Small Business Lending:

(1)

1 Noah Breslow, CEO, OnDeck

LendIt | April 15, 2015

The Scaling of

Small Business Lending:

(2)

The Way It Used To Be…

(3)

Agenda

Local

What are the trends in

local small business

lending?

National

What is driving the growth

in national scale small

business lending?

Global

Can / should / will

small business lending

platforms go global?

(4)

What are the trends in local small

business lending?

(5)

Traditional SMB Loans Are Onerous

Apply

Offline

33 Hours

1 Manual

Review

Weeks / Months

1. Source: Small business survey conducted by the Federal Reserve Bank of New York

Get

Funding

Several Days

(6)

Confidential & Proprietary

“

Banks have been shifting activity away from

the small business credit market

since the late

1990s, as they have consolidated and sought out

more profitable sectors of the credit market.”

– Federal Reserve Bank of Cleveland,

August 2013

“We have known for some years now that

banks’ small business loan portfolios

are not particularly profitable

.

– Oliver Wyman,

Financing Small Businesses 2013

Banks Shifting Away from SMB Lending

(7)

Fewer Branches, Fewer Banks

(8)

Major consolidation

of community banks

Less than 7,000

community banks today

Down from over 14,000

in the mid-1980s

Fewer Branches, Fewer Banks

(9)

Community Bank Lending Share Drops

Lending Share drops from

42% to 22% over 20 years

(10)

Majors SMB Lending Share is Rising

Top 5 Largest

Banks

(11)

Marketplace Lenders Growing Fast

Source: Liberum. Volumes of Lending Club, Prosper, Funding Circle, Zopa, RateSetter

(12)

What is driving the growth in national

scale small business lending?

(13)

13

4 Reasons National, Online SMB Lending is Rising

Customer Behavior

Less Subsidized

(14)

Behavior: SMB “Operating System” Moving Online

(15)

…And SMBs Looking Online for Loans

Almost

20%

of SMB applicants

looked online for financing

in the first half of 2014

1 1. Source: Joint Small Business Credit Survey Report, 2014: by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia

(16)

Subsidized SMB Loan Programs Lack Reach

16

Donations

Federal CDFI Fund

Low rates

Non-economic mission allows access

to underserved SMBs

Inefficient

: 42¢ admin per $1 loaned

Fragmented

: 1000+ CDFIs

Limited Reach

: $500-$700M volume,

<10K loans per year

Taxpayer guarantees

(cyclical)

Low rates

Available to startups

Helps underserved SMBs

Slow

: 60-90+ days

Unequal

: 50% of loan volume to large

loans over $2M

Limited Reach:

50-60K loans per year

SUBSIDY

CONS

PROS

(17)

Economies of Scale

SMB Lending Variable Costs

Credit

Capital

Processing and Servicing

Acquisition

Scale Drivers

Marketing Efficiency, Improved

Targeting, Brand Awareness

Process Automation,

Vendor Costs

Track Record,

“Buy in Bulk”

Credit Model Quality, Operational

Knowledge

(18)

Access to Capital: Business Data

Gastropub:

Rotunda, FL

Vietnamese

Restaurant:

Westminster, CA

Mexican Grill:

Newcastle, PA

Jazz Bar +

Restaurant:

Maitland, FL

Target Business

Similar Businesses

(19)

Highest Risk

Lowest Risk

_{Highest Risk}

_{Lowest Risk}

Highest…

Lowest…

_{Highest Risk}

_{Lowest Risk}

V1: 100s

V2: 1000s

V3: 10,000+

60%

70%

80%

_95%

V4: 50,000+

Access to Capital: Improving Models w/ Scale

= % of applications scored

19

Note: This is a representation of scoring improvement with scale, not exact data

Version 1:

Riskiest loans

~3X

likelier to default

than safest loans

Version 4:

Riskiest loans

~10X

likelier to default

than safest loans

(20)

So, should small business

lending platforms go global?

(21)

Going Global: For and Against

21

Small business lending

problem is universal

Leverage common tech and

data platform

Capital formation challenging

for new players

Business process knowledge

is transferable

Customer behavior moving

online globally

Data coverage uneven

Banking sector differences

Local regulation

Lack of local brand

FOR

(22)

Surge in Mobile and Online Banking Worldwide

(23)

Online SMB Lender Int’l Expansion: Now

Home Market

Expansion Markets

(24)

Drivers of Global Online Lending Models

24

How valid are the reasons against multi-country lending platforms?

Local Regulation

• Regulation can be clearer / more uniform vs. US

• UK has taken pro-alternative SMB lending position

• Local data storage / privacy issues solvable

• Concentrated banking systems usually mean less product variety

• Non-US payments networks often superior to US ACH system

Lack of Local Brand

• May not be necessary (e.g. PayPal)

_{• Can be addressed through local partnerships, licensing}

• Some data sources available that are not in the US

(e.g. national corporate registries)

• All businesses have cash flow, a balance sheet, and a P&L

Data Coverage

Uneven

Banking Sector

Differences

(25)

Models for International Expansion

Organic

Licensing

Acquisition

Partnering

(26)

Looking Ahead to LendIt 2020: A Few Predictions

• Emergence of global / multi-country

leaders

• More like tech and payments than local

banking

• Complemented by dozens of niche

players in local markets

• Different solutions in developed vs.

emerging markets

• LendIt 2020 held at Yankee Stadium



(27)

27 LendIt New York 2015

Booth #308

$2B+

delivered

to small

business