Fintech Disruptors And Enablers, Both Winners

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1 Fintech Disruptors And Enablers, Both Winners January 2018 ATONRÂ PARTNERS SA 12, Rue Pierre Fatio 1204 GENEVA SWITZERLAND - Tel:

2 2 Investment Case Record investments in Fintech over the last three years (above $100bn according to KPMG) are about to spark a massive wave of innovative financial and banking services One of the most obvious outcomes of the Fintech revolution is the disintermediation of financial services as nimble companies take advantage of technologies such as AI and blockchain to develop new services or to take business away from legacy players While the emergence of mobile payment platforms has drawn much attention, other Fintech applications ranging from robo-advisers to peer-to-peer lending are also taking off Blockchain represents the final disintermediation step: the technology has wide-ranging applications (smart contracts, decentralized apps ) in the financial world and in many industries Against this backdrop, banks and insurers have to reinvent themselves and invest heavily in new technologies in order to enhance customer experience and extract operating efficiencies This suggests that tech enablers (both hardware and software) should also be in the spotlight as they are in the early stages of a secular growth cycle Fintech Certificate details Issuing bank: Natixis, Calculation agent: Natixis SA ISIN: XS Currency: USD Fees: 1.65% management fee + 15% performance fee, high water mark Bloomberg ticker: NXSRFINT

3 3 Payment Processing AI & Bots P2P Lending Financial Software Mobile Payments B2B Payments Loyalty & Rewards Blockchain Biometrics & Security

4 4 Mobile Payments: The Tip Of The Iceberg (I) Now that the mobile payment infrastructure is in place, widespread adoption of mobile payments by consumers is just a question of when, not if Upcoming catalysts: Loyalty programs and P2P features In-car payments Payments in virtual stores Seamless, mobile-based checkout experience Government incentives

5 5 Mobile Payments: The Tip Of The Iceberg (II) The annual transaction volume via mobile payments in 2015 was $450bn and is expected to exceed $1tn in 2019 Annual transaction volume in US$ bn - Mobile Payments Mobile Payments users by region (in mn) CAGR ~ 20% Asia/ Pacific Africa North America Europe Latin America Middle East Source: AtonRâ Partners, TrendForce, NFC World+ Source: AtonRâ Partners, Gartner Inc. Asia Pacific and Africa are early and faster adopters of mobile payments with more than 100 million mobile payments users

6 6 Mobile Payments: The Tip Of The Iceberg (III) Payment processors are the best way to capture the volume growth of digital transactions Highly scalable business models hint at significant earnings leverage Strong balance sheets and cash-flow generation give ammo for M&A in a highly fragmented industry

7 7 The Fintech Universe Is Much Larger Artificial Intelligence Robo-advisors Advanced analytics Process Automation Crowdfunding Social investing Asset and Wealth Management Lending Online / P2P lending Mortgage Auto finance Credit scoring IoT and connected devices Analytics Blockchain Artificial Intelligence, bots Cybersecurity Risk assessment Anti-money laundering Client profiling Insurance Infrastructure Payments Mobile payments Digital wallets Payment processing B2B payments International remittances Point-of-sale devices

8 8 Online Lending Has Been A Major Area Of Development According to KPMG, non-bank startups arranged more than $36bn of loans in 2015, mainly for consumers, up from $11bn in 2014 The boom of peer-to-peer lending platforms is mainly due to: Reduced lending by incumbents to small merchants and consumers following the 2008 financial crisis The low rate environment, a positive for the funding of P2P platforms Increased use of online banking services by consumers How peer-to-peer lending works Borrower Applies for a loan (1) Loan repayment (10) Informs a thirdparty bank that borrower is verified, investors have committed (3) Lending Platform (e.g., Lending Club) Loan note (8) Partner Bank (e.g., Web Bank) Commits to a borrower (2) Gives cash to the platform (6) Investor receives loan note (9) Loan repayment (11) Purchases the loan note using investor s cash (7) Loan repayment Lender/ Investor Initial application and funding Loan note transfer Loan note purchasing

9 9 Online Lending At The Core Of Many Fintech Offerings Lending has become a natural extension of the services offered by many fintech and tech companies They can leverage their existing relations with consumers and merchants to develop a potentially large and profitable lending business They can increase the stickiness of customers to their main platform / business A few examples: Amazon has offered more than $1bn in small loans to third-party sellers on its site in the past 12 months, compared with $1.5bn in the period. Loans range from $1,000 to $750,000 and interest rates from 6% to 14% Square and PayPal have launched lending businesses targeting small businesses Qiwi, the Russian digital wallet and remittances company, is just launching a consumer lending business Robinhood, which lets customers trade stocks for free, makes money thanks to margin trading

10 10 Online Lending And Banking: Tech Companies To Play A Major Role? Lending, and more generally financial services, fit well with tech companies know-how They are data-rich businesses The large amount of data that is easily labeled makes this an interesting place for Deep Learning (DL) methods Access to detailed data on the customers business allows to mitigate risks Securitization suggests balance sheets will not balloon A couple of tech companies already act de facto as banks By storing clients cash and allowing them to use their cash balance through debit cards

11 11 The Bank Status Offered By The US Government Is A Major Positive Until now, Fintech companies have grown wild, without many restrictions The US government (through the OCC) just set up of a specific bank charter for fintech companies that may seem at first sight as a regulatory headwind It has actually more pros than cons:

12 12 Tech Giants Likely Eager To Tap A Huge Market Mobile payments offerings from Tech giants (Apple/Android Pay ) could be a Trojan horse to develop a full financial services offering in the future Bypassing credit card companies would allow them to fully monetize mobile transactions Leveraging huge numbers of users, unique data sets and AI skills, would then allow them to expand into lending and banking and to find a new growth avenue Market Capitalization (in $bn) banks & credit cards companies In $bn 1'800 1' '600 1'400 1'200 1'000 1' The 20 largest banks in US The 20 largest banks in Europe Credit cards companies (V, MA, AXP, DFS) Source: Bloomberg, Banksdaily.com, Relbanks.com

13 13 Traditional Banks Have No Choice But To Make Large Fintech Investments (I) There always will be new emerging competitors that we need to keep an eye on JP Morgan CEO, Jamie Dimon in April 2015 New competitors always will be emerging and that is even truer today because of new technologies and large changes in regulations. The combination of these factors will have a lot of people looking to compete with banks because they have fewer capital and regulatory constraints and fewer legacy systems. We also have a healthy fear of the potential effects of an uneven playing field which may be developing. Below are some areas that we are keeping an eye on ilicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various Salternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small business very quickly and - these entities believe effectively by using Big Data to enhance credit underwriting. hey are very good at reducing the pain points in that they can make loans in minutes, which might take banks weeks. TWe are going to work hard to make our services as seamless and competitive as theirs. And we also are completely comfortable with partnering where it makes sense.

14 14 Traditional Banks Have No Choice But To Make Large Fintech Investments (II) What JPMorgan is doing with that $9.5bn tech spend JPMorgan Chase pumped $600mn into fintech in 2016 French Bank BNP Paribas is spending 3bn to build the bank of tomorrow RBC wants 40% of total technology budget devoted to innovation Credit Suisse further enhances digital banking with Fintech Partnership; launches regional industry s first digital client onboarding application

15 15 Robo-Advisory And Bots: A Major Cost Saving Opportunity For Banks Robo-advisory start-ups (Betterment, Wealthfront ) have been making the buzz lately Taking over traditional financial advisors, they offer asset allocation services to users based on their personal and employment situation, assets and liabilities, savings and retirement targets Their success so far is limited (roughly $100bn in AUM) as brand is key and client acquisition costly While it s highly unlikely to see a high number of start-ups thriving in this low-margin business, traditional banks are expected to capitalize on bots to reduce costs From portfolio allocation in wealth management To customer service (chatbots) and process automation

16 16 Software Solutions: The Picks And Shovels of Banks Fintech Revolution Digital banking Online and mobile platforms Online account opening Financial document automation Electronic payments Compliance and fraud prevention Financial messaging Asset & wealth management Front - trading, asset allocation, portfolio construction, investment products Electronic Middle payments - performance reporting, due diligence, tax optimization Back office - reconciliation, account administration, processing, clearing Functions Electronics payments Bill presentment Automatic invoice processing Payment forms on web or mobile apps Integration with mobile payment platforms and digital wallets Currency conversions Dispute management Fraud detection. Credit scoring Consumer lending Mortgage Auto Credit cards Marketing Customer loyalty programs Direct marketing services Analytics Analytics & regulatory compliance Customer analytics Portfolio analytics Automated compliance checks

17 17 Software Solutions: Outsourcing A secular Trend Keeping up with the latest fintech developments proves difficult Rising interest rate environment a positive for banks revenue and capex/it spending outlook Regulatory burden on financial institutions is a driver of continued outsourcing According to IDC, 79% of bank IT spending is still in-house! Fast-changing Technologies New Competitors Convenience - multi channel (mobile, internet) Ease of use Reliability Personalized banking Telcos Technology giants Fintech Basel II and III MIFID II PSD II Banks Weak revenue momentum Poor ROEs Increasing Regulations Financial Metrics Under Pressure

18 18 Blockchain: The Most Disruptive Technology Of The Past 10 Years Blockchain 1.0 CryptoCurrencies Blockchain 2.0+ Smart Contracts Decentralized Apps The building block of Web 3.0 and Industry 4.0

19 World Population Penetration Fintech Certificate 19 Blockchain: It s Just Getting Started (I) Blockchain looks like the Internet back in /1995 In 1995, the entire internet sector (public & private) was ~$70B In 1994, the entire global internet population was ~20M or 0.4% Today The decentralized software market value is $100B+ ~20M crypto accounts in the world today or 0.3% 4'000 3'500 3'000 2'500 2' '500 1' We are here % 3.1% 0.3% 0.4% 0.8% 1.3% 2.0% 14.2% 10.6% 12.3% 6.8% 8.1% 15.8% 17.6% 20.6% 25.8% 23.3% 31.8% 29.2% Internet Users (Millions) 2004 World Population Penetration % % 40.7% 43.4% % Source: scribblrs.com 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

20 20 Blockchain Disrupting Old And New Business Models OLD (centralized) NEW (decentralized) Data Storage E-commerce Social Media Sharing Economy

21 21 Blockchain: It s Just Getting Started (II) In 2017 alone, $4bn has been raised through ICOs (Initial Coin Offerings) Conventional VC Funding To Blockchain Firms Vs. ICO Funding Global, Millions ($), Q Q VC funding ICO Funding $1400 $1327 $1200 $1000 $800 $600 Q3 2017: ICO: $1,327 VS. VC: $259 ratio of 5 to 1 $757 $400 $200 $0 $248 $259 $179 $161 $122 $130 $83 $12 $21 $21 $39 $38 Q Q Q Q Q Q Q Source: CB Insights, BI Intelligence

22 22 Blockchain: The Ultimate Disintermediation A Blockchain (2.0+) is a distributed database of transactions (and computer code) recorded and verified across a network of participants How blockchain works: Validation The network of nodes validates the transaction and the user s status using known algorithms Someone requests a transaction The first block is created online and represents the transaction The requested transaction is broadcast to a P2P network consisting of computers, known as nodes A verified transaction can involve cryptocurrency, contracts, records or other information The transaction is now complete The new block is then added to the existing blockchain, in a way that is permanent and unalterable Once verified, the transaction is combined with other transactions to create a new block of data for the ledger

23 23 Blockchain: Wide-Ranging Applications Use cases Improving and speeding the post-trade clearing and settlement processes Streamlining compliance procedures (AML, client onboarding ), hence reducing manual intervention Smart contracts allow the performance of trackable and irreversible transactions without third parties. This level of automation and security has the power to revolutionize the management of traditional contractual engagements across all industries. B B lockchain technology isn't just a more efficient way to settle securities. It will fundamentally change market structures, and maybe even the architecture of the Internet itself. Abigail Johnson, CEO Fidelity Investments itcoin is a remarkable cryptographic achievement The ability to create something which is not duplicable in the digital world has enormous value Lots of people will build businesses on top of that Eric Schmidt, Executive Chairman of Google

24 24 Lufax $60 bn Ant Financial $70 bn est. valuation PAYMENTS Stripe $10 bn A rich newsflow ahead in Fintech: expected IPOs and M&A targets Adyen $7.5 $2.3 bn bn Transfer wise $1.6 bn $2.3 bn SoFi $4 bn Credit Karma $3.5 bn Commonbond $4 bn LENDING $1 bn Kabbage $700 mn WealthFront WEALTH MANAGEMENT $800 mn Betterment Robinhood $1.3 bn

25 25 Conclusion A major positive impact on GDP growth (greater efficiency of the banking system) A huge revenue opportunity in lending and payments Many cost savings opportunities at stake for traditional financial institutions Financial software a sweet spot Blockchain to have a massive impact as it represents the ultimate disintermediation M&A frenzy in sight: many Fintech businesses are highly fragmented and scalable

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