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THE FUTURE OF DIGITALLENDING: 2015

Sources: Shutterstock/Rrraum,Shutterstock/wongwean

A Research Service By Business Insider

BI Intelligence


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The US was rocked by a financial crisis in 2008.

Source: Reuters/Robert Galbraith


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4.6% 4.6%

5.8%

9.3%9.6%

2006 2007 2008 2009 2010

Average US Unemployment Rate

It robbed financial well-being from countless cons

Source: US Bureau Of Labor Statistics


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$1,007$961

$910$872

$836

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Consumer Credit Collapsed During The Great RecessiOutstanding US Revolving Consumer Credit – $Billions

People spent less to reduce personal debt...

Source: Federal Reserve


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And they started looking for waysto refinance expensive credit card debt.

Source: Flickr/Wonderlane


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63%

23%

6%2%

None 1 card 2 cards 3 cards

Number Of Major Credit Cards OwnedUS – Millennials Age 18 to 29

Younger generations shied away from credit altoge

Source: Bankrate August 2014 Financial Security Index


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3.0 3.0

3.8

4.6

5.2

3.3

1.6 1.5

2003 2004 2005 2006 2007 2008 2009 2010

Loans Originated To US Small Businesses – MillionFirms with $1 million or less in revenue

The recession also affected small businesses —it became more difficult for them to find a loan.

Source: FFIEC, 2014


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25%36%

65% 70%11% 4%

6%10%

11%10%

12%52% 50%

14% 20%

Microbusinesses (lessthan $250k)

Small ($250k-$1M) Mid-size ($1M-$10M) Commercial (>$10M)

US Small Businesses Have Unfulfilled Credit NeedsPortion Of Financing Received By Business Size, First Half Of 2014

Recei

Recei

Recei

Recei

applie

And in 2014, they were still thirsty for capital.

Source: New York Fed, Joint Small Business Credit Survey Report


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This created a huge opportunityfor lending startups to step in.

Source: VentureBeat


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Peer-to-peer (P2P) lending emergedas a new business model.


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So how does P2P lending work?


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Like these popular startups, P2P lenders act as thmiddleman connecting people to services via the i

2


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!"#$%#& ()*+,-./,--,0"- !"#$677)%"4 8,- *),*# 9:;


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!"#$%#& ()*+,-./,--,0"- !"

(*-5#"- /*#?

677)%"4 8,- *

),*# 9:;


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21.8%

14.8%

Traditional bank lenders Lending Club

Average Interest Rate Charged To BorrowersConsolidating Outstanding Debt – US

P2P lending platforms are ableto give borrowers lower interest rates…

Source: Company Filings


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1.2%1.7%

3.0%

6.4%

7.5%

8.8%

9.6%

Bonds TIPS REIT EmergingMarkets

Large CapStocks Lending Club

Small CapStocks

M

Comparison Of Returns Between Lending ClubAnd Major Asset Classes – US

Historical Returns – 2007-2014

…and investors higher returns.

Source: Lending Memo, Lending Club


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A good deal for both parties!

Source: Shutterstock/mikute

P2P l di d i 2005 ith Z i th UK


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P2P lending emerged in 2005 with Zopa in the UKand Prosper in the US.

Consumers are now using P2P lenders


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Consumers are now using P2P lendersfor a broad array of purposes.

Sources: Flickr, Reuters/Alan L.


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Small businesses are also attracted to P2P lendin

Source: Facebook/Bloc11

Small businesses are receiving higher loan approv


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19%

64%

22%

61%

Big banks Alternative lenders

Alternative Lenders Have Higher Small-Business Loan Approval Rates – US

Feb-14 Feb-15

Small businesses are receiving higher loan approvfrom P2P lenders than big banks.

Source: Biz2Credit Small Business Lending Index


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2012 2013 2014

P2P Lending Volume In China, US, And Europe Combi

P2P lending is growing rapidly in the US, China, a

Source: Cambridge University, Ernst & Young, GrowthPraxis, Wangdaizhijia, BI Intelligence Calculations

The US has one of the world’s largest


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$0.9$2.9

$6.6

$19.7

$32.8

2012 2013 2014 2015E* 2016E

Total Value Of Loan Originations On US P2P Lending Plat$Billions

The US has one of the world s largestand most successful P2P lending markets.

Source: GrowthPraxis, *BI Intelligence Estimate

But P2P lending still represents just a fraction


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$7

$890

P2P LendingOutstanding Revolving Consumer Credit

P2P Lending Volume Compared To TotalRevolving Consumer Credit In 2014

US – $Billions

But P2P lending still represents just a fractionof total consumer credit.

Source: US Federal Reserve, GrowthPraxis


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2012 2013 20

Total Lending Volume On Alternative FinancePlatforms In Continental Europe

Europe is a promising emerging market for P2P le

Source: Cambridge University, Ernst & Young

P2P lending is becoming more popular


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1,084

2,858

5,801

2012 2013 2014

Number Of European Small To Medium-SizedBusinesses Receiving Alternative Finance

Excluding UK

P2P lending is becoming more popularamong small businesses in Europe.

Source: Cambridge University, Ernst & Young, BI Intelligence Calculations


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Th UK’ k t d f th t f E ’


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! 70 ($92)

! 197 ($257)

! 368 ($480)! 248 ($324)

! 629 ($821)

! 1,750 ($2,283

2012 2013 2014

Online Peer-To-Peer Lending VolumeUK Vs. The Rest Of Europe

!Millions ($Millions)

Europe excluding UK UK

The UK’s market dwarfs the rest of Europe’s.


One factor contributing to the UK’s success


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One factor contributing to the UK s successis supportive regulations.

Source: The Guardian

Partnerships between P2P lenders and major ban


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Aware, 58%

Consumer Awareness Of Alternative Finance In The UK – 2014

Consumer Awareness Of Alternative FinanceUK – 2014

Partnerships between P2P lenders and major banhave likely helped boost consumer awareness.

Source: Nesta, University Of Cambridge

A d i F P2P l di i i l i


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$0 ! 0.2 ($0.3)

! 8.1 ($10.6)

2012 2013 2014

France's P2P Small Business Lending MarketIs Nascent But Growing Rapidly

Value Of P2P Business Loan Originations, !Millions ($Millions)

!"#$%& ()*+,- ./,0

And in France, P2P lending is seeing explosive gro



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The most interesting things are happening in C


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Since the credit market is underdevelopeP2P lenders have to get creative.

In China, P2P lenders are giving out loans


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72%

22%

US China

Percentage Of Citizens Who Own A Credit Card

, g gto consumers who’ve never even held credit.

Source: Federal Reserve Bank of Boston, Company Statements

For example, China Rapid Finance analyzes mobile


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p p ydata and issues loans through Tencent’s QQ mess

Source: Shutterstock/thodonal88

Its success is part of why internet finance


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$0.1 $0.5

$3.5

$17.3

$41.3

2010 2011 2012 2013 2014

China's Internet Finance Market Is BoomingAnnual loan volume – $Billions

yis booming in the country.

Source: Wangdaizhijia

The growth of P2P lending


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has banks feeling a little threatened…

Source: Business Insider

Some are investing in alternative lenders


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as a way to reach a new segment of customers.

Source: Wired

Others are competing by creating


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new digital lending divisions.

Source: Business Insider

Some are vowing to serve more borrowers


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Some are vowing to serve more borrowers.

Source: Financial Times

So what’s the future of P2P lending?


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So what s the future of P2P lending?

Source: Shutterstock/06photo

Interest rate increases could make P2P loansl tt ti t i t d b


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0%

1%

2%

3%

4%

5%

6%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Effective US Federal Funds Rate

less attractive to investors and borrowers.

Source: US Federal Reserve

Stringent regulations currently preventj P2P i f ti h


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major P2P companies from operating everywhere.

Source: http://www.lendingmemo.com/lending-club-and-prosper-states/

But lack of regulation could allow bad lenders to tthi ld d t t i P2P l di


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3%

9%

18%

2012 2013 2014

China-Based Alternative Lending PlatformsWith Reported Problems

Percentage Of Total

this would erode trust in P2P lending.

Source: Mercator Institute for China Studies


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Henry BlodgetCEO & Editor-in-Chief

Barbara Peng

Vice President,Research

g

Jaime T

Researc

BII DIGITAL FINANCIAL SERVICES

Evan Bakker

Research Analyst

John Heggestuen

Senior Research Analyst

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