Fintech bubble or Fintech trouble

1. © Julian Levy - May 2016 an overview of the fintech landscape 30 MAY 2016 fintech bubble or fintech trouble An overview of the FinTech Landscape and its implications for retail banking 1

2. © Julian Levy - May 2016 setting the context the nature of the competition why now what happens next? table of contents 2

3. © Julian Levy - May 2016 Setting the context 3

4. © Julian Levy - May 2016 FOR BANKING the easy bit is over The 2008 credit crisis presented unparalleled challenges for modern finance, however many firms have pulled through restructure deleverage shed non core assets write down assets increase provisions 2009 todo list decrease operating costs 4

5. © Julian Levy - May 2016 now comes the hard bit increased regulation cost of capital>roe functional disaggregation new competitors Non Performing Loans 2016 challenges low interest rates low growth However the road ahead presents more challenges and opportunities "I'm convinced that too few European banks were dismantled and disappeared from the market" Andrea Enria, European Banking Authority (EBA) chief (2013) 5

6. © Julian Levy - May 2016 how much is being invested in capturing your business? ~$20obn Estimated Global IT Spend by Banks ~$16obn Run the BankChange the Bank US$0 US$7,500 US$15,000 US$22,500 US$30,000 2010 2011 2012 2013 2014 2015 Venture Capital allocation to FinTech continues to grow https://newsroom.accenture.com/news/global-ﬁntech-investment-growth-continues-in-2016-driven-by-europe-and-asia-accenture-study-ﬁnds.htm $22bn ~$4ob “Silicon Valley is coming. There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking” Jamie Dimon, CEO JP Morgan Chase 6

7. © Julian Levy - May 2016 how much is at risk? Citibank research suggests that the digitalisation of an industry resulted in an average shift of 44%1 of market share to new players over a decade , whilst mckinsey estimate 60% of Global banking profits from origination and sales under attack2 1. How FinTech is Forcing Banking to a Tipping Point - Citibank Research 2. McKinsey - Cutting Through the FinTech Noise: Markers of Success, Imperatives for Banks source: Citibank1 "The incumbents risk becoming merely capital- providing utilities that operate in a highly regulated, less profitable environment, a situation unlikely to be tolerated by shareholders.” Antony Jenkins, former CEO - Barclays 7

8. © Julian Levy - May 2016 and how much is hype? £6.6bn UK Annual Revenues from High Growth FinTech 61K Number of People Employed in High Growth FinTech £108k Implied average revenue per employee £20bn UK Annual Revenues from FinTech1 The industry is still young, and whilst it has a lot of capital being allocated to it, has not been through an economic cycle. Performance Time low quality use medium quality use high quality use most demanding use Technology Disruption Source: Clay Christensen Disruptive Innovation Framework “There is near hysteria about Fintech. Yes it’s here, yes it’s real, but it’s not going to change your life tomorrow. It will take years for the potential of these technologies to unfold” James Gorman, CEO Morgan Stanley 1. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/341336/Landscaping_UK_Fintech.pdf 2. https://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/Research-2015/Total-Tax-2015-OnlineFinal.pdf 3. https://www.linkedin.com/pulse/fintech-lending-balance-sheet-vs-intermediary-michael-baptista 2005 £1.2B .73% (0.5% - 3.4%)5£11.5M 2014 revenues3 year founded amount lent through platform Avg default rates 2010 - 20144 4. http://www.zopa.com/lending/risk-data 5. http://www.lendacademy.com/an-inside-look-at-zopa-the-worlds-first-p2p-lender/ 8

9. © Julian Levy - May 2016 the nature of the competition source:cbinsights 9

10. © Julian Levy - May 2016 seven areas of FINTECH Challengers foreign exchange investment/advisory platforms LENDing platforms payments financial aggregators each customer experience lost to a new player can weaken their relationship with a bank, and accelerate their acceptance of new technology providers 10 Insurance currency outofscope this deck is only focusing on the five that directly impact retail banking

11. © Julian Levy - May 2016 Foreign exchange 141.31 139.22 (1.5%) UK banks charge an average of 3.6% on a £10,000 transaction, compared to an average of just 0.9% charged by nonbank providers1. New players are now offering interbank spot rates. FX PLATFORMS WITH LOW CUSTOMER ACQUISITION COSTS, END TO END DIGITAL EXPERIENCE, AND a better value proposition are available for consumers and sMe’s1 https://www.saxopayments.com/non-bank-money-transfer-providers-eating-into-uk-bank-proﬁts-111198 11 134.73 (4.8%)

12. © Julian Levy - May 2016 lending to smes and consumers 27% 16% % FinTech investment $ allocated to1 Business Lending Consumer Lending 2. http://www3.weforum.org/docs/IP/2015/FS/GAC15_The_Future_of_FinTech_Paradigm_Shift_Small_Business_Finance_report_2015.pdf 123% 2010 - 2014 CAGR for marketplace lending2 1. http://www.morganstanley.com/ideas/p2p-marketplace-lending/ 3.43% 3. http://www.nesta.org.uk/sites/default/ﬁles/pushing_boundaries_0.pdf % of SME lending in uk via alt. financing (2015) almost 1/3 targeting real-estate sector3 intermediary and principal based models mainly unsecured higher risk and moral hazard innovative credit scoring models lean operational models uk fintech lending growth by sector3 2015 2014 YoY Growth P2P Business Lending (ex Real Estate) 881 P2P Real Estate Lending 609 total P2P Business Lending 1490 749 99% P2P Consumer Lending 909 547 66% Invoice Trading 325 270 20% Equity Based Crowd Funding (ex Real Estate) 245 Equity Based Crowd Funding (Real Estate) 87 total Equity Based Crowd Funding 332 84 295% nonbank lenders have structural capital advantage 12

13. © Julian Levy - May 2016 payments Deloitte’s Estimate 25% of european retail banking revenue linked to payments 1 http://www.mckinsey.com/industries/ﬁnancial-services/our-insights/the-digital-battle-that-banks-must-win 2 Deloittes 2015: Payments disrupted - The emerging challenge for European retail banks 25% credit card interest credit interest margin float benefit interchange fees fx spread bank transfer charges debit/credit card fees CURRENT-ACCOUNT FEES 44% 35% 21% big difference between developed/ developing world non banks creating payment and acceptance solutions ecommerce dominated by new players and growing rapidly CROSS-BORDER SME PAYMENTS SEEN AS major opportunities ecommerce currently at 8.5% of US sales, and CAGR of 10.4% 2006-20153 source: http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf 13

14. © Julian Levy - May 2016 aggregators services allowing users to combine multiple financial data sources present a disintermediation risk to incumbent players. PSD2 xs2a* will be a major driver of change XS2A (API) Third party providers Banking apps Banking apps XS2A (API) XS2A (API) XS2A (API) current approach post psd2 xs2a *EU Regulation - Payment Services Directive 2, Access to Accounts Currently growth is held back by broad refusal of banks to support sharing of credentials with third party services. 14

15. © Julian Levy - May 2016 investment/advisory platforms robo-advisors, and user-centric financial management platforms offer partnership opportunities and disintermediation threat 15

16. © Julian Levy - May 2016 why now? 16

17. © Julian Levy - May 2016 multiple factors are accelerating the rate of change Digital Natives new technology low growth new regulation new entrants a combination of structural and technical changes are converging to accelerate the growth of the fintech industry 17

18. © Julian Levy - May 2016 rapid Release cycles structurally lower cost base regulatory support highly focused low barriers to entry online is default environment supply and demand are digital natives With a generation of companies and consumers growing up with the Internet as standard, leveraging new online services and platforms is seen as normative, and New players are entering without accrued technical debt providing structural cost advantages. “customers are 4.5 times more likely to choose a bank with a good digital banking platform than one with branches nearby” The fight for the customer:McKinsey Global Banking Review 2015 18

19. © Julian Levy - May 2016 new technologies New technological capabilities and delivery mediums have resulted in the ability to reengineer the customer experience and replace legacy systems at low cost big data - here mobile ubiquity - here cloud services - here machine learning - getting here open source Software - here Blockchain - not quite here yet standardised API’S - GETTING here 19

20. © Julian Levy - May 2016 Low Growth Long-term low interest rate environments has resulted in increases in both venture allocation, and appetite for opportunities offered by new lending schemes and alternative finance platforms. displaced financial services workers provide experienced resources for new players 6%-9% 1. Source: MORGAN STANLEY RESEARCH, May 19, 2015 Global Marketplace Lending Yield on marketplace financing (W/Out Leverage)1 11% venture capital fund raising caGR 2009 - 20142 2. Source: http://www.bain.com/Images/BAIN_REPORT_Global_Private_Equity_Report_2015.pdf 43% Monthly compound growth in institutional capital on p2p lending platforms jan 2014 - apr 2015 132K Number of jobs lost in city of london 2008 - 20133 3. Source: http://realbusiness.co.uk/article/29193-a-glance-at-london-employment-over-10-years-the-ﬁnancial-crisis-and-its-aftermath extensive government support via tax breaks and investment 20

21. © Julian Levy - May 2016 New regulation Regulators have significantly increased their oversight on traditional financial institutions whilst providing new entry paths and a light touch for newcomers PSD2 xs2a* will be a major shift Regulatory Arbitrage for MarketPlace Lenders international payments remain tightly regulated “Regulators should never be at the front of technological development. Regulators should follow it as closely as possible, understand it and deal with financial stability and consumer protection. You don’t want to over regulate before you understand it.”1 Jeroen Dijsselbloem, Dutch Finance Minister 1 http://www.bloomberg.com/news/articles/2016-01-25/biggest-global-banks-at-davos-we-re-all-ﬁntech-innovators-now security and accountability being addressed 21

22. © Julian Levy - May 2016 new entrants Non-traditional players have begun to eat into financial services, and with psd2, they have more scope to extend their capabilities e-commerce platforms - real-time insight into financial performance mobile eating into branch network moat highly targeted propositions 63% % Retail Bank Customers leveraging Fintech applications or services1 students real estate supply chain financing money transfer new data sources allowing experimentation in risk models 22

24. © Julian Levy - May 2016 Fear NOT All is not lost banks are well positioned to compete with significant reputational, digital and material assets trusted brands lots of data banks have the customers Massive scale and the appetite to change Big balance sheets A Physical Network “doing the same thing a little better is now the riskiest thing you can do.” Antony Jenkins, former CEO - Barclays 24

25. © Julian Levy - May 2016 how are banks responding? invest acquire engage Direct Strategic Investments Setting up their own VC’s investing in other vc’s startup accelerators commercial partnerships innovation programs Startup incubators fast followers catalysts leaders banks have been acquiring a wide range of fintech companies ranging from online banks to technical capabilities and specific solutions “FS-on-FS acquisitions achieve ‘above market’ returns of 4%-6% after 12 months, FS-on-Tech acquisitions returned 10%-15% over the same period.” Arjun Sethi, Partner, A.T. Kearney Where banks have structural disadvantages due to cost of capital, fintech platforms offer a route to higher returns 27

26. © Julian Levy - May 2016 and the new players have a lot to learn In the us - leading platforms struggling to get their models right sells on loans to institutional seen demand fall 35% YoY has needed to raise rates 3 times in 6 months increased risk on balance sheet cutting staff by 28% seen first QOq fall in 3 years has had major compliance issues Quality of high risk U.S. loans decreasing BORROWERS debt/income ratio grew 18% in 2015 average income of borrowers dropped 3% in 2015. recent loan delinquency rates rising1 1. http://ftalphaville.ft.com/2016/02/22/2153904/the-worrying-signal-from-us-online-lending/ “We don't Take Credit Risk” - maybe you do!2 2. http://ftalphaville.ft.com/tag/online-lending/ 26

27. © Julian Levy - May 2016 where to next regulatory and cost pressures likely to remain new players grow into ancillary services EATING AWAY AT BANKING MARGINS Time confidence interest rates go up higher profile failures in lending business banking consolidation back-end utilities and front-end banks diverge? low high near far digitisation works ~50% of personal lending was executed through digital channels at Barclays in March 2015, up from one-third in 2014. regulations gradually increase on fintech ongoing banking digitalisation minor fintech scandals 28

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