Updated view of current themes and trends in FinTech

1. © Julian Levy - Ayarma Ltd
an overview of the fintech landscape
27 sep 2017
fintech bubble or fintech trouble redux
An overview of the FinTech Landscape for Retail
Banking in 2017
1
Julian Levy

2. © Julian Levy - Ayarma Ltd
2
Key Messages
• First wave of fintech was characterised by an explosion of different approaches aimed at horizontally and
vertically functionally disaggregating banks, and filling gaps created by their retreat from riskier lending
• The second wave which we are coming into, is based around horizontal expansion of first phase winners,
and the banking fightback
• Banks are not necessarily going to be the losers, but still have the most to lose. Consumers are the
winners.
Fintech Bubble - maybe in parts; Fintech trouble - definitely.
• Proprietary data
• Entrenched branch networks,
• Low-cost of capital
• Opaque charging structures
• Effective Oligopolies
• Functional Disaggregation
• Increased Regulation
• Systemic reduction in risk
• Enforced data sharing
• Legacy processes
• Digital Natives
the way it was the way it is

3. © Julian Levy - Ayarma Ltd
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• Restructure
• Deleverage
• Shed non core assets
• Write down assets
• Increase provisions
• Decrease operating costs
• Increased regulation
• Reduced Leverage
increased competition
• Non Performing Loans
• Low interest rates
• Low growth
regulatory arbitragersfunctional disagGregators tech Platforms
post-crisis challenges 10 years on
• Cost of Capital>ROE
Banking has had a tough decade

4. © Julian Levy - Ayarma Ltd
Source: Financial Stability Review November 2016 − Euro area financial institutions
4
banking profitability
remains weak
lending environmentS
remain challenged
Cost of Equity > Return on Equity
%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1694
2017
Low Interest Rates
%
1%
2%
3%
4%
5%
6%
7%
8%
2009 2010 2011 2012 2013 2014 2015 2016
European Union United States
Poor Loan Performance
Net Operating Income/costs
volatile
and CHALLENGES still REMAIN
BANKS remain
under pressure
4000
4500
5000
5500
6000
6500
7000
2009 2010 2011 2012 2013 2014 2015 2016 2017
Number of EU Credit Institutions
Regulated credit institutions
decreasing
Marketplace lending expanding
Source: Morgan Stanley Research, Global Market Place Lending
Source: Morgan Stanley Research, Global Market Place LendingSource: International Monetary Fund, Global Financial Stability Report
Source: Bank of England
NPLas%GrossLending
InterestRates

5. © Julian Levy - Ayarma Ltd
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1. Financial industry Digitalisation
presents strategic threat and
opportunity
3. banking industry not sitting still and continues to invest in technology
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
2. venture capital and corporates have targeted banking profit pools
$2,581M
$6,252M
$11,873M
$15,648M
$17,355M
699
1036
1420
1617
1436
0
600
1200
1800
0
5000
10000
15000
20000
25000
2012 2013 2014 2015 2016
Deal Value Number of Deals
Amounts invested into FinTech
continues to grow
but shifting to later stage capital
as low hanging fruit disappear
Globally banks invested close to $50bn
in changing their businesses last year
and the leaders keep getting
bigger
digitalisation has changed the banking industry
Combined value of top 50 banks globally
2 0 1 1
$ 2 . 7 T
2 0 1 6
$ 4 . 3 T
~$48B
~$192B
Global Run The Bank Spend Global Change The Bank Spend
Source: Pitchbook
Source: CB Insights
Source: Celent: Global Tech Spending Forecast: Banking Edi=on, 2016, Ayarma
Source: How FinTech is Forcing Banking to a Tipping Point - Ci=bank Research

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regulatory support has been a major enabler
Compliance Spend as % Rev in Financial
Services, and expected change over next 5
years
1. Tier 1 common capital increases and
risk exposure decreases systemically
reducing credit capacity opening door
to new lenders
Source: Duff & Phelps GRO – 2017
3. Whilst compliance spending continues
eating into operating costs
“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
XS2A
(API)
Third
party
providers
Banking
apps
XS2A
(API)
XS2A
(API)
XS2A
(API)
2. Enforced introduction of PSD2 and
open-banking standards structurally
remove major banking moat
Source: EBA Risk Assessment Report December 2016
"I'm convinced that too few European banks were dismantled and disappeared from the market"
Andrea Enria, European Banking Authority (EBA) chief (2013)

7. © Julian Levy - Ayarma Ltd
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as has technology evolution
Cloud Services
Structurally reduced
infrastructure costs of
entry
Big Data
The ability to
economically analyse
massive quantities of
data have opened up
new analysis and
modelling techniques
Mobile Ubiquity
Consumer shift to
mobile reduce benefit of
branch infrastructure
Open Source Software
Dramatically reduced
cost of software
infrastructure lowers
technology barriers to
entry
API based integration
Faster time to market on
new business services,
and integrating partner
offerings
AI
Improving automated
analytics and process
automation reducing
cost of servicing
customers
DevOps
High quality software
engineering processes
based around continuous
delivery accelerating
improvements

8. © Julian Levy - Ayarma Ltd
0%
10%
20%
30%
40%
50%
60%
One Two Three or More
Financial Product Ownership excluding
checking account
With Primary Bank With other Financial Institution
0%
10%
20%
30%
40%
50%
60%
70%
80%
8
FINTECH IS THE new NORMAL
1. china leads the way but fintech
usage has penetrated all developed
markets
2. and age is no boundary as usage
increases across all demographics
0%
10%
20%
30%
40%
50%
60%
18-24 25-34 35-44 45-54 55-64 65-74 75+
2017 Adoption 2015 Adoption
3. eating into cross-selling as a
source of low-cost customer
acquisition for banks
Source: DeloiKe Centre for Financial Services
2015: Taking retail bank cross-selling to the next
level
Source: E&Y Fintech adop=on Index, 2015 & 2017
4. however the banking industry is adapting
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
banks have been acquiring a
wide range of fintech
companies
ranging from online
banks to specific solutions
Source: E&Y Fintech adop=on Index, 2015 & 2017

9. © Julian Levy - Ayarma Ltd
and banks are responding with new propositions
Digital Bank Brand Digital Bank Channel
Digital Bank Subsidiary Digital Native
Differentiated product, sales and
marketing on same underlying
infrastructure and channels
Differentiated product, sales and
marketing and channel using
same back office
Entirely separate digital
subsidiary but depending on
parent banking license
Top to bottom digital bank that
exists as entirely self-contained
Product,
Sales &
Marketing
Channels
Back Office
Bank Charter
Shared with/based on
Parent Bank
Leverage Back Office of
Parent Bank
Leverage Back Office of
Parent Bank
Do not have own bank
charter
Do not have own bank
charter
Do not have own bank
charter
Digital Bank Brand
Digital Bank
Channel
Digital Bank
Subsidiary Digital Native
Build Acquire
Impactofacquiring
onabank’sTransformationagenda
Low
High
Digital Bank Brand Digital Bank Channel Digital Bank
Subsidiary
Digital Native
Source: IBM, Ayarma Ltd.
9

10. © Julian Levy - Ayarma Ltd
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five areas of functional disaggregation for retail banking
$FX
Payments
foreign
exchange
lending advisory
PSD2/open
banking

11. © Julian Levy - Ayarma Ltd
PSD2/open Banking
1. Banks have had three major allies in managing
churn; Inertia, Friction and Opacity
2. New mobile/digital first banks have started
based on API based back-ends to facilitate new
services and integration
4. PSD2 threatens to undermine one of banking’s
strongest moats - the data that is at heart of
consumer relationships
5. UK pushing ahead with aggressive January 2018
timeline for data sharing by largest banks
6. Third party Aggregators well positioned (on
paper) to cut out banks as anything other than
current account providers
“We have provisionally decided to:
Make an Order requiring that RBSG,
LBG, Barclays, HSBCG, Nationwide,
Santander, Danske, BoI and AIBG
adopt and maintain common API
standards through which they will
share data with other providers and
third parties.”
Source: UK Competition and Markets Authority
Source: thisisbud.com
9 0 %
Number of UK SME’s
taking business loans
from their main bank
4 %
Number of UK SME’s
that switch banks
accounts each year
Source: UK Competition and Markets Authority, Making banks work harder for customers
XS2A
(API)
Third
party
providersBanking apps
XS2A XS2A XS2A
Partner
3. although even in digital friendly economies,
traction is slow
1 4 % % of UK Users willing to consider
digital-only bank
Building bank-centric
market place
3 % Number of UK consumers that switch
banks accounts each year
9 0 %
UK consumers accessing
their accounts online
3 6 %
% UK consumers trusting
financial services

12. © Julian Levy - Ayarma Ltd
but open banking is not just for startups
1. Forward thinking banks recognise the
opportunity to use APIs in their favour
2. ING’s Yolt is a perfect example enabling them to
build deep insight into a market they are not
currently regulated in
3. Positioning them to inform future strategic
decisions and creating disintermediation
opportunities
“banking engineering teams are far more capable than they are given credit for, and given the mandate and freedom,
can deliver outstanding technology and user experiences”
Me
12

13. © Julian Levy - Ayarma Ltd
3. Digital Disruptors expected to extract
7%1 of payments revenue by 2020
13
payments
2 5 %
Credit card interest
Credit interest margin
Float benefit
Interchange fees
FX spread
Bank transfer charges
Debit/credit card fees
Current Account Fees
4 4 %
3 5 %
2 1 %
1. Deloitte estimate 25% of European retail
banking revenue linked to payments
1Accenture: Seizing the Opportunities Unlocked by the EU’s Revised Payment Services Directive
91
85
9
15
2016 2020
Physical Digital
2. Digital payments expected to grow
at a caGR of 20% to 2020
Global Payment increasingly shifting from physical to digital
Source: Visa Investor Day 2017
5. legacy payment providers aggressively
targeting growth opportunities
4. technology reducing cost of POS support
increasing support for digital payments
Source: Visa Investor Day 2017
~65% cost of deploying
traditional POS system
>1% cost of
traditional POS
system
6. payment proviDErs like visa &
MASTERCARD still have millions of
merchants and billions of users

14. © Julian Levy - Ayarma Ltd
1. banks retreat from riskier lending have
opened door to shadow banking backed facilities
$.683T $.177T $.057T $.065T $.678T
$4.810T
$1.322T
$.T
$.1T
$1.T
$10.T
$B
$1B
$2B
$3B
$4B
$5B
Unsecured
Personal
Lending
Small
Business
Loans
Leveraged
Lending
Student
Lending
Mortgage
Origination
Mortgage
Servicing
CRE
Lending
Improved technology and structural advantages
driving growth of shadow-banking
Amount in US Banking System Banking Profit Pool at Risk
5. Established web platforms leveraging unique
data addressing asymmetries of SME lending
14
lending platformS driven by regulations, data and rates
3. favourable macro CONDITIONS HAVE driven
increased institutional appetite for loans
2. Marketplace platforms with reduced capital
requirements enablE greater leverage
Source: Morgan Stanley Research: Marketplace Lending
6. Vertical specific lending offerings threaten an
estimated $11Bn of US banking profits
%
2%
4%
6%
8%
Average of Delinquency Rate on Commercial and Industrial Loans, All Commercial
Banks, Percent, Quarterly, Seasonally Adjusted
Average of Delinquency Rate on US Credit Card Loans
US Consumer and Commercial loan delinquency rates
Source: US Federal Reserve Economic Data
0%
20%
40%
60%
80%
100%
2015 2016
4. FINTECH LENDERS HAVE BENEFITTED FROM
INSTITUTIONAL CAPITAL ACROSS ALL LENDING CLASSES
Percentage of institutional investors in US alternative finance
platforms by lending type
Source: EU Shadow Banking Monitor May 2017, Goldman Sachs Global Investment
Research: Rise of the new shadow bank
Source: Cambridge Centre for Finance, 2017 America’s alternative finance industry report
Source: Goldman Sachs,The future of finance, rise of the shadow bank
€ 4 0 T
8 . 3 %
EU Shadow Banking CAGR
2012- 2015
Total Assets of EU Shadow
Banking System 2016
Shadow Banking as % US
Finance System

15. © Julian Levy - Ayarma Ltd
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investment/advisory platformS
250%
168% 168% 167%
101%
$0T
$2T
$4T
$6T
$8T
$10T
0%
100%
200%
300%
2015 2016(e) 2017(e) 2018(e) 2019(e) 2020(e)
Global AUM $(Trillions) Year over Year Growth Rate
2. Robo Advisory assets under management
continue to grow
Source: Business Intelligence, The evolution of robo-advising report
1. Three main models of robo-advisory
emerging
Direct to Consumer - high customer acquisition cost
automated, algorithm- based portfolio management
and without intervention from human advisors
B2B2C- Using existing wealth managers as partners
to deliver white-label automated platform, and allow
them to extend capabilities to wider set of consumers
Hybrid - Augmenting traditional high-touch wealth
managers with advisory tools such as personalised
equity or bond portfolio recommendations
3. But high customer acquisition costs, and
competition from white label solutions make
standalone opportunity difficult
$ 3 8 9
Estimated Average
Customer Acquisition
Cost
Estimated Average
Customer Lifetime
Value
Source: Burnmark Report April 2017: Digital Wealth
$ 2 1 7
What’s Happening?
Small number of companies have managed to scale-up, but advisory systems appear to be a feature of broader wealth management platforms.
Structural issues suggest that investment/advisory companies have challenges scaling and best outcome is as part of large platform with pre-existing customers
Incumbents recognise benefit of being able to offer automated financial advisory services to extend reach at lower cost and leverage established brand
Implementation of PSD2 in Europe likely to accelerate adoption, and may provide new revenue channels

16. © Julian Levy - Ayarma Ltd
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Foreign Exchange
1GBP = 1.354 1GBP = $1.3269
(2%)
1 GBP = $1.2862
(5%)
1. FX has been a source of easy
capital for banks due to opaque
charges, wide spreads, and
uninformed customers.
The initial success of these platforms are serving as basis to move into additional financial
services including lending, overseas current accounts, business banking and more.
2. UK banks charge an average of 3.6%
on a £10,000 transaction, compared to
an average of just 0.9% charged by
non-bank providers1.
3. New platforms offer tighter
spreads and slick, frictionless
user experiences
1 https://www.saxopayments.com/non-bank-money-transfer-providers-eating-into-uk-bank-profits-111198
Key example of how losing customers on a single feature reduces barriers to entry for up-
selling new services, and how modern architectures facilitate business outcomes.

17. © Julian Levy - Ayarma Ltd
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where is it all going?
time structural regulatory
three fact0rs in next wave of fintech
• The change in ownership of data
enabled by PSD2 is a dramatic shift
and presents the greatest threat of
disintermediation
• Some banks will aim to be regulated
utilities that will facilitate
competitors with established banks
• With increased pricing transparency,
AI based support and frictionless
user experiences on a mobile device,
the marginal strategic advantages
of a branch network continue to
reduce, but remain essential for
banks
• As non bank lenders continue to
become more significant,
increased regulatory oversight
may even the playing field
• FinTechs that have built momentum are
well positioned to expand into new
services based on user base and acquired
trust
• Digital banks will have to stop just being
cool, and either make money or be
acquired.
• Banks operational costs will eventually
come under control, and at some point, the
regulatory fines and penalties will stop
• Internal reorganisations to adjust to digital
delivery workflows and modern
development processes will get there
eventually
• When Interest rates eventually rise,
banking profits should rise with them
• It is likely that not all lending models will
survive a full economic cycle

18. © Julian Levy - Ayarma Ltd
thanks
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