Transforming the banking system into an online marketplace
2014
Remember life before the Internet?
Circa 1970 businesses !captured value through…
Vertical integration
Scale
Brand
Poor value exchange
Limited choice
Limited information
For the consumer this meant…
The technology revolution delivered major efficiency gainsCost of a 10
minute phone call1970 Today
90x$4.50
$0.05
Size of a computer (cubic feet)
1970 Today
100x~20
~0.2
TV channels "available
1970 Today
40x
5
200
Note: Phone calls are domestic, 1970s call was LA-NYC!Sources: Federal Communications Commission “Trends in the U.S. International Telecommunications Industry” August 1998, AT&T website April 2014, Xfinity website April 2014, “The Evolution of TV Viewing” by John Carey of Fordham University 2002, PCWorld “Timeline: 50 Years of Hard Drives” September 2006
Banking has not experienced the same improvements
No efficiency gains since 1900Net US revenues of financial intermediaries as % intermediated assets (i.e. unit cost of intermediation)
Note: Quality Adjusted!Sources: Liberum “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation”, Philippon Thomas, March 2014, http://bit.ly/1gRuAEB
Early 1970s Today
Consumer value capture is even lower today
0%!
4%!
8%!
12%!
16%!
~8%~13%
Borrower Rate
Savings Rate
Note: 1970 borrower rate is commercial bank interest rate on 24 month personal loan Feb 1972; Today borrower rate is commercial bank interest rate on credit cards assessed interest Feb 2014; 1970 savings rate is average 3 month secondary market CD rate Feb 1971-1973; Today savings rate is 3 month CD rate in the secondary market as of April 2014 Sources: Federalreserve.gov G.19 and H.15 reports, bankrate.com April 2014
The banking industry became more concentrated
~ 20% ~50%
Early 1970s Today
Top 10 banks share of deposits
Note: Today marketshare is based on 2013 data!Sources: SNL Financial 2014, Federal Reserve Bank of Richmond Economic Quarterly Volume 92/4 Fall 2006
There is limited differentiationPREMIUM MULTI-SPECIALIST WINNERS
VALUEFAILING
Strong
Weak
Quality
StrongWeak Value
Trader Joes
Costco
Whole Foods
Grocerystores
USAA
Wells FargoCapital One
Credit UnionsCiti Bank
BOA
TD"Bank Banks
Note: N ~3,000!Source: Oliver Wyman consumer survey
Banks even look the same
Wells Fargo Bank"San Francisco!
Today
Union Trust Company San Francisco!Early 1900s
Source: artandarchitecture-sf.com
4. Sharing!economy
3. Many to many!marketplaces2. Marketplaces
OMG. The Internet.
1. Online storefronts
% US Adults"
buying online:~20%"
(2000)
~70%"
(2014)
Improved efficiency, more information, expanded choice
Note: Measure is % of US Adults who report ever purchasing a product online; Data is averaged across sources for 2014!Sources: PEW Internet Research Project, E-Marketer, Walker Sands Communications
10%
20%
30%
40%
50%
60%
70%
200520062007200820092010201120122013
A few examples in financial services
20
40
60
80
100
120
140
1975 1995 1998 2004 2010 2014
Internet enables lower cost Aggregated information, easy transact
$ per trade "(Charles Schwab)
% UK car insurance originations"from online aggregators
1. Online Storefront 2. Marketplaces
Sources: Oliver Wyman, Wired, CNN
Walmart can’t sell you a broken laser pointer…but I can
Revenue ($bn)3. Many to Many Marketplaces"!
- more choice"- lower cost"- efficient pricing
Source: Ebay financials
The rise of sharing
Views
About 32,000,000 results
1m"(2004)
1,200m"(2013)
Users
20k"(2007)
500m"(2013)
Tweets per day
Uploaded hours per minute
0.6"(2006)
100"(2013)
Sources: Oliver Wyman, Facebook, Twitter, Youtube press releases, Video is from YouTube
Slower start for sharing of financial information, but growing fast now
1,010300
80120
102
20092012
Users (M)
Source: Facebook Paypal Mint press releases
0
10
20
30
40
50
60
70
80
90
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
A shift in the national psycheGoogle search index “happiness” (US only)
Search for happiness "and fulfillment rises "
in importance
Backlash against "consumerism and "banking industry
Building businesses out of passions and hobbies
Note: Monthly average of weekly index data pulled April 2014!Source: Google trend
Things that matter. Pass 'em on.
“Helping our generation !understand what’s !
happening in the world.”
Christopher Altek!& Jake Horowitz
Eli Pariser &!Peter Koechley
And the sharing economy was born
4. Sharing Economy
Higher utilization of my existing assets Sharing with each other
Leading sharing economy marketplaces are highly valued
8 highest valued US VC-backed private companies Total equity funding Latest valuation
Part of the sharing economySource: Wall Street Journal “Billion-Dollar Startup Club” January 2014 http://graphics.wsj.com/billion-dollar-club/
The convergence of Internet trends & banking gave birth to marketplace lending
Source: McKinsey & Company
Operating expenses as % of outstanding loan balance
Internet enabled low cost model1. Online storefronts
Traditional Bank Lender Lending Club
The convergence of Internet trends & banking gave birth to marketplace lending
One place for transparent information and transaction made easy
2. Marketplaces
The convergence of Internet trends & banking gave birth to marketplace lending
Lower intermediation costs, more choices3. Many to many marketplaces
All Loans originated and issued by WebBank, a FDIC insured Utah state bank. � 1. Servicing fee is average for 60-month loans.
Principal + Interest
Funding
Investors Borrowers
The convergence of Internet trends & banking gave birth to marketplace lending
Higher utilization of existing assets4. Sharing economy
~13%
Borrowers Rate
Investors Rate
0%!
4%!
8%!
12%!
16%!
~5%
Traditional Bank Lenders Lending Club
Note: Average Lending Club Interest Rate for 36-month loans in Q1 2014.; Lending Club Investor Rate is Median Adjusted Net Annualized Return for investors with 100+ notes, note concentration of <2.5% of portfolio value, and portfolio age of 12-18 months; !Traditional Bank Lender borrower rate is commercial bank interest rate on credit cards assessed interest Feb 2014; Traditional Bank Lender savings rate is 3 month CD rate in the secondary market as of April 2014 Sources: Lending Club, Federalreserve.gov G.19 and H.15 reports, bankrate.com April 2014
Marketplace lending is becoming increasingly diverse
Consumer
Pay Day
Purchase Finance
Education Financing
Real Estate
Merchant CashAdvance
SMB Credit
Source: Foundation Capital 2014
And a global phenomenon$
$2.4bn
$1.4bn
$1.9bn
Sources: Liberum “P2P Lending: Opportunity & how to invest” March 2014
Experiencing rapid growth
Lending Club Prosper Funding Circle Zopa Ratesetter
CAGR: 130%
Loan Originations ($B
illions)
Sources: Liberum “P2P Lending: Opportunity & how to invest” March 2014
Lending Club leading the way
$791,348,200
($ Millions)
Annual Run Rate:"$3,165,392,800"
!Year over year Q1:"
124%
Benefiting from lower operating costs
Lending Club in 2015
Traditional bank lender
Lending Club’s cost advantage
Opex / total balance outstanding, Basis points
135 is steady state, ~40 is excess mktg in 2015 to fund growth
40 Marketing 175 135
IT 29
Other 28
G&A 20
Origination 19
CS / collection Billing / fraud
FDIC
Branch
Total opex 310 270 40 695
100
35
30
30
100
170
10
220
0
220
425
35
0
10
130
10
80
39
Source: McKinsey & Company
While improving customer experience
Borrower"Net Promoter Score1
Average NPS Scores
Lending Club
Credit Unions
Community Banks
Regional Banks
Credit Cards
National Banks
79insurance
online services retail
technology
telco
travel/hospitality banking
Industry averages
1. As of April 2014 for borrowers that were approved for loans!Sources: Bain, Lending Club
And bringing transparency
Becoming more useful to more people
Tuition financing
Patient financing
Small business loans
More useful to more people
More useful to more people
More useful to more people
More useful to more people
Partnering with the banks to transform banking
Bank Partner HappyBank Customers
Other Investors
Large Customer Base"Low cost of capital
Great Customer Experience Low operating cost+ =
And today we are pleased to announce