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Banking Industry Overview Sectors, trends, and disruptions August 2015

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Banking Industry Overview Sectors, trends, and disruptions August 2015


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Banking Overview


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S&P 500 Breakdown 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


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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 funds Primary 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 Lending Purchase Finance Foreign Currencies Bonds Securities Credit Cards Purchase Finance Business Loans 4


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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


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Banking Landscape – Banks by Size 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


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JP Morgan Chase 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


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Bank of America 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


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Citigroup 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


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Wells Fargo 1996 Wells Faro acquires First Interstate Bancorp 1998 Wells Fargo merges with Norwest Corp 2000 Wells Fargo acquires National Bank of Alaska 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


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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


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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


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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 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


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SMB Credit Education Finance Banking Landscape – Market Share by Industry Sector Consumer Credit Real Estate Purchase Finance Payday Lending Banking Source: Thomvest Research Estimates 14


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Banking Landscape – Industry Sector Magnitude by Annual Loan Volume 15 SMB Credit Education Finance Consumer Credit Real Estate Purchase Finance Payday Lending $1.8 T $143 B $400 B $173 B $547 B $27 B


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Banking Landscape – Industry Sector Magnitude by Debt Outstanding 16 SMB Credit Education Finance Consumer Credit Real Estate Purchase Finance Payday Lending $10.8 T $1.1 T $924 M $889 M $594 M $30 M


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Lending Real Estate – Residential Mortgages


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Residential Mortgages Overview Annual Loan Volume Outstanding Mortgage Debt Debt Outstanding $10.8 T 63% Regular or home equity mortgages Reverse mortgages 1% 36% Owned free and clear Customer Base 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


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Residential Mortgages – Trends in the Industry 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 Trends Key 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


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Lending Education Finance


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Education Financing Overview 83% Outstanding Debt is Government Owned 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


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Private Education Financing – Trends in the Industry Private Loan Originations ($B) Trends Fintech Startups 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 2012 Source: FinAid 2009 22


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Lending Purchase Finance – Auto Lending


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Auto Loan Overview Industry Size Customer Base $924 B 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 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


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Auto Loans – Trends in the Industry Charge-off Rate by Risk Segment Source: Experian 2012 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


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Lending Consumer Credit


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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. 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 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


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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. 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


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Lending SMB Lending


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Small Business Lending Overview Industry Size Customer Base Annual Loan Volume Debt Outstanding SBALoan 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 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


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SMB Lending – Trends in the Industry Regulation SMB loans are often unprofitable for large banks due to high servicing costs. SMB lending is thus dominated by smaller banks. 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


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Lending Payday


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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. 38K annual salary 35 years old 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) 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


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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. 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


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Venture Financing


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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


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What Sectors are Hot? 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


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FinTech Investing has Increased 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


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What’s Hot in Finance? Source: CB Insights – Q4 2014 – Q1 2015 $ Billions 39


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Notable Fintech Investments Source: Crunchbase 40


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Major 2014 – 2015 Milestones New Unicorns New Fintech Funds 41


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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


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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


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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


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