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Banking Industry Overview
Sectors, trends, and disruptions
August 2015
Banking Overview
S&P 500 Breakdown
Consumer
Energy
Finance
Health Care
Industrials
Information Technology
Materials
Telecom
Utilities
Banks
Capital Markets
Consumer Finance
Diversified Financial Services
Insurance
Real Estate
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
S&P 500 Finance
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 Banks
Banks serve an essential role as middlemen between those who have money (lenders) and those who need money (borrowers).
Fund Sources
Lenders 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 Intermediaries
Banks, 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 $1 billion
of aggregate assets. Community banks have a limited product offering and do not
fall under the same federal regulations as full-service banks. Community banks
therefore are able to supply loans to lower account value customers.
Direct banks offer products and services through online and telephone banking.
Regulations vary depending on the business model of the virtual bank (e.g. peer-
to-peer lending, savings accounts, consumer credit). Cost efficiencies due to their
lack of physical branches are typically passed onto consumers through lower
interest rates and fees.
Credit Unions
Traditional full-service banks comprise 85% of the market by assets. Full-service
banks can be segmented into large banks and mid-sized banks. Large banks typically
offer both commercial banking and investment banking services. While full-service
banks benefit from economies of scale, the costs to underwrite loans are notably
high – resulting in banks focusing heavily on high value opportunities.
Credit unions are member-owned depository and lending services organizations.
Credit unions vary in size and geographic reach. Credit unions have less expansive
product lines and offer limited online/mobile services when compared to full-
service banks. Credit unions are non-profit organizations that seek to provide
credit at competitive rates.
5
Banking Landscape – Banks by Size
JPMorgan
Chase & Co.
Bank of
America
Citigroup
Wells Fargo
0
200
400
600
800
1,000
1,200
1,400
1,600
0 500 1,000 1,500 2,000 2,500 3,000
Assets ($B)
Deposits($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
1995
First Chicago Corp. merged
with NBD Bancorp., forming
First Chicago NBD
1996
The Chase Manhattan
Corp. merged with
Chemical Banking Corp.
1998
Banc One Corp. merged
with First Chicago NBD
2000
J.P. Morgan & Co. merged
with The Chase Manhattan
Corp.
2004
Bank One Corp. merged with
J.P. Morgan Chase & Co
2008
JPMorgan Chase & Co. acquired The
Bear Stearns Companies Inc.
2008
JPMorgan Chase & Co. acquired the
deposits, assets and certain liabilities of
Washington Mutual's banking
operations
2010
J.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
Founded 1904 Market Cap $173 B
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
1994
BankAmerica
acquires
Continental Illinois
National Bank
1997
BankAmerica
acquires Robertson
Stephens
1997
NationsBank purchases
BankAmerica; merged
bank takes name of Bank
of America
2004
Bank of America
purchases
FleetBoston Financial
2005
Bank of America
purchases MBNA
2006
Bank of
America
acquires The
United States
Trust
Company
2007
Bank of America
acquires LaSalle Bank
2008
Bank of America purchases
Countrywide Financial
2009
Bank of America purchases
Merrill Lynch
2014
Bank 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
Founded 1812 Market Cap $163 B
Headquarters New York, New York Chief Executive Officer Michael Corbat
Geographic Locations 35 countries Employees 241,000
1995 2000 2005 2010 2015
1997
Travelers Group
purchases Solomon
Brothers
1998
Travelers Group and
Citicorp merge, creating
Citigroup
2000
Citigroup purchases
Associates First Capital
Corporation
2001
Citigroup acquires
European American Bank
2001
Citigroup acquires
Banamex
2002
Citigroup 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
Founded 1852 Market Cap $286 B
Headquarters San Francisco, California Chief Executive Officer John Stumpf
Geographic Locations 35 countries Employees 263,900
1996
Wells Faro acquires First
Interstate Bancorp
1998
Wells Fargo
merges with
Norwest Corp
2000
Wells Fargo acquires
National Bank of Alaska
1995 2000 2005 2010 2015
2000
Wells Fargo acquires
First Security
Corporation
2001
Wells Fargo acquires
H.D. Vest Financial
Services
2007
Wells Fargo
acquires CIT
Construction
2007
Wells Fargo
acquires Placer
Sierra Bank
2007
Wells Fargo
acquires
Greater Bay
Bancorp
2008
Wells Fargo acquires
United Bancorporation
of Wyoming
2008
Wells Fargo
acquires Century
Bancshares of Texas
2008
Wells Fargo acquires
Wachovia Corporation
2009
Wells Fargo acquires North Coast
Surety Insurance Services
2012
Wells 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: FDIC
12
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 0
5,000
10,000
15,000
Jan-84 Jan-94 Jan-04 Jan-14
 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 Express
Cash America
QC Holdings
Dollar Financial
EZCORP
Other
Ally
Wells Fargo
JP Morgan
Capital One
Toyota FS
Ford MCC
Honda Finance
Bank of
America
Other
JP Morgan
Bank of America
Wells Fargo
US Bank
Citi
Capital One
Other
Sallie Mae
Wells 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
Government
JP Morgan
Bank of America
Wells Fargo
US Bank
Citi
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 Morgan
Bank of America
Wells Fargo
Other
American Express
JP Morgan
Bank of America
Other
$10.8 T
$1.1 T $924 M
$889 M $594 M
$30 M
Lending
Real Estate – Residential Mortgages
Residential Mortgages Overview
Annual Loan Volume
$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
0%
20%
40%
60%
80%
100%
U.S. Under 35 35-44 45-54 55-64 65+
Homeownership Rates
750+
57%
700-749
26%
621-659
13%
Under 620
4%
Closed 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
0
2
4
6
8
10
12
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Freddie Mac Loan Originations (M) Unemployment Rate (%) Delinquincy 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
Lending
Education Finance
Education Financing Overview
Federal Loans Private Loans
83%
Outstanding Debt
is Government
Owned
0%
200%
400%
600%
800%
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.
21,000,000
College Students
Average Tuition of
$19,339/Year
Average Debt of
$29,400/Borrower
Federal Loans
Stafford 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 Loans
School-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
21.0
10.7
5.9
4.9
3.5
26.7
72.7
Total Loan
Originations
Sallie Mae Wells Fargo Citi Bank of
America
JP Morgan Other
 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
Lending
Purchase Finance – Auto Lending
Auto Loan Overview
Industry Size Customer Base
$924 B
5.8%
5.0%
4.3% 4.3%
4.1%
3.3%
3.0%
2.5%
1.9%
1.7%
0%
2%
4%
6%
Wells
Fargo
Ally Capital
One
Chase Toyota FS Ford MCC Honda
Finance
Nissan
Infiniti FS
Chrysler
Capital
Santander
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
Annual Loan Volume Debt Outstanding
35.8
10.2
18.5
9.4
17.9
12.4
10.1
12.0
2.8
10.2
New Car Loans Used Car Loans
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
Source: Experian 2014
Source: Experian 2014
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 Industry
Charge-off Rate by Risk Segment
3.8%
2.8%
1.6%
0.8%
0.1%
0.6%
3.8%
2.5%
1.4%
0.7%
0.2%
1.0%
0%
1%
2%
3%
4%
Deep
subprime
Subprime Nonprime Prime Superprime Total
New Cars Used Cars
Vehicles with negative history (crashes, etc.)
are 1.46 times more likely to be charged-off
Source: Experian 2012
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%
0%
5%
10%
15%
20%
25%
30%
Deep subprime Subprime Nonprime Prime Superprime
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, ON
Series A
Austin, TX
Series 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
Lending
Consumer 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.
159
$1,242
$680
156
$1,944
$886
160
$2,378
$870
0
1000
2000
3000
Cardholders (M) Purchase Volume ($B) Debt Outsanding ($B)
2000 2009 2012*
Card-Issuing Bank: Issues the credit card to the consumer.
Bank bears risk of fraudulent use and consumer default
Acquiring Bank: Accepts credit card payments on behalf of
the merchant. Provides the merchant a line of credit to
exchange funds with the issuing bank
Credit Card Association: Network of issuing and acquiring
banks which handle payment processing
501 420 206 187 165 119 109
American Express JP Morgan Bank of America Capital One
Citigroup Discover US Bancorp
Credit Card Purchase Volume ($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
$5,342
balance/card
37%
utilization
Source: Experian 2013
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
Annual Loan Volume Debt Outstanding
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
Corporation
Regulates 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
Coin
San 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, CA
Series 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
Lending
SMB Lending
Small Business Lending Overview
Industry Size Customer Base
Annual Loan Volume Debt Outstanding
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 amount
2. Only considers business loans that have a state balance of $1M or less
594 B2
Source: FDIC 2015
547 B1
0%
10%
20%
30%
40%
Firm Size (Employees) Number of Firms* Sales ($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, GA
Series 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, NY
Public
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
Lending
Payday
Industry Size Customer Base
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
>$50,0
00
38K
annual
salary
<35
35-44
45-54
55+
35
years old
0
10
20
30
<2 wks 3-4 wks 5-6 wks 7-8 wks 9-13 wks 14+ wks
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 Industry
Payday 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
15
No payday loan
storefronts
Restrictive
Hybrid
Some
restrictions on
payday loans
Permissive
Allow 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, CA
Seed
Move to Online
Lending
Given the young demographic of the payday customers
online lending has gained significant traction.
Fintech Startups
San Francisco, CA
Series 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 $11.3B was invested in 805 deals – the first drop in financing since 2011.
Source: CB Insights – Q4 2014 – Q1 2015
36
What Sectors are Hot?
0
500
1000
1500
2000
2500
3000
0
5000
10000
15000
20000
25000
30000
35000
NumberofDeals
Funding($M)
Funding Deals
Source: CB Insights – Q4 2014 – Q1 2015
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
0
5
10
15
20
25
30
35
40
45
50
0
1,000
2,000
3,000
4,000
5,000
6,000
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 Q1
Deals
Funding($M)
Funding Deals
Source: CB Insights – Q4 2014 – Q1 2015
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?
2330
72
670 52
46
8
447
14
460
25
2335
34
21
8
167
16
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Funding Deals
Lending Retail Banking Credit Real Estate
Financial Management Insurance Investment Banking Payments
Source: CB Insights – Q4 2014 – Q1 2015
$ Billions
39
Notable Fintech Investments
Notable
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 2014
Ebay announces PayPal spin-
off
Oct 2014
Apple launches Apple Pay
Feb 2015
Google to acquire Softcard
IP
May 2015
Google announces Android
Pay
May 2015
Mastercard announces
MasterCard Send
March 2015
Northwestern Mutual to
acquire LearnVest
April 2014
Second Market launches
regulated Bitcoin Exchange
Dec 2014
Stripe raises $70 M Series C
Dec 2014
Lending Club goes public
Nov 2014
Powa raises $80 M Series C
April 2015
Prosper raises $165 M Series
D
Dec 2014
Adyen raises $250 M Series
B
Mar 2014
OnDeck raises $77 M Series
E
March 2015
D+H acquires FUNDtech
Aug 2014
Funding Circle acquires
LeapPay
April 2015
Funding Circle raises $150
M Series E
Feb 2015
Betterment raises $60 M
Series D
May 2015
Affirm raises $275 M Series
B
Dec 2014
WeWork raises $355 M
Series D
Feb 2014
BBVA acquires Simple
Sept 2014
Credit Karma raises $75 M
Series C
Oct 2014
Yodlee goes public
Oct 2014
Square raises $150 Series E
M&A Venture Financing and IPOs Technology
May 2014
Kabbage raises $50 M Series
D
Jan 2015
Coinbase 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.
45

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Banking and Lending in the US: A Market Overview

  • 1. Banking Industry Overview Sectors, trends, and disruptions August 2015
  • 3. S&P 500 Breakdown Consumer Energy Finance Health Care Industrials Information Technology Materials Telecom Utilities Banks Capital Markets Consumer Finance Diversified Financial Services Insurance Real Estate 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% S&P 500 Finance 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
  • 4. Role of Banks Banks serve an essential role as middlemen between those who have money (lenders) and those who need money (borrowers). Fund Sources Lenders 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 Intermediaries Banks, 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
  • 5. Categories of Banks Full-Service Banks Community Banks Direct Banks Community banks specialize in serving specific communities with under $1 billion of aggregate assets. Community banks have a limited product offering and do not fall under the same federal regulations as full-service banks. Community banks therefore are able to supply loans to lower account value customers. Direct banks offer products and services through online and telephone banking. Regulations vary depending on the business model of the virtual bank (e.g. peer- to-peer lending, savings accounts, consumer credit). Cost efficiencies due to their lack of physical branches are typically passed onto consumers through lower interest rates and fees. Credit Unions Traditional full-service banks comprise 85% of the market by assets. Full-service banks can be segmented into large banks and mid-sized banks. Large banks typically offer both commercial banking and investment banking services. While full-service banks benefit from economies of scale, the costs to underwrite loans are notably high – resulting in banks focusing heavily on high value opportunities. Credit unions are member-owned depository and lending services organizations. Credit unions vary in size and geographic reach. Credit unions have less expansive product lines and offer limited online/mobile services when compared to full- service banks. Credit unions are non-profit organizations that seek to provide credit at competitive rates. 5
  • 6. Banking Landscape – Banks by Size JPMorgan Chase & Co. Bank of America Citigroup Wells Fargo 0 200 400 600 800 1,000 1,200 1,400 1,600 0 500 1,000 1,500 2,000 2,500 3,000 Assets ($B) Deposits($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
  • 7. 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 1995 First Chicago Corp. merged with NBD Bancorp., forming First Chicago NBD 1996 The Chase Manhattan Corp. merged with Chemical Banking Corp. 1998 Banc One Corp. merged with First Chicago NBD 2000 J.P. Morgan & Co. merged with The Chase Manhattan Corp. 2004 Bank One Corp. merged with J.P. Morgan Chase & Co 2008 JPMorgan Chase & Co. acquired The Bear Stearns Companies Inc. 2008 JPMorgan Chase & Co. acquired the deposits, assets and certain liabilities of Washington Mutual's banking operations 2010 J.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
  • 8. Bank of America Founded 1904 Market Cap $173 B 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 1994 BankAmerica acquires Continental Illinois National Bank 1997 BankAmerica acquires Robertson Stephens 1997 NationsBank purchases BankAmerica; merged bank takes name of Bank of America 2004 Bank of America purchases FleetBoston Financial 2005 Bank of America purchases MBNA 2006 Bank of America acquires The United States Trust Company 2007 Bank of America acquires LaSalle Bank 2008 Bank of America purchases Countrywide Financial 2009 Bank of America purchases Merrill Lynch 2014 Bank 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
  • 9. Citigroup Founded 1812 Market Cap $163 B Headquarters New York, New York Chief Executive Officer Michael Corbat Geographic Locations 35 countries Employees 241,000 1995 2000 2005 2010 2015 1997 Travelers Group purchases Solomon Brothers 1998 Travelers Group and Citicorp merge, creating Citigroup 2000 Citigroup purchases Associates First Capital Corporation 2001 Citigroup acquires European American Bank 2001 Citigroup acquires Banamex 2002 Citigroup 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
  • 10. Wells Fargo Founded 1852 Market Cap $286 B Headquarters San Francisco, California Chief Executive Officer John Stumpf Geographic Locations 35 countries Employees 263,900 1996 Wells Faro acquires First Interstate Bancorp 1998 Wells Fargo merges with Norwest Corp 2000 Wells Fargo acquires National Bank of Alaska 1995 2000 2005 2010 2015 2000 Wells Fargo acquires First Security Corporation 2001 Wells Fargo acquires H.D. Vest Financial Services 2007 Wells Fargo acquires CIT Construction 2007 Wells Fargo acquires Placer Sierra Bank 2007 Wells Fargo acquires Greater Bay Bancorp 2008 Wells Fargo acquires United Bancorporation of Wyoming 2008 Wells Fargo acquires Century Bancshares of Texas 2008 Wells Fargo acquires Wachovia Corporation 2009 Wells Fargo acquires North Coast Surety Insurance Services 2012 Wells 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
  • 11. 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
  • 12. 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: FDIC 12
  • 13. 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 0 5,000 10,000 15,000 Jan-84 Jan-94 Jan-04 Jan-14  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
  • 14. American Express JP Morgan Bank of America Capital One Citi Discover US Bank Other Advance America Check 'N Go Check Into Cash ACE Cash Express Cash America QC Holdings Dollar Financial EZCORP Other Ally Wells Fargo JP Morgan Capital One Toyota FS Ford MCC Honda Finance Bank of America Other JP Morgan Bank of America Wells Fargo US Bank Citi Capital One Other Sallie Mae Wells 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
  • 15. 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 Government JP Morgan Bank of America Wells Fargo US Bank Citi Other $143 B $400 B $173 B $547 B $27 B
  • 16. 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 Morgan Bank of America Wells Fargo Other American Express JP Morgan Bank of America Other $10.8 T $1.1 T $924 M $889 M $594 M $30 M
  • 17. Lending Real Estate – Residential Mortgages
  • 18. Residential Mortgages Overview Annual Loan Volume $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 0% 20% 40% 60% 80% 100% U.S. Under 35 35-44 45-54 55-64 65+ Homeownership Rates 750+ 57% 700-749 26% 621-659 13% Under 620 4% Closed 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
  • 19. Residential Mortgages – Trends in the Industry 0 2 4 6 8 10 12 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Freddie Mac Loan Originations (M) Unemployment Rate (%) Delinquincy 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
  • 21. Education Financing Overview Federal Loans Private Loans 83% Outstanding Debt is Government Owned 0% 200% 400% 600% 800% 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. 21,000,000 College Students Average Tuition of $19,339/Year Average Debt of $29,400/Borrower Federal Loans Stafford 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 Loans School-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$143 B1 1. Thomvest Estimate: (number of college students) / 4 * average debt per borrower Industry Size Products 21
  • 22. Private Education Financing – Trends in the Industry Private Loan Originations ($B) Trends Fintech Startups 21.0 10.7 5.9 4.9 3.5 26.7 72.7 Total Loan Originations Sallie Mae Wells Fargo Citi Bank of America JP Morgan Other  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
  • 24. Auto Loan Overview Industry Size Customer Base $924 B 5.8% 5.0% 4.3% 4.3% 4.1% 3.3% 3.0% 2.5% 1.9% 1.7% 0% 2% 4% 6% Wells Fargo Ally Capital One Chase Toyota FS Ford MCC Honda Finance Nissan Infiniti FS Chrysler Capital Santander 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 Annual Loan Volume Debt Outstanding 35.8 10.2 18.5 9.4 17.9 12.4 10.1 12.0 2.8 10.2 New Car Loans Used Car Loans 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 Source: Experian 2014 Source: Experian 2014 Auto finance is the third largest consumer loan market after mortgages and student loans. After housing, transportation is the second largest household expense. 24
  • 25. Auto Loans – Trends in the Industry Charge-off Rate by Risk Segment 3.8% 2.8% 1.6% 0.8% 0.1% 0.6% 3.8% 2.5% 1.4% 0.7% 0.2% 1.0% 0% 1% 2% 3% 4% Deep subprime Subprime Nonprime Prime Superprime Total New Cars Used Cars Vehicles with negative history (crashes, etc.) are 1.46 times more likely to be charged-off Source: Experian 2012 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% 0% 5% 10% 15% 20% 25% 30% Deep subprime Subprime Nonprime Prime Superprime 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, ON Series A Austin, TX Series 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
  • 27. 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. 159 $1,242 $680 156 $1,944 $886 160 $2,378 $870 0 1000 2000 3000 Cardholders (M) Purchase Volume ($B) Debt Outsanding ($B) 2000 2009 2012* Card-Issuing Bank: Issues the credit card to the consumer. Bank bears risk of fraudulent use and consumer default Acquiring Bank: Accepts credit card payments on behalf of the merchant. Provides the merchant a line of credit to exchange funds with the issuing bank Credit Card Association: Network of issuing and acquiring banks which handle payment processing 501 420 206 187 165 119 109 American Express JP Morgan Bank of America Capital One Citigroup Discover US Bancorp Credit Card Purchase Volume ($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 $5,342 balance/card 37% utilization Source: Experian 2013 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 Annual Loan Volume Debt Outstanding 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
  • 28. 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 Corporation Regulates 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 Coin San 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, CA Series 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
  • 30. Small Business Lending Overview Industry Size Customer Base Annual Loan Volume Debt Outstanding 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 amount 2. Only considers business loans that have a state balance of $1M or less 594 B2 Source: FDIC 2015 547 B1 0% 10% 20% 30% 40% Firm Size (Employees) Number of Firms* Sales ($T) <20 5,410,367 $4.0 20-99 532,391 $3.8 100-499 88,586 $3.6 500+ 18,311 $18.4 As loan amounts decrease, there is an increasing overlap between the use of business loans and personal loans (personal loans are used by more than 30% of small businesses). SMB Sources of Financing Sources: SBA, US Census Bureau, PPCMP capital markets report Small businesses make up 99.7% of US employer firms and 46% of the private-sector output. Only about half of all new establishments survive 5 years or more, and about one third survive 10 years or more. 30 * Private sector establishments, 2012 US Census
  • 31. SMB Lending – Trends in the Industry Regulation SBA 7(a) Business Loans Commercial Credit Wells Fargo Bank, National Association Live Oak Banking Company JPMorgan Chase Bank, National Association U.S. Bank National Association The Huntington National Bank Bank of America US Bank Citibank Capital One SMB loans are often unprofitable for large banks due to high servicing costs. SMB lending is thus dominated by smaller banks. Loan Size 2009 ($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, GA Series 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, NY Public 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
  • 33. Industry Size Customer Base 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 >$50,0 00 38K annual salary <35 35-44 45-54 55+ 35 years old 0 10 20 30 <2 wks 3-4 wks 5-6 wks 7-8 wks 9-13 wks 14+ wks 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
  • 34. Trends Payday Loans – Trends in the Industry Payday 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 15 No payday loan storefronts Restrictive Hybrid Some restrictions on payday loans Permissive Allow 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, CA Seed Move to Online Lending Given the young demographic of the payday customers online lending has gained significant traction. Fintech Startups San Francisco, CA Series A Offers small dollar loans and financial education through gamification. Currently 27% of payday loan customers use online platforms to obtain loans. 34
  • 36. 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 $11.3B was invested in 805 deals – the first drop in financing since 2011. Source: CB Insights – Q4 2014 – Q1 2015 36
  • 37. What Sectors are Hot? 0 500 1000 1500 2000 2500 3000 0 5000 10000 15000 20000 25000 30000 35000 NumberofDeals Funding($M) Funding Deals Source: CB Insights – Q4 2014 – Q1 2015 Investments in internet, healthcare, mobile & telecom, and fintech account for around 55% of all venture capital funding in the past year. 37
  • 38. FinTech Investing has Increased 0 5 10 15 20 25 30 35 40 45 50 0 1,000 2,000 3,000 4,000 5,000 6,000 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 Q1 Deals Funding($M) Funding Deals Source: CB Insights – Q4 2014 – Q1 2015 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
  • 39. What’s Hot in Finance? 2330 72 670 52 46 8 447 14 460 25 2335 34 21 8 167 16 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Funding Deals Lending Retail Banking Credit Real Estate Financial Management Insurance Investment Banking Payments Source: CB Insights – Q4 2014 – Q1 2015 $ Billions 39
  • 40. Notable Fintech Investments Notable Investments NEA RRE QED Accel Ribbit Andreesen Horowitz Kholsa Bessemer Sequoia Union Square Thomvest Seed Early Stage Late Stage Source: Crunchbase 40
  • 41. Major 2014 – 2015 Milestones Sept 2014 Ebay announces PayPal spin- off Oct 2014 Apple launches Apple Pay Feb 2015 Google to acquire Softcard IP May 2015 Google announces Android Pay May 2015 Mastercard announces MasterCard Send March 2015 Northwestern Mutual to acquire LearnVest April 2014 Second Market launches regulated Bitcoin Exchange Dec 2014 Stripe raises $70 M Series C Dec 2014 Lending Club goes public Nov 2014 Powa raises $80 M Series C April 2015 Prosper raises $165 M Series D Dec 2014 Adyen raises $250 M Series B Mar 2014 OnDeck raises $77 M Series E March 2015 D+H acquires FUNDtech Aug 2014 Funding Circle acquires LeapPay April 2015 Funding Circle raises $150 M Series E Feb 2015 Betterment raises $60 M Series D May 2015 Affirm raises $275 M Series B Dec 2014 WeWork raises $355 M Series D Feb 2014 BBVA acquires Simple Sept 2014 Credit Karma raises $75 M Series C Oct 2014 Yodlee goes public Oct 2014 Square raises $150 Series E M&A Venture Financing and IPOs Technology May 2014 Kabbage raises $50 M Series D Jan 2015 Coinbase raises $75 M Series C New Unicorns New Fintech Funds 41
  • 42. 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
  • 43. 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
  • 44. 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
  • 45. 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. 45