Investor and Originator Pain Points and Perspectives for Fintech Small Business Lending
MODERATORMark Solovy, Monroe Capital
SPEAKERSJeffrey Rogers, LiftForwardRyan Rosett, CrediblyJeremy Todd, Prime Meridian Capital ManagementEdward Wu, Revere Capital
CONFIDENTIAL AND PROPRIETARY: FOR APPROVED RECIPIENTS ONLY. NO DISTRIBUTION OR USE WITHOUT PRIOR WRITTEN CONSENT OF CREDIBLY.
Credibly General OverviewOctober, 2018
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The SMB Lending Opportunity
I N T R O D U C T I O N T O C R E D I B L Y | O C T O B E R 2 0 1 8
The SMB lending market is huge and underserved by banks which has created an opportunity for new entrants to earn revenue. Tech enabled lenders are positioned to best serve the small business market.
Small Business Market Financing Opportunity
Key Skills For Lenders
However, SMBs are not receiving the financing needed to most successfully operate and grow. The total market is only 1% penetrated.
$ 600 Billion
(1) Harvard Business School “The State of Small Business Lending: Innovation and Technology and the Implications for Regulation.” Includes all commercial and industrial and nonfarm nonresidential loans < 1mm.
(2) University of Cambridge Jude Business School, Polsky Center for Entrepreneurship and Innovation; The University of Chicago Booth School of Business. “The Americas Alternative Finance Industry Report, 2017.”
$7.7 Billion Total Online Business Lending in 2016(2)
Total Small Business Financing in 2016(1)
(1) SBA.gov
28.8 Million
Small businesses are a critical source of growth and output for the economy.
Small businesses, defined as those with fewer than 500 employees, account for 99.7% of all business in the U.S.
Technology-Enabled Lenders have started to penetrate the market and the ones best positioned to capitalize on the opportunity will exhibit these key traits:
Small Businesses in the U.S. (1)
Well-Established Platform
Sophisticated Servicing CapabilitiesDiversified Financing Structure
Data Science Focused Organization
Origination and Revenue Growth
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Credibly’s Culture of Compliance
Credibly has deeper experience with regulators than any other alternative lender. We are the only platform in the space founded on a partnership with an FDIC-regulated bank, and with a senior management team that includes: a former bank owner and Chairman of a Federal Savings Bank, a Chief Compliance Officer with experience in creditor's rights and collections, a former CIO of the Federal Bureau of Investigation (FBI), and an entire team of Data Science and Analytics experts with lending backgrounds and familiarity with the FDIC, CFPB, and OCC.
• Credibly reports to the Credit Bureaus
• Credibly’s Chief Risk Officer & Chief Data Scientist is a member of the Small Business Credit Share Advisory Board (Experian) and former member of the Small Business Financial Exchange Advisory Board (Equifax/LexisNexis)
• Through Credibly’s early joint venture with Crestmark Bank, Credibly was subject to quarterly FDIC audits, instilling an early culture of disciplined compliance
• Through our partnership with WebBank, Credibly was subject to annual compliance reviews conducted by an independent third party firm. These audits concluded that Credibly has strong compliance controls and a culture of compliance throughout the organization.
• Credibly is compliant with business bank regulations and adheres to the following policies and best practices:
- Bank Secrecy Act (BSA)/Anti-Money Laundering - CAN-SPAM Act- Complaint Handling - Fair Credit Reporting Act- Fair Debt Collection Practices Act - Equal Credit Opportunity Act (i.e., Fair Lending)- Marketing
- Office of Foreign Assets Control Regulation- Privacy/Information Security - Red Flags/Identity Theft- Right to Financial Privacy Act- Service Members Civil Relief Act- Telephone Consumer Protection Act- UDAAP
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Diversified Financing from Leading Partners
Credibly has a diversified, stable, and leading set of financing partners.
Facility Partners
Two credit facilities:
1. Core products financed by $100MM senior asset-based facility led by SunTrust (with participation from a bank syndicate) featuring an industry-leading advance rate and a very low cost of funds.
2. Separate warehouse line with Atalaya to fund broader credit spectrum MCA product (“MXP”)
Subordinated debt facility from Genesis Capital
Equity capital from Flexpoint Ford, LLC, a $2.8B private equity firm focused on financial services and healthcare
Institutional Whole Loan Sale Program and Participation Partners VARIOUS PARTNERS
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Our Data Science capabilities are at the core of everything we do at Credibly. The Data Science team has a depth and breadth of experience, skill and education.
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The team has specific experience with merchant processing including:
• CRO formerly on Board of Directors of Citicorp Payment Services (Citi Merchant Services provided by First Data is an alliance between Citicorp Payment Services and First Data Merchant Services)
• Former Advisory Board member of Equifax’s Small Business Financial Exchange
• Current Advisory Board member of Experian’s Small Business Advisory Council
Tina ReichChief Data Scientist, Chief Risk Officer
Massachusetts Institute of Technology American Express, Citibank, JPMorgan Chase
Customer Acquisition Underwriting
Customer &Portfolio
EngagementModeling
DS Tech Capabilities
(starting 6/2018)
Ph.D.Statistical Psychology
Cornell University & NYU
M.S.Financial Engineering
Cornell University
M.A.Applied Economics
M.S.E.Industrial & Operations Engineering
University of Michigan
Ph.D.Operations Research
Cornell University
Ph.D.Computer Science and Engineering
Stanford University
Data Science Team with Deep Experience in the Lending and Banking Space
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NotEligible
For Funding
BXL
WCL
MCA
Public Mkts
BANKS
MXP
CREDIT RISK/PRODUCT
CREDIBLY
BXL
BXLBusiness
Expansion Loan
WCLWorking Capital
Loan
MCAMerchant Cash
Advance
MXPMarket Expansion
Product
Term/Turnin months 18 & 24 6 - 17 3 - 17 2 - 8
Remittance Type Daily or Weekly Daily or Weekly Daily or Weekly Daily
Credibly has experience approving splits across the credit spectrum: • 70% approval rate for applications with split processing• Minimum FICO of 500 • We have risk-based pricing and a profitability model where APRs and
term are be capped accordingly
Provide More of Your SMB Customers With Access to Capital
A deeper sub-prime customer that is often overlooked by banks, however, provide a strong risk adjusted return
Prime Credit Credit-Challenged
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Use Pre-Approval to Win Prospects and Close Relationships on the Spot
Merchant and Prospect Base:20MM small businesses
Screened and Preapproved:One Database with Consistency
Web In Person Mail Phone
Our pre-approval capability would allow bank reps to offer a loan request immediately. This can be utilized on-demand or in batch.
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Customer Experience
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Firs
t Loa
n!
WELCOME SURVEY NET PROMOTER SCORE
WELCOME WEBSITE
WELCOME GIFT
MONTHLY NEWSLETTER
Renew
als!
BUSINESS HEALTH REPORT
RE-ENGAGEMENT INVITATIONONLINE ACCOUNT CREATION
Credibly has a holistic nurturing strategy in place to optimize the relationship built with customers.
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Leading Servicing CapabilitiesCredibly has leveraged its industry-leading Data Science capabilities to develop an exceptional servicing platform.
• Sophisticated Data Science-driven portfolio management strategy
- Early Warning triggers based on internal and external data
- Active portfolio monitoring, including macroeconomic indicators
- Behavior scores that take into consideration bank account types, account number types, return codes, and credit
- Funding characteristics, behavior scores, or triggers can send a deal into early warning, and also influence each other:
- Advanced analytics to determine when to file UCC and when not to
- Reporting that includes customized email triggers and encompasses our fraud management, macro-economic indicators, stress testing and enterprise risk management system
• We leverage the network of our private equity investor, Flexpoint Ford. This has strengthened our portfolio management system in several ways (e.g. expanded attorney network, new collections agencies, independent reviews, and consulting on natural disaster risk assessments)
• Sophisticated Data Science collections capabilities
- Automated voicemails, texts, emails and letters
- Cascading payoff APIs and/or services
ARisky
outcomeA1 C B
Origination Behavior Score
(Weekly)
Trigger Trigger
D E F
Funding
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Consumer Changes to the Online Marketplace
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MARKET GAP
FinTech lenders emerged in the mid-2000s as an alternative source of capital for SMBs Fintech lenders leverage technology and big data to feed their proprietary underwriting models that
utilize machine learning artificial intelligence and a variety of other sophisticated technologysolutions to make lending decisions instantaneously
FINTECH LENDERS MEETING SMB LENDING NEEDS
Gained attention by providing credit to borrowers very quickly, sometimes within hours Offer smaller loans with shorter terms (avg. facility size is $65K with a term of 15 months) Use automated online loan applications and have no retail branches Rely on a variety of funding sources including institutional investors, hedge funds, individual
investors, venture capital, and depository institutions Use online data sources and technology-enabled underwriting models to automate processes and
credit risk assessment
HIGHER CREDIT RISK WITH HIGHER YIELDS
Lending primarily to SMBs with lower credit scores and fewer assets, FinTech lenders’ typically facehigher credit risk compared to traditional lenders:
FinTech lender portfolios in 2016 had an average FICO score of 669 equating to a 10.5% defaultrate. In exchange for higher risk, FinTech lenders are able to charge interest ranging from 20% to90%
Despite higher rates, SMBs are increasingly applying for online loans, and reporting highersatisfaction with such loans
DISRUPTIVE AND RAPIDLY GROWING MARKET OPPORTUNITY
Despite growing from $3B in 2014 to $11B in 2017 (54% CAGR), online lenders have barelyscratched the surface of the $600B total US market for loans to SMBs, making up less than 2% ofthe market.
Some analysts expect the online lending market to grow to $50B by 2020, representing a CAGRof 66%
Morgan Stanley estimates the global market for online lenders will reach $290B by 2020, withmost of this growth occurring in the US and China
20% 21%24%
19%26%
35%
0%
10%
20%
30%
40%
2015 2016 2017Borrowers Who Applied to Online LendersOnline Lender Satisfaction Over Time
Online Lenders Statistics
75%
68%
56%
0% 20% 40% 60% 80%
Online Lender
Small Bank
Large Bank
MCA / WCL Approval Rates
21%
34%
20%17%
8%0%5%
10%15%20%25%30%35%40%
< $25K $25K -$100K
$100K -$250K
$250K -$1M
> $1M
Total Amount of Financing Sought
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Leading Servicing Capabilities
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SUBSTANTIAL MARKET
SMBs defined as those with less than 500 employeeso Represent 99.9% of all US businesseso Employ 58.9M people or nearly 50% of the US workforceo Produce approximately 46% of gross domestic product
GROWING OPPORTUNITY
SMBs are expected to remain a growing driver of the U.S. economyo 72% of SMBs expecting revenue growth, ando 48% expected to increase hiring in 2018.
CRITICAL TO THE ECONOMY
For every dollar loaned to SMBs, sales increased by an average of $2.31, and total output in theeconomy rose by $3.79
It is imperative that SMBs receive funding to drive this growth
UNDERSERVED
Commercial loans to SMBs make up only 21% of the $3.0T U.S. debt market, down nearly 50%from 1995, while the businesses represent nearly 50% of the economy. Fundamentalchanges to the banking industry have created this gap:o Consolidation within the banking industry: Community bank relationships with SMBs
were replaced by large banks seeking larger, less risky lending opportunitieso Tighter regulations post-Great Recession: Increased regulation and cost pressure have
forced banks to focus on lower credit risk loans
CHALLENGES OBTAINING CAPITAL FACED BY SMBS
Lower approval rates Shortage of funding Long wait times for funding Difficult application process
< 20
20 to 99
100 to 499
> 500
0M
20M
40M
60M
80M
100M
120M
140M
US Employment by Business Size
SMB U.S. Loans as a Share of Total Loans
63%
55%
37%
27%
50%
37%
45%
63%
73%
50%
0% 20% 40% 60% 80% 100%
Micro (<$100K)
$100K - $10M
$1M - $10M
> 10M
All Firms
Financing Shortfall Fully Funded
40% 35% 36% 31% 26% 23% 21% 0
1,000
2,000
3,000
4,000
0%
10%
20%
30%
40%
50%
1995 2000 2005 2010 2012 2014 2016Small Business Share of Commercial Loans (%)Commercial Loan Balances ($ Billions)
Loan Applicants ReceivingFull Funding
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Market Opportunity
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EQUITY MEDIUM TERM LOANS
BANK LOANS
SHORT TERM LOANS
MERCHANT CASH ADVANCE
AGGREGATORS
SBA LOANS
LINE OF CREDIT
INVOICE FINANCING
EQUIPMENT LOANS
FRANCHISE LOANS
CROWDFUNDING
MARKETPLACE
