Marketplace Lending in the U.S. - An industry overview March 2015

Note: Study limited to the US market
CONTENTS
• TBD
• ITEM 2
Marketplace Lending
An overview of the marketplace lending business in the U.S.
March 2015

Contents
• Different financing models – Traditional & alternative
• The need for alternative financing
• What sets alternative financing apart?
RAJESH KAMATH © 2015 2
Introduction to alternative finance1
• The basic structure of alternative lending
• A summary of the alternative lending business
• Some alternative lending metrics
Alternative lending – The basics2
• Participants in the alternative lending ecosystem
• Typical borrower, lender (‘investor’) profiles and products
• Common platform business models and revenue streams
Alternative lending – Deep dive3
• Current and awaited regulations governing alternative lending
• Some investments in alternative lending and related metrics
• Active considerations, key success factors & the future…
Alternative lending – The near term4

Financing models – Traditional & alternative
3
Note: Similar alternative mechanisms are also being seen in the Investing & Wealth Management area
Traditional Lending
Access to debt finance via banks and lenders,
mostly brick-n-mortar
Traditional Investment Banking
Access to equity and structured finance via
investment banks
Online Lending
Established banks and new players lending via
the online channel
TRADITIONAL
FINANCE
ALTERNATIVE
FINANCE
Crowdfunding
Crowd-sourced investments in the
form on equity or end-product
rewards
Non-profit Finance
Crowd-sourced investments with a
social cause – under section
501(c)(3)
Alternative Lending
Peer and other investor sourced
financing, in the form of debt
The focus of this study
RAJESH KAMATH © 2015

The need for alternative financing
4
Seekers of funds
Traditional financing mechanisms are not anticipating / meeting the
funding needs of some customers / segments
• Traditional lenders have eliminated some unsecured products completely
• Reduction in home equity collateral mechanism as security for borrowing
• Rigid underwriting standards eliminate potentially deserving prospects –
insufficient credit / business history, irregular income, new graduates with jobs
• High costs act against small ticket personal & business loans (<$100,000)
• Equity funding via IPOs tends to be costly and requires robust business history
Some potential customers might not even approach traditional finance
channels for their funding needs
• Small businesses do not consider bank lending as a viable funding channel
• Millennials are less likely to approach traditional banks for loans
• Borrowers are looking for finance costing lesser than credit card borrowing
• Traditional investment banks are generally not accessible to these segments
Providers of funds
Providers might be looking for
• Marketplace investments provide a product that is perceived to yield a higher
return as compared to ‘traditional’ investment products (e.g., deposits, bonds)
• Investors might want to participate in a ‘social’ cause that the funding is for
• Some investors might want first-comer access to a path-breaking product /
innovation that the borrower seeks to create with their investment
Some Traditional
Finance Metrics
• More than 50% of small business
applicants sought less than
$100,000 in credit
• A majority of small firms (under
$1 million AR) and startups
(under 5 years in business) were
unable to secure any credit
• 22% of millennials say they
might never have a relationship
with a bank
• 76% of millennials said a mobile
mechanism to access finance
was very important to them
• 73% of millennials said they are
more excited about getting
products from non-bank tech.
companies
Data sources: Federal Reserves - SBCS,
ICBA, Microsoft, MDI, Peerform

Alternative financing essentials
5
Data-driven: Use broader set of data sources in decision-making, and technology to
leverage this data
Channels: No branches – access and service almost exclusively over online & mobile
channel and phone
Efficiency: Focus on technology-driven speed in decision-making and funding; try to
reduce human-in-loop aspect significantly
Cost of funds: Lower establishment costs and higher efficiency = lower cost of funds for
clients and better returns to investors
Fund sources: Multiple sources - individuals, accredited & institutional investors, lenders
Choice: Greater say (/flexibility) to the customers in the financial product
Experience: Focus on overall customer experience before, during and after the funding
Community: Expertise of community and investors made available to the fund-seeker, in
some cases

Alternative Lending – The basics
Financing provided in the form of debt
Crowdfunding
Not in scope of study
Non-profit Finance
Not in scope of study
Alternative Lending
Covered in detail in
subsequent slides

Alternative lending – The basics
7
Marketplace
1
2
3
4
5
6
Requests loan
Grades borrower risk, posts loan
& notes, provides loan data
Funds loan by purchasing
‘notes’
Borrower
Lender
Processes loan funding payment
Makes loan installment
payment
Processes loan inst. payment
7
Remits loan payment
against ‘notes’
A borrower might have their loan
request funded by one or more lenders
(called ‘investors’)
The lender (called ‘investor’) might
decide to fund a loan request
completely or partly
The marketplace brings together the
borrowers and investors, and charges
fees for its services
Product(s) Investment securities (‘notes’)
Product(s): Loans, Refi, Lines of credit

Alternative lending – Business summary
8
Targets the millennials segment of borrowers, both as individuals and small (&
medium) businesses
Is often benchmarked against credit cards in terms of highest cost of finance offered,
rather than traditional personal or small business term loans
Is growing at a significantly higher rate as compared to traditional lenders, in sub &
near-prime personal, small business and some other lending
Is focusing on access to institutional sources of funds & liquidity via lending
commitments, securitization & secondary markets
Targets mostly accredited and institutional investors (i.e., lenders), with final regulation
on retail investor participation awaited
Has increasingly specialized loan offerings, even for specific business scenarios in
specific customer segments

Alternative lending – Some metrics
9
alternative lending
originated: ~$5.5b
traditional finance
new: ~$67b
The alternative lending channel can be considered
small as compared to the traditional channel, but…
… alternative lending is growing at a scorching pace
as traditional lending growth is declining
84 %
credit cards o/s cons. fin. o/s alt. lend. orig.
-2 % -0.7 %
Note: Growth calculated in period Q2 2007 – Q2 2014Note: Figures as of Q4 2014
Alternative lenders have a significant advantage over
traditional lenders in operating expenses
Estimates for the future size of the alternative lending
market vary, but all suggest significant impact on lending
Data sources: Cleveland Fed, McKinsey, PwC
Note: Operating expenses expressed as % of loan portfolio
traditional lender alternate lender
5 %
7 %
2 %
Part of 3-5% difference in
ops costs passed on to
borrowers and investors
2015
$6 b
2025 (e)
$150 b PwC
$1,000 b Some VCs
$13,000 b Current rate

Alternative Lending – Deep dive

The alternative lending ecosystem
11
Marketplace
Secondary Market
Provide mechanism for investors to
trade marketplace securities (notes)
e.g. FOLIOfn for LendingClub
3rd Party Loan Servicer
Provide servicing for loans
originated on marketplace
e.g. Mohela & TruStudent for SoFi
Investor Data Aids
Provide loan data & analytics, for
investment decision support mostly
e.g. Crowdnetic, LendingRobot
Marketplace Software
Provide white-labeled software
platforms for building marketplaces
e.g. Cloud Lending Inc., Mirador
Payment Processor
Provide payment processing for
borrower, investor, other payments
e.g. Stripe, Braintree
Collection Agency
Provide collection services to
lenders for past due /in default
loans
eSignature Provider
Provide eSignature capabilities for
contracts and other documents
e.g. DocuSign
Marketplace Aggregator
Aggregate investment opportunities
from multiple marketplaces
e.g. Orchard
Bank / Lender
Fund loans qualified and referred
by online broker / marketplace
e.g. Cross River Bank for Peerform
Forms & Services Provider
Provide e-forms, filing & payment
tracking services for P2P lending
e.g. NFM, Lending Karma
Asset Manager
Buy marketplace loans to convert
into saleable securities
e.g. Blackrock for Prosper
Broker / Referrer
Channel borrowers to lending
marketplaces (Can be small banks)
e.g. Buynance
Data Providers
Provide credit, social and other
data, for underwriting risk analysis
e.g. Credit bureaus, ‘Social’ websites
Rating Agency
Provide risk ratings to securities
originated by marketplaces
e.g. S&P for SoFi’s securities

Wants funds in form of bitcoins
Typical borrowers – Segments, profile, needs
12
FICO > 660
Active ‘social’ profile
Other additional requirements
Individual
Is looking for a student loan / refi
Is looking for to payoff credit cards
Is looking for a mortgage
Small business
Owner FICO > 600
1-2+ years in business
Annual revenues $100,000
Other additional requirements
Is looking for franchise finance
Is looking for a term business loan
Note: Above listing is illustrative, and is not intended to be comprehensive. Certain lenders listed above have products that fulfil more than one business requirement.
Is looking for merchant cash advances
Is looking for a line of credit
Is looking for funds against invoices
Real estate co.
Is looking for a personal loan
Is looking to provide clients with funds
Is looking for debt / equity investment
Is looking to finance commercial
non-owner occupied residential RE
for development, rehab etc.
Complex, highly specific
borrower eligibility
requirements

Typical borrower product structure
13
Individual
Note: Above listing is illustrative, and is not intended to be comprehensive. Certain lenders might have different loan / finance terms from those listed above.
Loan type Term (Months) Amount ($ 000s) Min APR (%) Other Notes
Mortgage 60 36 84 250 450 5,000150 . .2.8% 5.7%
Data shown for 5/1 &
7/1 ARM mortgages
Min and max from
any marketplace
Typical range from
across marketplaces
Personal loan 12 36 606 3 35 501
Fixed APR, generally
4% .5% 7% 7.5%
Student loan refi 12 36 606 3 35 501
Rates for fixed rate loan
Min var. APR - 1.9%. .2.8% 3.5% 3.75%
Notes: Rates vary frequently. Other loan terms might also change. Data meant to be representative, not comprehensive.
Marketplaces typically do NOT charge any prepayment penalties or fees. Refer subsequent slide for revenue streams.
Data snapshot taken on 3/21/2015.
Small
business
Term loan 12 36 606 50 250 5,0005
Fixed APR, generally
8% .10%
Line of credit 12 36 606 25 100 5005
Fees charged monthly
. .12.7% 27% 30%

Typical lenders (‘investors’) and products
14
Accredited
Investor
• The most common form
of marketplace ‘investor’
• Consists of high net-
worth persons & families,
subject to certain income
and networth criteria
• Can invest after
establishing accredited
status
Retail (‘Peer’)
Investor
Traditional
Bank / Lender
Marketplace /
Online Lender
IRA Account
Holder
Other Financial
Institution
• Found on very few alt.
lending platforms, which
are community or family
& friends lending oriented
• Can invest in ‘private’
offerings only
• Need to meet additional
state qualifications
• Not all IRAs eligible to
invest via platforms
• Can invest through a ‘self-
directed IRA’ account
• Some platforms have
started offering self-
directed IRA accounts –
e.g. Prospect IRA
• Lend (rather than ‘invest’)
their own funds
• Funds available via capital
infusions or lending
commitments
• Model close to traditional
lending, but via the online
/ mobile channel
• Traditional banks, lenders
buying loans originated
on marketplaces
• Fund (and service) loans
after platform approval
• Platforms play the role of
origination risk managers
/ referral channels
• Specialist factors,
merchant cash advance
providers using platforms
to fund borrower needs
• Some FIs have also
started securitizing loans
originated by platforms,
providing ‘indirect’ capital
for lending
The Investor
Product
• The most common investor
product is Borrower Payment
Dependent Notes, or “Notes”
• The notes do not have a
payment guarantee, even if
underlying loans are secured
• Marketplaces might allow
both part and whole-loan
investments via these notes
• The notes do not have a
secondary market (with few
exceptions like FOLIOfn)
• Some RE marketplaces also
allow investments in equities
or fund-like products
Typical characteristics of notes
- bear interest from issue date
- have a fixed rate of return
- are payable monthly
- have a maturity of 1-3 years
- typical APR 5-14%, v/s 1% CD

Common platform business models
15
P2P Lender • Very few of pure-play P2P lenders exist currently. A few have
adopted ‘hybrid’ models (Peer + Self / Investor lending)
• Some bit-coin based lending still shows P2PL characteristics
Note: Accredited investors
NOT considered ‘peers’.
Offer investments by
peers (i.e., retail investors)
Online Lender • No concept of ‘investor’ marketplace – loan funds come from
single source
• Typically, own funds are lent to borrowers
• Can also be alternate origination channel for a bank / lender
Offer loans through
online / mobile channel.
No investor marketplace
Lending
Marketplace
• The most common model of alternative lending currently
• Funds lent might be own capital /debt funding or from accredited
/ institutional investors, single / multiple lenders
• Some only originate for a single lender now, but with scope for
future expansion or act as a loan broker
Marketplace model for
loans. Mix of traditional
lenders & ‘investors’
RE Lending
Marketplace
• Variant of lending marketplace, focusing on real estate
• Funds typically lent for development and rehab of commercial RE
/ non-owner occupied RE, including fix-n-flip
• Many allow for both loan and equity-based funding
real estate loans
Financing
Marketplace
• Offers non-term-loan business finance like lines of credit, cash
advances and invoice factoring
• Focused on working capital needs of small businesses
• Can act as broker or online channel for existing financers
non-loan debt financing

Platform revenue streams - Summary
16
Origination Fee
Maintenance / Servicing Fee
Failed Payment Fee
Rate Spreads
Listing / Platform Fee
Most platforms make their
revenues (and defray their
costs) by charging fees
Revenue from rate spreads
do not accrue to
marketplaces, only to
online / lenders
Borrowers are expected to
pay a higher number (and
amount) of fees as
compared to investors
Fees and charges can be
one-time or periodic or
event based; they can be
charged as a percentage
or as a flat amount
Refer following slide for additional discussion…
Borrower
Fees & Charges
Investor
Fees & Charges
Late Payment Fee
Check Processing Fee
Other Fees
Other Fees
Investor Servicing Fee

Platform revenue streams
17
Borrower
Fees &
Charges
Investor
Fees &
Charges
• Most common fee on marketplace / lending platforms
• Biggest contributor to marketplace revenue
• Exact amount (as %age) based on borrower risk ‘grade’
determined by the platform algorithm, on funding success
Origination
Fee
• One time
• Between 1% – 5% of
amount funded
• Typically charged in non-term-loan financing scenarios
• Represents fee against extended line of credit, calculated
on actual credit availed / outstanding
Maintenance /
Servicing Fee
• Monthly (or weekly)
• Between 1% – 2% of
credit line outstanding
• Failed payment fee – For reprocessing failed payments
• Check processing fee – For payments made via checks
• Late payment fee – For payments not received by due date
Payment-
related Fees
• Typ. flat fee per event
• Late fees can be
%age of payment due
No pre-payment
penalties are
charged by alt.
lending platforms
• Charged by online lenders, but NOT by marketplaces
• Difference between cost of funds, and borrower APRs
Rate Spreads • %age of loan amount
• Listing / Platform fee – For listing loan on marketplace
• Rarely seen; typically charged by <5% of platforms
• Others
Other Fees • Varies
• Most common fee on marketplace / lending investors;
though NOT as common as Borrower Origination fees
• Used mostly for processing periodic investor payments
Servicing Fee
• Payment based
• Between 0.5% – 1% of
every investor payment
• Platform fee – For registration, charged as one-time flat fee
• Rarely seen; typically charged by <2% of platforms
• Others
Other Fees • Varies

Alternative Lending – The near term

Regulation - Summary
19
Note: In addition to the above, offerings have to consider state financial suitability requirements.
Crowdfunding, and more
specifically, alternative
financing is sought to be
finally regulated under
the JOBS Act 2012.
Title III rules of the Act,
governing crowdfunding
intermediary (i.e.,
marketplace) provisions,
are expected to go into
effect by Q4 2015.
Current marketplace
offerings mostly take
advantage of Reg. D
exemptions under the
Securities Act 1933.
Today, mostly institutional or accredited investors (‘lenders’) can invest
in securities offered by these marketplaces, with few exceptions.
JOBS Act Title III means to allow wider participation of non-accredited
(i.e., retail) investors in securities offerings by these marketplaces.
Some commentators think that once allowed by Title III, the size of
investments by non-accredited investors might be as high as $300 bn.
Even with current exceptions, the number of non-accredited investors
who are allowed to participate in any offering today is miniscule.
Refer following slide for additional discussion…
Currently, marketplaces are in a holding pattern with regard to Title III,
which explains their absence of focus on retail investors.
As of March 2015, existing alternative lending offerings operate under
Securities Act 1933 Reg. D, and NOT under JOBs Act, Title III.

Regulation - Details
20
General Offering Private Offering
Securities Act 1933 - Reg. D JOBS Act 2012 – Title III
In effect. Being used today. Expected. ETA Q4 2015.
Governs Types of Marketplace Offerings Allowed
Note: All current offering types expected to file Form D with the SEC
Reg. D Rule 505 Reg. D Rule 506(b)Reg. D Rule 506(c)
Non-accredited
investors?
Not allowed Allowed. Max = 35 Allowed. Max = 35
Accredited /
Inst. investors?
Allowed. NO
number restriction
Allowed. NO
number restriction
Allowed. NO
number restriction
General
solicitation?
Allowed Not allowed Not allowed
Non-accredited
sophistication?
Not applicable Not required Required
Annual fund
raising maximum
No restriction $ 5,000,000 No restriction
SEC Disclosure
burden
Lower Higher Lower
Governs Issuers & Marketplaces
Issuers:
Exempts issuers from Securities
Act, Sec 5 requirements for
issue < $ 1 million, if they use
an intermediary* - broker or
‘funding portal’
Funding Portals (Marketplaces):
• Required to register with SEC
as ‘funding portal’
• Required to be member of a
NSA (e.g. FINRA)
• Cannot offer investment
advice or recommendations
• Cannot solicit purchases, sales
on securities offered
• Cannot pay compensation for
solicitation
• Cannot hold, manage or
handle funds or securities
* In addition to other conditionsRAJESH KAMATH © 2015

Major recent investments in marketplaces
21
Data sources: Primary research on investments in alternative lending conducted by the author using CrunchBase, AngelList and other public domain sources.
Sample size ~50. Sample was meant to be representative, not comprehensive. Only investment deals with size > $50 million shown in this representation.
Represents total investments made in marketplace sample (size ~50) in that calendar year. USD millions.
Direct Lending Investments 250
Q4 2007
80NelNet, Vikram Pandit + 120
Q4 2012
100GarrisonQ4 2013
65Accel Partners +
Q3 2013
270
Q1 2009
866
IPO 12/2014, Google Capital,
BlackRock +
125 6557Q1 2007
200130100 7775
IPO 12/2014, Thiel, Goldman
Sachs, Google Ventures +Q2 2006
350
Q3 2011
70Phenomen Ventures +
Q1 2006
200200 8077 60
Peter Thiel, Renren Inc.,
QED Investors +Q2 2011
143
1,198
318
2,575
12/31/201412/31/201312/31/201212/31/2011
12/31/201412/31/201312/31/201212/31/2011
Platform &
launch date
Major Investors

Alternative lending investments
22
Most of the early funding for marketplaces came in
the form of angel / seed / bootstrap and venture
capital. In contrast, funding today is increasingly
coming from more ‘mainstream’ institutional players in
the form of equity and debt / debt commitments. Two
marketplaces also went public in 2014 through IPOs.
Data sources: Primary research on investments in alternative lending conducted by the author using CrunchBase, AngelList and other public domain sources.
Investment types: Angel / seed / bootstrap, Venture capital, Private equity, Debt & lending commitments, IPO
Sample size ~50. Sample was meant to be representative, not comprehensive
Investments in 2011 and earlier were going into
alternative lending that offered mostly non-segmented
personal and business credit. However, marketplaces
since then have become increasingly product &
customer-segment specific, and investments in them
can be thought of as reflecting those specifications.

Some active considerations
23
Regulation
How will the ‘final’
rules under JOBS Act
Title III affect the way
marketplaces work?
Segmentation
Which borrower
segment(s) to target?
What should the
product mix look like?
Differentiation
How to differentiate
ones offering in an
increasingly crowded
business?
Acquisition Costs
How much should be
spent on acquiring
new borrowers? What
channels?
Operational Cost
Will costs in the model
increase? Especially
with human-in-loop
decision making?
Brokers in small business
lending can charge as much
as 10-15% of loan amount as
brokerage charges
Previously specialized lenders
have now started diversifying
into new products. e.g. SoFi
For example, there are 60+
marketplaces targeting real
estate funding in the US alone
Investor Mix
What is the ideal
investor mix?
Especially after Title III
comes into force?
This is also connected to how
fast the marketplace can scale,
to handle investor growth
Marketplaces today explicitly
say that they do NOT operate
under Title III
Investor Access
How much access to
provide institutional &
technology-based
investors?
Some marketplaces have
started limiting automated
access by algorithms that
select loans for investment
Technology costs are lower
than human costs in the
operational context
Technology
What strategy should
be followed for the
platform technology?
Build? Buy? Mix?
While the user-facing features
are common across most
platforms, the decision-making
algorithm is the differentiator

Key success factors
24
Scale
• Influences marketplace top-line – (fee) revenues ᾱ loans originated
• Key driver in attracting customers, capital, growth and survivability
Agility
• Bringing new products to market
• Rolling out offering in new states
• Reacting to introduction of new regulation
• Modifying technology & data to align with real world observations
Customer
Experience
• Drives return business to the platform
• Influences customer (borrower and investor) referrals
• Contributes to differentiation & reduces acquisition costs
Access to
Capital
• Drives scale – especially capital from institutional sources
• Can influence cost of capital, which has a direct bearing on bottom-line
Risk
Management
• Implemented in underwriting technology (algorithm) and processes
• Drives sustainability, and in the longer term, access to capital
• Especially important during downturns in the credit cycle
Cost
Structure
• Governs cost of capital to borrowers, influencing customer acquisition
• Drives bottom-line, and return on capital
• Technology used to break co-relation of scale with human costs

What the future might look like
25
2014201220082006 2010
WE ARE HERE
25+ commitments of more than
$50 mm each in this period
SunTrust launches online
lending – ‘LightStream’
S&P provides rating for
SoFi’s securities offering
Number of ‘independent’ alternative marketplaces
Number of bank online lending / marketplaces
Key:
Alibaba offers loans to US
businesses through Lending Club
Lending Club & OnDeck
go public
FOLIOfn offers secondary
market for P2P securities
Number of alternative
marketplaces might
reduce drastically
through cash burn
without scale,
consolidation & effects
of bad credit cycle
Mainstream banks will have to
adapt to online lending to acquire /
retain millennials as customers
Lending club surpasses
$1 bn. in loans issued
Prosper surpasses $2 bn.
In loans issued
OnDeck records annual loan
origination volume of $1.2 bn.
Union Bank agrees to buy
loans from Lending Club
Steady state
Marketplaces & lenders that excel at the
key success factors will survive. Customers
will move to the survivors. Rate of new
platform launches will be low, and will
require really robust differentiation and /
or sharp niches. Marketplaces and banks
will compete, but also collaborate.
Smaller banks are likely to see
marketplaces as partners in
expanding / sustaining business

Thank You
https://www.linkedin.com/in/hsejarhtamak
RAJESH KAMATH

Marketplace Lending in the U.S. - An industry overview March 2015

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