The document provides an overview of the transformation taking place in the lending market. It discusses the large amount of startup activity and funding in lending technologies. While traditional lenders are still dominant, cracks are starting to appear as lending startups adopt new approaches to assessing credit risk and directly connecting borrowers and lenders. The document predicts that alternative credit assessment methods will become mainstream and that banks will be forced to partner with startups to improve customer experience and returns. It also suggests that many phase 2 lending startups are likely to fail or be acquired.

1. SPOTLIGHT ON LENDING
Dushyant Shahrawat, CFA
Perspectives and Analysis of
the Transformation Taking
Place in the Lending Market
“Ain’t your Grandpa’s business anymore”

2. Salient Points About the State of Lending Innovation
1. Startup Activity, VC Funding: The red-hot startup activity and VC funding in Lending seems
to be slowing down, but we have 800 Lending startups with $9.7B capital deployed
2. Disruption of Traditional Lenders: News of the demise of traditional bank lenders is
vastly exaggerated, but cracks are appearing: spreads declining, loan portfolios
deteriorating, risk profiles rising
3. Bank/Startup Competition: Lending startups mistakenly believe they outcompete banks
on all fronts. Instead, the sole advantages are in customer experience and origination
4. Shakeout Among Startups Imminent: Phase 1 of Lending startup growth holds the most
promise for the long-term, with Phase 2 startups bound to struggle, or simply fail
5. Most Powerful Innovation: The use of alternate criterion for assessing credit risk and to
originate loans (aka “Alt Lending”), will transform lending by better matching borrower
requirements with funding risk appetite
6. P2P Marketplaces: This is the biggest transformation in lending as it directly connects
borrowers & lenders, a significant improvement over the traditional bank-intermediated
lender model

3. Startup Growth, VC Funding
and
Market Multiples of Lending Unicorns

4. Lending Startup Activity Has Been Red Hot Since 2014, With 400
Firms Launched And $6B Of Capital Deployed
$9.5B Cumulative VC funding of alternate
Lending since 2010
$4.95B Amount raised in 2015 alone!
$1B SoftBank’s funding round to SoFi, the
single largest FinTech funding
800+ Number of Lending Startups funded since
2005, with 1/2 funded in 2014/2015
$1.5B Funds raised in LendingClub’s IPO in Dec
2014
7 Number of Lending Unicorns (valuations
of over $1bill)
The 7 Lending Unicorns are: Avant,
Credit Karma, Funding Circle,
Kabbage, Klarna, Prosper, SoFi
Consumer Lending is biggest sector:
• Personal Loans (166 firms, $2B
funding)
• Education (33 firms, $1.7B funding)
Average funding per startup is highest
for B2C models at $54M

5. VC Funding More Than Doubled in 2015, From 2014
“Funding Circle Raises $65 Million for Peer-to-Peer Small Business Loans”
“Loan Platform Kabbage Raises $135M at a $1B Valuation, Grows Credit Line to $900M”
“Fundbox Secures $50 Million in Funding, With Investment by Jeff Bezos”
“Square Raises More Money To Make Small Business Loans”
Source: Dow Jones VentureSource

6. Investor Base in Lending Startups is Broadening with Corporates,
VCs, Exchanges and Banks Involved in Funding
Its not just Angels and VCs investing in Lending startups; there are Banks,
Corporates, Payment Networks and even Exchanges providing Funding
Source: CBInsights

7. Lending Startups Dominate the FinTech Unicorn List (5 of 15)
7
FIRM TYPE OF BUSINESS INVESTORS
VALUATION
($M)
INVESTED
CAPITAL ($M)
VAL/INV
CAP
Lufax Lending, Specialized Financing
CDH Investments, China International Capital Corporation, BlackPine
Private Equity Partners, Ping An Insurance $10,000 $485 20.6x
Square POS devices, Financing platform First Round Capital, Citi Ventures, GGV Capital $6,000 $717 8.4x
xStripe Payments platform Khosla Ventures, Lowercase Capital, Redpoint Venture $5,000 $190 26.3x
Zenefits HR platform SV Angel, Institutional Venture Partners, Venrock $4,500 $584 7.7x
Social Finance Marketplace lender, Student loan refinancing
Baseline Ventures, Doll Capital Management, Institutional Venture
Partners $4,000 $1,540 2.6x
Credit Karma Consumer credit management service Felicis Ventures, SV Angel, Founders Fund $3,500 $369 9.5x
POWA
Technologies Provides payments/infrastructure technology Bright Station Ventures, Wellington Management $2,700 $177 15.3x
Adyen Payment transaction platform Felicis Ventures, Index Ventures, Temasek Holdings $2,300 $266 8.6x
Klarna Helps retailers process payments Institutional Venture Partners, Sequoia Capital, General Atlantic $2,250 $289 7.8x
One97 Comm Mobile wallet, online marketplace Intel Capital, Sapphire Ventures, Alibaba Group $2,000 $585 3.4x
Prosper P2P lending marketplace Accel Partners, DAG Ventures, Draper Fisher Jurvetson $1,900 $355 5.4x
Transferwise Money transfer service IA Ventures, Index Ventures, SV Angel $1,000 $90 11.1x
China Rapid
Finance Online consumer loan marketplace Broadline Capital, UBS $1,000 $35 28.6x
Coupa Software Cloud-based business automation provider Battery Ventures, Iconiq Capital, T. Rowe Price $1,000 $169 5.9x
Funding Circle Lending platform for small-businesses Accel Partners, Index Ventures, Ribbit Capital $1,000 $273 3.7x
$48,150 $6,124 7.9x
Lufax, SoFi, Prosper, China Rapid Finance and Funding Circle are valued at over
$1B• Largest Unicorn is in the Lending space, and is valued 66% higher than the next Unicorn
• Three lending Unicorns are US, two are Chinese

8. Chinese Lending Startups Have a Much Greater Valuation Than US
Lenders, and Much Higher Than Other FinTech Unicorns
8
The average Lending startup has a valuation of 12.9x compared to 7.9x for the
average FinTech Unicorn. But the Chinese startups drive up this valuation
Firm Type of Lender Investors
Market
Valuation ($M)
Invested
Capital ($M) Multiple*
Lufax
Lending, Specialized
Financing
CDH Investments, China Capital
BlackPine Private Equity, Ping An $10,000 $485 20.6x
Social
Finance
Marketplace lender,
Student loan
Baseline Ventures, Doll Capital,
Institutional Venture Partners $4,000 $1,540 2.6x
Prosper P2P lending
Accel Partners, DAG Ventures,
Fisher Jurvetson $1,900 $355 5.4x
China Rapid
Finance
Online consumer loan
marketplace Broadline Capital, UBS $1,000 $35 28.6x
Funding
Circle
Lending platform for
small-businesses
Accel Partners, Index Ventures,
Capital $1,000 $273 3.7x
Average FinTech Valuation 7.9x
*Multiple is calculated as [Market Valuation / Invested Capital]; i.e. what premium the market is willing
to pay to acquire a startup over its invested capital
Source: CBInsights, Individual Firm Data, Venture Sources

9. Categorizing Lending Startups
and
Analyzing the Longer-term Market
Transformation

10. There Are Four Models In Alternative Lending, With Marketplaces
Being The Most Transformative
• Direct Lender: Firms with a lending license that carry loans on their own books
• B2C: Platforms that partner with a single lender for loan origination
• B2C Marketplace: Platforms that have multiple lenders (Financial Institutions, Accredited
investors) for loan origination
• P2P Marketplace : Platforms with multiple lenders including non-accredited individual investors
Source: Tracxn, Media Sources, WSJ

11. Lending Startups Play In A Larger Ecosystem That Includes
Payment Networks, Aggregators And Invoicers
Source: Oliver Wyman

12. We Are In the Middle of a 12-15 Year Transformation of the
Lending Market
EARLY STAGE GROWTH MATURITY
2008-2011 2012-2016 2017-2020
Stricter capital
requirements force banks
to restrict lending
Some segments of
borrowers go neglected,
and their needs unmet
First sign of
investment interest
emerge
Traditional banks
dominate as lenders
Lending startups begin
emerging in 2012
Investment funding
explodes in Lending sector
during 2014-2015
Startups begin using
alternative methods to assess
risk (Alt Lending emerges)
Traditional banking lenders
begin paying attention to
lending startups
15 Lending startups
achieve Unicorn status
($1B valuation)
Banks acquire many
startups and bolt-on new
front-ends to their back-
end platforms
Shakeout among startups;
50% shutter, 20% sell-out
Big improvement in customer
satisfaction among savers
and borrowers

13. Looking Ahead:
Six Projections For the Future of
FinTech Lending

14. 1. Of The Three Phases In The Growth Of Lending Startups, Phase 1
Startups Are Best Positioned To Succeed In The Long-term
PHASE 1 (firms started in 2010-2013): Real innovators with a high chance of long-
term success
PHASE 2 (firms started in 2013-2015): “Me Too” startups excited by Phase 1’s
success, but most bound to fail
PHASE 3 (firms started after 2015): Still in early stages of innovation, with high
hopes for another phase of growth

15. 2. By 2017, Lending Startups Will Begin to Exert Real Competitive
Pressure on Traditional Lenders
Source: WEF Report: “The Future of
Financial Services”
Alt Lenders have distinct competitive advantages over traditional Lenders that
are becoming evident every day
More Accurate Underwriting
The modern approaches for
underwriting and assessing
credit risk used by startup
lenders will be adopted more
widely by traditional lenders
Increased Access
Alt Lenders are providing more
lending options to a broader
range of borrowers, who are
currently being neglected by
traditional lenders
Control & Transparency
Lenders will gain greater
control over the return on
savings based on their risk
appetite and more visibility into
the flow of their savings
Reduced Costs for Borrowers/
Increased Returns for Savers
Better risk management use by Alt
lenders reduces the costs for
borrowers, and enhances returns for
savers
Significantly Better Customer
Experience
Streamlined and automated
processes expedite loan
processing and improve customer
experience for borrowers

16. 3. Alternative Measures Used by Innovators to Assess Credit Will Go
Mainstream, as Banks Rush to Adopt Them
Conventional
Credit Scoring
Limitations of
Traditional
Models
Need for
Alternative
Methods
Forms of
Alternate Credit
Scoring
Uses existing
financial/credit info
to assess credit risk
Ignores people with
limited credit history
(new immigrants,
international
students)
Include ignored
customer segments,
improve risk
assessment and
better matching of
borrowers/lenders
Use of Social media
info, utility bill
payments,
employment
information
Firms driving usage of Alternative measures to assess credit risk in Lending market
Source: Tracxn “Alt Lending Report”, Firm analysis, Public filings

17. 4. Lending Startups Think They Can Compete with Banks On All
Fronts. They Are MISTAKEN!
Funding
Costs
Credit
Decisioning
Customer
Acquisition
Servicing/
Customer Experience
BANKS
LENDING
FINTECHS
How Banks Stack Up Versus Startups in Differentiating Their Services

18. 5. Advice to Banks: Change Your Incentive Structure for Lending
Sales teams If You Want to Truly Compete With Startups
If a Bank’s Loan Department Grows its Loan
Portfolio by 50% in 3 years…
The Department Head Gets Promoted and
the staff gets a bonus of 10-15%
If a Lending Startup Grows its Loan Portfolio
by 50% in 3 years…
The Valuation of the startup skyrockets,
enough for the Founders and key employees
to hang up their boots and retire!
Incentives at traditional banks are woefully inadequate to drive lending growth,
and definitely trail what Lending startups are doing to drive growth

19. 6. Banks Will be Forced to Partner with Startups to Improve
Customer Experience, Adopt Alternative Credit Methods and Boost
Returns
Source: Oliver Wyman Report:
“Battle for Supremacy in Lending”
”JP Morgan Chase Bank announces strategic partnership to use OnDeck’s platform for small business loans”
Select Bank/Startup Partnerships in the Lending Market

20. Dushyant Shahrawat, CFA
Dushyant.shahrawat@sloan.mit.edu
617.905.5500
THANK YOU
Please reach to me with comments, insights or questions.