Challenger banks, blockchain, marketplace lending, and robo-advisors are changing the way we think about finance. Recent events such as the the hack on the DAO and trouble at America’s largest marketplace lender remind us how quickly things can change. A number of recent reports, conferences and events discuss developments in the space and how participants are responding. New incumbents have capitalized on low customer satisfaction at traditional financial institutions. Blockchain makes inroads, but not at the pace expected. Growth at robo advisors stumble, and marketplace lending wins in some sectors and geographies. How are banks responding? How can entrepreneurs capitalize on the opportunity? What is the pulse of the venture community? Read on to find out:

1. 1www.frontline.vc
European FinTech Trends
June 2016

2. Discussed Themes
2
Intro
Challenger Banks
Blockchain
Marketplace Lending
Robo-Advisors
How are banks responding?
Takeways
Appendix

3. 18% switched from their bank in the past 12 months2
40% would consider banking with Google
59% of financial products are not targeted at them
79% view there relationship as ‘transactional’
3
18-34 year olds think differently about personal finance1
“…digital natives are really pissed off with their digital
banking experience” - Valentin Stalf, CEO
The Pulse of FinTech Q1 2016 Review, CBInsights, MoneyConf, Madrid, Panel Discussion “Distributed Money: The arbitrage game”, 2
In a survey of 4000 customers in the US
& Canada: Banking Shaped by the Customer, Accenture

4. 4
Low customer satisfaction creates opportunity for new players
The Pulse of FinTech Q1 2016 Review, CBInsights

5. 5
Which gave rise to…the new FinTech ecosystem

6. 6
Challenger Banks
What is a non-bank? Someone who engages in banking without a banking license.

7. • It is cheaper, easier and faster than ever
to engage in banking activities
• Existing low customer satisfaction
creates an incentive to try new banks
• Bank partnerships extend the same
deposit guarantees for customers
• Lower compliance standards for online
only banks makes it easier to onboard
customers (address and ID verification)
7
A perfect storm has catalysed the growth of challenger banks
Atom Bank
Starling
Number26
Tandem
Mondo
Fidor
0 45 90 135 180
Digital challenger banks by total
disclosed funding (€m)
MoneyConf, Madrid, Panel Discussion “How can banking become a level playing field”

8. • Announced €40m Series B financing round at a
rumoured €140m (post) valuation
• Acquired 200k customers since launch in January
2015. Suggests a €700 valuation per user
• Does not have a banking license, and is built on
top of WiredCard bank
1
• Marketplace where they integrate 3rd party
products rather than offering services off of their
balance sheet
8
Case Study: German startup challenger bank Number26
“We are not regulated,
but our partner bank is”
- Valentin Stalf, CEO2
1
Wiredcard bank is a specialist in online transfers, and is used by CurrencyFair/ LinkedFinance. 2
MoneyConf, Madrid, Panel Discussion “What do you want from a bank?”

9. 9
Number26 primary differentiator is user experience
ID Verification via video chat
No proof of address document required
Entire process takes about 8 minutes
Deposit cash at your local
grocery store or through
electronics transfers
Free transfers to friends who also
use Number26

10. 10
Number26 analyses your spending patterns to loan you money

11. 11
Number26 offers Transferwise integration directly in the app

12. Easiest and fastest account to open
Completely free to open and use
Covers any withdrawal fees, from any ATM
Send money within the Number26 ecosystem for free
Send money internationally with Transferwise
Affordable credit/ overdraft easily accessible
12
Number26 is great!

13. From the users perspective, product is similar to high street bank
Banks offer higher level of customer service at branches
Cost of customer acquisition for non-banks is high
Cost of compliance is high (or not conducted properly)
Many ‘perks’ are not sustainable (ATM fees, limited identity verification)
Banks have huge distribution
13
But will it last?

14. A banking license continues to be an unfair advantage
14
“…You get a license to defy the
laws of gravity…government
guarantees, and ability to
increase leverage…it is a license
to print money.” CEO, Atom Bank
MoneyConf, Madrid, Panel Discussion “How can banking become a level playing field?

15. 15
Blockchain

16. • VCs like cryptocurrencies because it
reminds them over the early days of
the internet
• It is taken longer than expected to gain
traction, and many players are still
looking for a strong use case
• The role banks play in blockchain is
not the point. The real question is, will
any of these technologies take off at all
16
How did we get here?
“Like the Internet itself, the blockchain is architected
for resilience and self healing…I have a deep and
fundamental belief in open and decentralized
systems.” - Fred Wilson, Union Square Ventures1
1
If they're not lauging at you, you aren't working on the right thing

17. 17
More than just Bitcoin…
There are hundreds of cryptocurrencies built on the blockchain

18. Fundamental flaws of Bitcoin: mining is to expensive, transaction capacity is slow
Increasing complexity of producing new coins makes it less scalable
Growing pains or fundamental flaws? Patient investors are sitting on the side lines
18
Blockchain: Status Quo
“Blockchain technology is immature, unproven and not scalable…
disagreement about core protocol…it could take 5-10 years to sort
out these issues.” - Toby Coppel, Parter & Co-Founder, Mosaic
Ventures (investors in several cryptocurrency businesses)

19. 19
Marketplace Lending

20. 20
Marketplace lending has arrived in a big way
Real Estate LoansInstitutional
Investors
Hedge Funds
BDCs
Banks
Insurance
Pensions
Family Office
Governments
Sovereign Funds
Endowments
Foundations
Private Equity
Small Business Loans
Consumer Loans
Factoring and Receivables
ServicesMedicalStudents & EduImpact Investing
Orhcard Platform, Lendscape

21. Consumer is by far the largest use case in the USA for MPL
In Europe, Funding Circle leads the way in Small Business loans
Real estate and factoring are showing potential in recent years (MarketInvoice, FastPay)
Creating markets: many factoring deals are loans that would have never taken place before
Cost basis for issuing loans in the long run should be lower than banks
Stricter capital requirements for banks have led to reduced credit availability,
Scrutiny around high risk lending have made banks pull back
In 2015 UK and USA MPL loans were £2.2b
1
and $36b
2
respectively
21
Status Quo: Marketplace Lending
UK P2P Industry Lent £2.2 Billion in 2015 UK P2P Industry Lent £2.2 Billion in 2015 , Breaking New Ground the Americas Alternative Finance Benchmarking Report, KPMG

22. 22
Lending Club in the USA is dominating the consumer space
LendingClub Statistics

23. • The total outstanding consumer debt is $3.4t1
in the
USA vs €16b2
in Ireland, and £183b in the UK3
• The average consumer debt per capita is €3,500 in
Ireland, $10,700 in the USA and £2,850 in the UK
• In the USA, student debt, auto loans, and credit card
debt account for $1.2t, $1.0t, and $714b respectively4
• European marketplace lending will be B2B focused
because the EU consumer lending market is too small
23
Consumer lending in Europe is small compared to the USA
1
Consumer Creidt & Payment Statistics, Philadelphia Federal Reserve, 2
Irish Central Bank, Household Credit Report 2H 2015. 3
The Money
Charity, UK Lending Statistcs 4
New York Fed: Quarterly Report on Household Debt and Credit. Consumer debt is ex-mortgages
Lending Club Reported
Loan Purpose

24. 24
How will banks respond to new lending businesses?
• Push for increased regulation to level the
playing field
• Banks will still win some asset classes
such as mortgages
• Reduce pricing to compete
• Acquire, build or use white label services
to participate in growth
Banks are partnering with
marketplace lending platforms

25. Marketplace lending cost structure
25The future of finance, rise of the new shadow bank. Goldman Sachs Research

26. Marketplace lending is expected to be a trillion dollar business
26
Projected Marketplace Lending Deals 2020
0
35
70
105
140
2012 2013 2014 2015 2016
China Origination Volume
United Kingdom Origination Volume
United States Origination Volume
300
250
200
150
100
50
BillionsofUSD
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
YoY Growth in 2014: 167%
YoY Growth in 2015: 200%+
Global Marketplace Lending: Disruptive Innovation in Financials, Morgan Stanley.Global Crowdfunding Market to Reach $34b in 2015, Mass Solution
• Morgan Stanely forecasts global
originations will reach $300b
• This would suggest $1trln in loans
outstanding in 2020
• Half of this growth has come from china,
where there has been massive fraud
• Banks will acquire or build similar
platforms

27. Alternative lending by the numbers in the USA
27
. While it took Prosper 8 years to reach the first $1bn loans issued via its P2P
lending platform, it took just six months to reach the second billion.
The future of finance, rise of the new shadow bank. Goldman Sachs Research

28. 28
Robo-Advsiors (i.e.Automated Wealth Managers)

29. Assets under management are still relatively small
29

30. And growth is slowing.Trouble ahead?
30
“Stand-alone firms will need $16b to $40b of net
assets to break even. Moreover, [Morningstar]
estimates…$1000 cost to add a new account, after
factoring in attrition, and up to a decade to recoup
marketing costs. It will be hard for robe-firms to
self finance their growth.” - Joe Manseuto, CEO,
Morningstar
The Pulse of FinTech Q1 2016 Review, CBInsights, Quote MoneyConf, Madrid, Panel Discussion “Distributed Money: The arbitrage game”, Does not compute, The Economist
“People are overestimating how juicy the
business is. Products are extremely low margin. It
will be harder than the airline industry.
Competition is still increasing. People coming in
with competitive pricing.” Tamaz Giorgadse,
CEO, Raisin (cross boarder deposits)

31. When scale is hard to achieve, companies are acquired for Tech
31The Pulse of FinTech Q1 2016 Review, CBInsights

32. • Goldman Sachs Asset Management (GSAM) has 1trln in AUM.
Betterment and WealthFront have a combined $6b. Early innings?
• Financial advisors have historically struggled to build tech, which
would justify high take out premiums
• Outside the USA, adoption of robo-advisors has been slow. Customer
acquisition cost in this segment is very high
• Barclays, RBS, Lloyds and Santander plan to launch their own services1
32
Wealth management innovation still generates a lot of interest
1UK banks set to launch robo-advisors, FT

33. 33
How are banks handling the situation?

34. 34
Case Study: Santander Bank
Agility
Risk Taking
Mindset
Customer Scale
Products
Infrastructure
Brand
Startups + Banks = Best of both worlds
Kabbage - Serving SMEs in the UK via 3m Santander SMB clients
ripple - Santander uses ripple for small sum currency transfer
Startups Banks

35. Startups build on top of bank systems and are looking for partners
35
Incubuments co-operate with new players
Banks are partnering with
marketplace lending platforms1
1Proprietary Research, The Pulse of FinTech Q1 2016 Review, CBInsights
WiredCard supports Number26,
CurrencyFair and LinkedFinance
Bank Investments to VC-backed
FinTech Companies Q1’2015- Q2’2016
Goldman Sachs
Citi
Santander
Mitsubishi
JPMorgan
ING Group
Bank of China
China Development
Mizuho
Sumitomo Mitsui
0 2 5 7 9

36. 36
Conclusion

37. Takeaways from MoneyConf discussions
37
Challenger Banks
• Mostly opportunity, not enemy
• Is better UX a large enough advantage?
• Is the business model/ service sustainable?
Blockchain
• Bitcoin may not be the big winner
• Expect some adoption in 5-10 years
• No need to jump on the next hot thing
Robo-Advisors
• Signs of trouble
• Valuable tech
• Large market potential
Marketplace Lending
• Capturing €35b+ loans annually
• Instances of fraud & non-compliance
• Small consumer opportunity in EU

38. 38
Thomas Olszewski
@TROlszewski
thomas@frontline.vc

39. 39
Appendix

40. 40
Brexit

41. • If the Brexit would occur, Ireland and
Germany are seen as favourites for new
business locations, due to their favourable
regulatory framework, EU membership
and existing tech communities.
• 34% of software developers working in
the UK are from outside of the UK and
24% are from the European Union. Skilled
labor have a lot of options and they will
go where its easiest for them to work.
41
Germany & Ireland potential winners in Brexit vote

42. Transferwise stated they would relocate HQ in case of Brexit
Massive devaluation similar to the Swiss Franc in 2005
Why is Transferwise halting transactions on day of Brexit?
42
Brexit causing spikes in volume transfered at remittance co’s