+ 18,311 $18.4

As loan amounts decrease, there is an increasing overlap between the use of business loans and personal loans (personal loans are used by more than 30% of small businesses).

SMB Sources of Financing

Sources: SBA, US Census Bureau, PPCMP capital markets report

Small businesses make up 99.7% of US employer firms and 46% of the private-sector output. Only about half of all new establishments survive 5 years or more, and about one third survive 10 years or more.

30

* Private sector establishments, 2012 US Census

SMB Lending – Trends in the Industry

Regulation

SBA 7(a) Business Loans Commercial Credit

Wells Fargo Bank, National Association Live Oak Banking Company JPMorgan Chase Bank, National Association

U.S. Bank National Association The Huntington National Bank Bank of America

US Bank Citibank Capital One

SMB loans are often unprofitable for large banks due to high servicing costs. SMB lending is thus dominated by smaller banks.

Loan Size 2009 ($B) 2010($B) 2011($B)<$100,000 $73.3 $56.8 $55.3

$100K to $1M $132.4 122.0 123.5

Total $205.7 $178.8 $178.8

Originations by Loan Size

Fintech Startups

The Credit CARD Act of 2009 only applied to personal credit cards, resulting in many business credit cards being non-compliant with the stated regulations

Small business credit has historically been subject to less regulation than personal credit

Atlanta, GASeries E

Kabbage offers small business loans through its online lending platform. Kabbage leverages data generated through business activity to understand performance and deliver financing options.

OnDeck is a financial platform that provides loan financing to small- and medium-sized businesses. The company aggregates data about a business’ operations to determine loan eligibility.

New York, NYPublic

Source: SBA Small Business Lending Study 2013

Sources: SBA 2015, Nilson Report 2014

By the fourth year of operation, about 60% of small business have credit cards. By the ninth year, 80% of small businesses have credit cards

49% of small-businesses use personal cards for business purposes Overall average days sales outstanding (DSO) is 44.5 days Three-quarters of businesses have an average DSO of greater than 30 days

Source: The Nilson Report, First Annapolis Consulting, Small Business & Entrepreneurship Counsel, NFIB

Top SMB Lenders Trends

31

LendingPayday


The average payday loan customer is 35 years old, makes around $38,000/year, and has a high school diploma and little or no college education.

<$25,000

$25,000 - $49,000

>$50,000

38Kannual salary

<35

35-44

45-54

55+

35 years old

<2 wks 3-4 wks 5-6 wks 7-8 wks 9-13 wks 14+ wks0

10

20

30

Length of Longest Sequence of Consecutive Advances in the Past 12 Months

Source: CFPB 2013

Source: Contemporary Economic Policy 2007

Payday Lending Overview

1. Thomvest Estimate: annual loan volume * (average days debt remains outstanding / 365) * (1 – default rate) * APR * (average days debt remains outstanding – average duration of loan / 365)

Size of Loan Median: $350 Average: $392

Interest Median: 322% Average: 339%

Fees $10-$20 per $100 borrowed

Product Substitutes Bank cards Pawn shops

Annual Loan Volume $27 B

The payday loan sector is fragmented and consists primarily of private companies

Debt Outstanding

Source: CFPB 2013

$30 B1

Source: Center for Responsible Lending

Products

Payday loans are unsecured short-term loans of nominal amounts made to consumers with the agreement that the borrower will repay the loan once a paycheck is received.

33

Trends

Payday Loans – Trends in the IndustryPayday loans have attracted the attention of regulators and consumer advocacy groups due to predatory lending practices of many lenders. Several startups have entered the space to provide consumers with safer and more affordable short-term loan options.

Regulation

Regulation Traditionally regulation has been left to the states, although the CFPB has recently issued proposed regulations.

28

8

15No payday loan storefronts

Restrictive

HybridSome restrictions on payday loansPermissiveAllow single loans with APRs >391%

State Regulation of Payday Loans

States that enact legal protections experience a large net decrease in payday loan usage - borrowers are not driven to seek payday loans online or from other sources.

Proposed Federal Regulation

Exit of Large Banks

Short-term Loans Determine ability-to-repay at the

front-end Limit rollovers to two series of three

loans, and no more than 90 days' total indebtedness in a twelve-month period

Long-term Loans Determine ability-to-repay at the

front-end For loans of $200-$1,000, offer terms

consistent with the National Credit Union Administration's small-dollar loan program

For loans of $500 or less, limit loan payments to 5% of the consumer's gross monthly income

Banks have been exiting the short-term loan business due to more stringent regulations.

Wells Fargo, US Bancorp and Regions Financial Corp stopped offering “deposit advance loans” – a product very similar to payday loans

Source: PEW Charitable Trusts 2012

Offers immediate payment for hours worked through proof of timesheet. No interest or fees charged on loans.

Palo Alto, CASeed

Move to Online Lending

Given the young demographic of the payday customers online lending has gained significant traction.

Fintech Startups

San Francisco, CASeries A

Offers small dollar loans and financial education through gamification.

Currently 27% of payday loan customers use online platforms to obtain loans.

34

Venture Financing

Market Cap Market Cap Growth VC Funding VC Funding Growth VC Deals Deal Growth

Finance $7.3 T 10.47% $13.7 B 45.83% 821 16.41%

Healthcare $4.99 T 25.72% $22.9 B 21.2% 2322 6.27%

Energy $3.65 T -17.77% $20.1 B 13.16% 469 -10.5%

Consumer Products $8.38 T 16.61% $3.03 B -49.01% 856 9.32%

Telecom $1.85 T -2.49% $30.5 B 216.34% 2542 16.29%

Internet

$6.11 T 17.36%

$57.2 B 80.88% 6324 9.89%

Hardware $4.64 B 16.12% 432 11.92%

Software $6.85 B 50.69% 895 46.48%

Venture Capital Activity

In 2014 venture capital funding reached its highest level since 2001, with $47.3 B invested across 3,617 deals. However the growth appears to be slowing, in Q1 2015 $11.3B was invested in 805 deals – the first drop in financing since 2011.

Source: CB Insights – Q4 2014 – Q1 201536

What Sectors are Hot?

Agricultu

re

Transporta

tion

Business

Products and Servi

ces

Computer Hardware and Servi

ces

Consumer P

roducts and Servi

ces

Electronics

Energy and U

tilities

Financial /

Fintech

Food and Beverages

Heathcare

Industrial

Internet

Leisure

Media / Adtech

Mining

Mobile &

Telecom

Retail

Securit

y

Software

EdTech

Green / CleanTech

0

5000

10000

15000

20000

25000

30000

35000

0

500

1000

1500

2000

2500

3000

Funding Deals

Fund

ing

($M

)

Num

ber o

f Dea

ls


Investments in internet, healthcare, mobile & telecom, and fintech account for around 55% of all venture capital funding in the past year.

37

FinTech Investing has Increased

2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q10

1,000

2,000

3,000

4,000

5,000

6,000

0

5

10

15

20

25

30

35

40

45

50

Funding Deals

Fund

ing

($M

)

Deal

s


In the past 5 years, both the number of fintech deals and the amount of capital invested have increased. The growth in funding has outpaced the growth in deals, suggesting that more investment dollars are going to later stage startups.

38

What’s Hot in Finance?

Funding Deals0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2330 72

670 5246

8447

14460

25

233534

218

167 16

Lending Retail Banking Credit Real EstateFinancial Management Insurance Investment Banking Payments


$ Billions

39

Notable Fintech InvestmentsNotable Investments NEA RRE QED Accel Ribbit Andreesen

Horowitz Kholsa Bessemer Sequoia Union Square Thomvest

Seed

Early Stage

Late Stage

Source: Crunchbase 40

Major 2014 – 2015 Milestones

Sept 2014Ebay announces PayPal spin-off

Oct 2014Apple launches Apple Pay

Feb 2015Google to acquire Softcard IP

May 2015Google announces Android Pay

May 2015Mastercard announces MasterCard Send

March 2015Northwestern Mutual to acquire LearnVest

April 2014Second Market launches regulated Bitcoin Exchange

Dec 2014Stripe raises $70 M Series C

Dec 2014Lending Club goes public

Nov 2014Powa raises $80 M Series C

April 2015Prosper raises $165 M Series D

Dec 2014Adyen raises $250 M Series B

Mar 2014OnDeck raises $77 M Series E

March 2015D+H acquires FUNDtech

Aug 2014Funding Circle acquires LeapPay

April 2015Funding Circle raises $150 M Series E

Feb 2015Betterment raises $60 M Series D

May 2015Affirm raises $275 M Series B

Dec 2014WeWork raises $355 M Series D

Feb 2014BBVA acquires Simple

Sept 2014Credit Karma raises $75 M Series C

Oct 2014Yodlee goes public

Oct 2014Square raises $150 Series E

M&A Venture Financing and IPOs Technology

May 2014Kabbage raises $50 M Series D

Jan 2015Coinbase raises $75 M Series C

New Unicorns New Fintech Funds

41

Fintech Sentiment

70% think that in five years the way we pay for things will be completely different

71% surveyed would rather go to the dentist than listen to what the banks say

73% are more excited by the offerings in financial services from web giants like Google, Amazon, Apple, PayPal, or Square than their own bank

What are millennials thinking?

What’s preventing mass adoption?

Customers express frustration with banks are but scared to put their money in new institutions. If fintech can win over the confidence of consumers, the financial services industry stands to lose $4.7 T in revenues according to Goldman Sachs.

Sources: VentureBeat, Business Insider, CI Insights, Goldman Sachs, Bankrate

Fraud Customer Acquisition Costs Customer Resistance

Data security breaches – such as those at JP Morgan and Target – gained widespread media coverage and have caused concern among consumers.

Lack of visibility and transparency into a startups’s security measures discourage potential customers, as larger banks are trusted to have better security measures.

A major weakness of the alternative credit model is the cost to acquire a customer. Banks spend approximately $350 per customer for each checking account opened.

While online lenders sometimes may have a lower customer acquisition cost, new products require significant education of potential customers.

While many people voice frustration and dislike for banks, there is a stickiness in banking that is not present in other industries – people are hesitant to move their money and savings to new unproven institutions.

Word of mouth is often cited as a catalyst for gaining customers on new platforms.

42

Sources (1/3)

"The Top 50 U.S. Banks by Assets." The Wall Street Journal. MoneyBeat, 26 Sept. 2013.

"Statistics at a Glance." Education at a Glance Education at a Glance 2014 (2014): 545-56. FDIC, 31 Mar. 2015.

“Payday Lending Regulation.” Federal Reserve Board. 15 Aug 2013.

“CFPB’s Preliminary Proposal to Address Payday and Similar Debt-Trap Loans.” Center for Responsible Lending. 30 Mar 2015.

“Payday Lending in America: Who Borrows, Where They Borrow, and Why.” PEW Chartable Trusts. Jul 2012.

“The Average Payday Loan Borrower Spends More than Half the Year in Debt to the Lender.” Consumerist. 26 Apr 2013.

“A Comparative Analysis of Payday Loan Customers.” Contemporary Economic Policy. Vol 26, No. 2. Apr 2008.

“Small Business Lending in the United States 2013.” Office of Advocacy – US Small Business Administration. Dec 2014.

“Fast Facts – Payday Loans.” Center for Responsible Lending. 2014.

“CFPB Sets Sights on Payday Loans.” The Wall Street Journal. 4 Jan 2014.

“The Predators’ Creditors: How the Biggest Banks are Bankrolling the Payday Loan Industry.” National People’s Action. 2011.

"Installment Loans." Comptroller of the Currency Administrator of National Banks. 2011.

"Too Risky? Feds Press Banks for More Auto Loan Data." CNBC. 13 Oct. 2014.

"Subprime Trouble? Car Buyers Struggle with Loans." CNBC. 20 Aug. 2014.

“State of the Automotive Finance Market Second Quarter 2014.” Experian. 4 Sept 2014.

“Understanding automotive loan charge-off patterns can help mitigate lender risk.” Experian. 2012.

“Expanding Consumer Protection in Auto Finance.” Center for American Progress. 12 Jan 2015.

“U.S. Agency Says It Will Regulate Nonbank Car-Loan Providers.” The Wall Street Journal. 17 Sept 2015.

“Ally Financial Beats Wells Fargo, Originates the Most Retail Auto Loans in Q3.” Forbes. 09 Dec 2014.

43

Sources (2/3)

“Overview of Recent Developments in the Credit Card Industry.” FDIC Banking Review. Nov 2005.

What is your state of credit? Experian. 2013.

American Household Credit Card Debt Statistics: 2015. Nerdwallet. Jun 2015.

Credit Card debt statistics. Nasdaq. 23 Sept 2014.

“Global Payments at a Glance.” McKinsey & Co. Sept 2014.

“Secret History of the Credit Card.” Frontline. Nov 2014.

“Directory of US Merchant Acquirers.” The Strawhecker Group. 2012.

“A Look at the Country’s Largest Card Lenders: Credit Card Payment Volumes.” Forbes. Nov 2014.

“Cash Dying As Credit Card Payments Predicted to Grow in Volume: Report.” The Huffington Post: Money. Jun 2012.

“Who Regulates Your Wallet?” WalletBlog. Oct 2009.

100 Most Active SBA 7(a) Lenders. US Small Business Administration. 2015.

“Small Business Lending in the United States 2013.” Office of Advocacy: US Small Business Administration. Dec 2014.

The State of US Small Business. Business Insider. Sept 2013.

“Statistics of US Businesses Employment and Payroll Summary: 2012.” US Census. Feb 2015.

“Top 10 Big Banks Lending to Small Business.” Forbes. 2015.

“Top Issuers of Commercial Card in the US.” Nilson Report. 2014.

“State of Small Business Lending: Credit Access During the Recover and How Technology May Change the Game.” Harvard Business School. Jul 2014.

Fast Facts: Back to school statistics. National Center for Education Statistics. 2015.

“The Student Debt Crisis.” Center for American Progress. 25 Oct 2012.

44

Sources (3/3)

“Trends in Student Aid 2014.” College Board. 2014

“Quick Facts about Student Debt.” The Institute for College Access & Success. Mar 2014.

“Private Student Loan Report 2013.” MeasureOne. 19 Dec 2013.

“Largest Education Lenders.” FinAid. 2015.

“Most States Funding Schools Less Than Before the Recession.” Center on Budget and Policy Priorities. 20 May 2014.

“Higher Education: State Funding Trends and Policies on Affordability.” United States Government Accountability Office. Dec 2014.

“Private Student Loans.” Consumer Financial Protection Bureau. 29 Aug 2012.

“How Interest Rates Affect Property Values.” Investopedia.

US Housing Market Tracker. Wall Street Journal. 16 Jun 2014.

Annual Rent Prices Vs. Average Home Prices (USA). Areavibes.

“Home Buyer and Seller Generational Trends.” National Association of Realtors. Mar 2014.

“Student Loans and Homeownership Trends.” Board of Governors of the Federal Reserve System. 15 Oct 2014.

“Emerging Trends in Real Estate 2014.” PwC and Urban Land Institute. 2014

30-Year Fixed-Rate Mortgages Since 1971. Freddie Mac. 2015.

Housing Vacancies and Homeownership: Historical Tables. United States Census Bureau.

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banking and lending in the us: a market overview

Economy & Finance