FINANCIAL SERVICES SYMPOSIUM FINANCIAL TECHNOLOGY OVERVIEW

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1 FINANCIAL SERVICES SYMPOSIUM FINANCIAL TECHNOLOGY OVERVIEW September 27,

2 INTRODUCTION Learning Objectives: 1. Develop a better understanding of the current FinTech market landscape, including key segments and growth drivers 2. Provide an update on the current capital markets & financing landscape for FinTech companies 2

3 WHAT IS FINTECH? FinTech companies deploy technology to create improved experiences, heighten efficiency, and accelerate growth in the financial services industry Improved Experiences Heighted Efficiency Accelerated Growth Anytime/Anywhere Streamlined Processes Access to New Customers Modern & Intuitive Reduced Service Costs Broader Reach Less Burdensome Improved Productivity New Product Capabilities 3

4 FINTECH IS A MASSIVE OPPORTUNITY Lending Deposits Wealth Management Payments Direct Lending Challenger Banks / Neo-banks Personal Finance Mobile / Online SMB Marketplace Lending Internet Players The Unbundled FI Real Estate Lending Zaim Digital Wealth / Robo-advisors Money Transfer Consumer Marketplace Lending Cryptocurrency 4

5 FINTECH OPPORTUNITY DRIVERS 1 MASSIVE MARKET MASSIVE MARKET FIs extract over $1T in revenues annually from over $400T of annual payments 5

6 FINTECH OPPORTUNITY DRIVERS 1 MASSIVE MARKET 2 MOBILE MOBILE Smart phones are a part of daily life and critical to the financial services ecosystem 6

7 FINTECH OPPORTUNITY DRIVERS 1 MASSIVE MARKET 2 MOBILE 3 DEMOGRAPHICS DEMOGRAPHICS Millennials are now the largest generation, are set to inherit $30T, and 71% would rather go to the dentist than a bank (1) (1) Ernst & Young, Advice Goes Virtual 7

8 FINTECH OPPORTUNITY DRIVERS 1 MASSIVE MARKET 2 MOBILE 3 DEMOGRAPHICS 4 DATA DATA 2.5 exabytes of data created daily (1) (1) PwC, Welcome to the Big Data Economy, September

9 FINTECH OPPORTUNITY DRIVERS 1 MASSIVE MARKET 2 MOBILE 3 DEMOGRAPHICS 4 DATA 5 REGULATORY REGULATORY $70B+ spent on regulatory compliance by FIs (1) (1) Let s Talk Payments, April

10 FINTECH OPPORTUNITY DRIVERS 1 MASSIVE MARKET 2 MOBILE 3 DEMOGRAPHICS 4 DATA 5 REGULATORY 6 SECURITY SECURITY 93% of FIs and businesses across the globe are maintaining or hiking their cyber security (1) (1) FINTalk Report, Summer

11 FINANCIAL INSTITUTIONS ARE TAKING NOTICE A Build It 11

12 FINANCIAL INSTITUTIONS ARE TAKING NOTICE A Build It M&A Venture Investing / / 10 Fintech Investments B Buy It / / 14 Fintech investments / / 5 Fintech investments / / 9 Fintech investments 12

13 FINANCIAL INSTITUTIONS ARE TAKING NOTICE A Build It Co-Creation / Incubation Labs Partnering B / Buy It / C Join It Innovation Lab / 13

14 FINTECH INVESTMENT IS ON THE RISE Investment in Private FinTech Companies Increased 10x in the Past 5 Years Increasing Number of FinTech Unicorns ($50B+ of Combined Value) $20.0 $19.0 $2.3B $2.0B $1.0B $16.0 $1.0B $3.5B $1.0B $12.0 $8.0 ($ in Billions) $12.0 $1.0B $1.0B $2.3B $18.5B $2.4B $5.0B $4.0 $1.8 $2.1 $2.4 $4.0 $2.7B $1.9B $ $4.0B $5.0B $1.1B $2.0B (1) Valuation as of estimates as of latest fundraising. 14

15 FUELED BY CONTINUED SUCCESSFUL EXITS Target Successful M&A Acquiror Date April 2016 August 2015 July 2015 Transaction Size ($MM) $275 ~$150 $1,053 Company * Successful IPO IPO Date April 2016 March 2014 March 2014 IPO Price $19.00 $13.00 $17.00 Current Price (as of 9/23/16) $31.80 $28.27 $43.61 Stock Performance Since IPO 67.4% 117.5% 156.5% * Announced $3.2 billion sale to CBOE on 9/26/

16 ALTHOUGH NOT ALL EXITS ARE CLEAR SUCCESS STORIES Company IPO Date November 2015 December 2014 December 2014 Mixed IPO IPO Price $9.00 $20.00 $15.00 Current Price (as of 9/12/16) $11.61 $5.76 $6.11 Stock Performance Since IPO 29.0% (71.2%) (59.3%) KEY ISSUES CONSTRAINING EXIT OUTCOMES Heightened Increasing Regulatory Competition Pressure Significant Valuation Aspirations 16

17 CONCLUSIONS FinTech Landscape Is Broad and Diverse Companies addressing all facets of financial services industry FinTech Is Here to Stay Massive opportunity to better utilize technology in delivering financial services FinTech Opportunities Increasing Numerous opportunities to capitalize on FinTech development through internal investment, M&A, and partnership activities 17

18 Grant Thornton Financial Services Symposium September 27, 2016 Marketplace Lending Threats (Madden vs. Midland and True Lender Cases) Presented by: Michael Thimmig of Alston & Bird

19 Madden v. Midland Overview Disruption After Supreme Court denied cert, 2nd Circuit s decision from May 2015 could disrupt secondary markets for consumer and commercial debts including Marketplace Lending with direct impact on NY, CT and VT No Preemption Courts held that nonbank entity taking assignment of debts originated by national bank is not entitled to protection under National Bank Act (NBA) from state law usury claims Valid-When-Made Doctrine Courts apparently did not consider this longstanding principle that if a debt is not usurious when made, then it does not become usurious when assigned to another party.

20 Madden v. Midland Court Analysis Charged-off credit cards debts assigned were originated by national bank, in which credit card agreement specified Delaware law and debt was later assigned to nonbank buyer (Marine Midland). Rate lawful at origination Although rate exceeded 16% usury cap of consumer s state of NY, bank s credit card rate was lawful when it was originated because bank had preemption over NY s usury cap. Bank s export of interest rate Court noted that NBA permits banks to charge interest at any rate permitted by state in which bank is located and export that rate notwithstanding state law of where borrower resides.

21 Madden v. Midland Court Holding Purchaser not protected by banking law Court concluded that nonbank purchaser of bank s credit card debt cannot continue to charge bank s contract rate. That collection activities of nonbank purchaser are otherwise subject to state control and are not protected by federal banking law or subject to bank regulatory oversight. End-run around usury Court opined that allowing nonbank purchaser to enforce credit card agreement would create an end-run around usury laws for nonbank entities that are not acting on behalf of a national bank.

22 Madden v. Midland Impact of Court s Decision Ramifications Far-reaching because secondary market for credit relies on Valid-When-Made Doctrine to enforce debts based on its terms Defaulted Debts Direct effect on nonbank buyers of defaulted debt (e.g. credit cards) that cannot enforce same rate as originating bank Other Purchasers e.g., same effect on securitizations, funds and other purchasers of bank originated loans, including marketplace online loans Liquidity & Value Liquidity and resale value of certain loan assets is uncertain and at risk because of Madden

23 Madden v. Midland Industry Response Current Loans Reviewing current loan portfolios to analyze risks if loans are subject to NY, CT or VT usury laws Usury Violations Analyzing effects in NY, CT and VT of civil and criminal violations, impact of usury savings clauses and potential damages and fines Servicing and Collection Considering changes to default servicing and collection for loans that have usurious rates in NY, CT and VT Disclosure Considering risk factors from impact of Madden decision

24 Madden v. Midland Industry Response Choice of Law Analyzing choice of law in originating bank contracts (e.g., DE or UT) to determine if it is enforceable in other states (NY, CT and VT) Bank retaining interest Changing structural framework for originating and purchasing new loans to mitigate risk, including bank retaining portion of loan Spread of Infection Considering impact on other States involving nonbank purchasers of bank originated loans (e.g., marketplace lending) True Lender Cases Added threat from true lender line cases involving CashCall in which facts involve rent-a-bank model

25 True Lender Cases Potentially Greater Threat CashCall Cases Analysis of true lender in which CashCall utilized rent-abank model to orchestrate its purchase of high rate consumer loans FDIC pressures rent-a-bank scheme (Maryland Court of Appeals reference) involved state banks originating consumer loans purchased by CashCall, but state banks withdrew per pressure from FDIC Tribal model replaced state banks with tribal lender Western Sky under federal Indian law to originate consumer loans purchased in structure orchestrated by CashCall that is almost identical to rent-a-bank scheme

26 True Lender Cases Potentially Greater Threat True Lender Court stated that it should look to substance, and not the form, of transaction to identify the true lender Predominate Economic Interest Court analyzed whether Western Sky placed its own money at risk or whether entire monetary burden and risk of program was borne by CashCall and concluded CashCall was true lender Entire monetary burden based on number of facts including CashCall deposits into reserve account to fund expected 2 days of loan originations and purchases all of loan originations before any payments were made

27 True Lender Cases Potentially Greater Threat Choice of Law Court concluded that Indian tribal law had no substantial relationship to parties or transactions, there is no other reasonable basis for choice of law and this application would be contrary to fundamental public policy of a state which has materially greater interest in particular issue Usury and Licensing Court concluded that CashCall used tribal law as shield against state usury and licensing laws and that 16 states have public policy in protecting citizens from usurious loans and unlicensed lenders Add Licensing Violations to Usury Violations two levels in analyzing state law violations of usury and licensing in which either may render loans void or uncollectible by relieving obligations to pay certain charges

28 Support and Analysis Provided by Scott Samlin, Partner Alston & Bird LLP 90 Park Avenue New York, NY (212)