This presentation is about the use of technology and innovative business models in financial services. It was presented at a conference entitled "Disruptive Innovations in Financial Services" sponsored by the Institute for Financial Services Analytics (IFSA) in the Lerner College of Business and Economics at the University of Delaware on March 3, 2016.

1. Reena Aggarwal
Robert E. McDonough Professor of Finance
Director, Georgetown Center for Financial Markets and Policy
FinTech as a Disruptor of Financial Services
Disruptive Innovations in Financial Services
Institute for Financial Services Analytics
Alfred Lerner College of Business & Economics
University of Delaware
March 2016

2. Disruption in Financial Services
• Address societal challenges
• Financial inclusion
• Inequality issues
• Access to capital
• SMEs
• Our work with the World Economic Forum/World Bank

3. •FinTech: Use of technology and innovative business models in financial services
•Companies provide financial services through the use of technology
– These companies provide products and services to users through online and/or
mobile channels
FinTech
Characteristics
Innovation
•Innovative solutions have disrupted the traditional financial services industry
•Promises to include un-served and under-served markets
•Have increasingly provided funding for SMEs especially after the Great Recession
•Face lower costs
Focus
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
•Single-purpose solutions: Offer a better experience in a single product or service
•New sets of products: Tailored for small businesses
FinTech as a Disruptor of Financial Services
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor

4. Factors Enabling the Industry’s Growth
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Regulation
Regulated banks face higher costs for lines of business FinTech
firms are tapping into
Technology
Macro
Environment
Big data analytics increasingly available
Online financial transactions, alongside big data analysis, have
lowered costs and increased speed
Low interest rates and low loan default rates allow for credit
creation; the former has increased the demand for loans while the
latter has increased investors’ willingness to lend
Investors are seeking assets with higher yields & are comfortable
with higher risk profiles of borrowers
Risks
1. Limited
investor
protection
2. Defaulting
borrowers
3. Systemic
risk
associated
with lack of
regulation

5. The Growth of FinTech
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
• Reduced the
availability of credit
for individuals and
small businesses
• Triggered regulations
that have since
hampered traditional
banks’ ability to meet
the needs of SMEs,
among others
• Big opportunity for
FinTech firms
Great Recession
2007-2008 2005-2011 2013-2014 2015
New players
emerged:
• Prosper (2005)
• Lending Club (2006)
• OnDeck (2006)
• Kabbage (2009)
• SoFi (2011)
New Players
Investment in FinTech
companies grew by four
times in one year,
reaching $12 billion in
2014
Threat to Banks
• 68% of bank
respondents believe
their small business
lending activities
were under “high
threat” from FinTech
firms
Growth
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor

6. Factors Enabling the Industry’s Growth
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Approval
Rates for
Small
Business
Loans
0% 10% 20% 30% 40% 50% 60% 70%
Alternative Lenders
Institutional Investors
Credit Union
Small Bank
Big Bank

7. 0%
10%
20%
30%
40%
50%
60%
70%
Millennials Gen X Boomers Matures
Millennials Prefer Online and
Mobile More than Other
Generations
Online Giving Mobile Giving
FinTech as a Disruptor of Financial Services
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Facts
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
Mobile P2P payments in the U.S.
reached $16bn in 2015 and are estimated
to reach $86bn in 2018
P2P loan issuance grew by 65
times from 2009 to 2014 on
Lending Club and Prosper,
reaching $1.7bn
Non-banks’ share of
mortgage originations
went from 10% in 2009 to 42% in
2014
60-80 countries already
have a lending platform or one
expected to launch soon

8. $1.5
$2.7
$5.1
$10.0
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
2011 2012 2013 2014
FundinginBillions
Year
Aggregate Amount of Funding Through Crowdfunding
FinTech as a Disruptor of Financial Services
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Facts
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
Kickstarter crowdfunding platform has reached
$1.6 bn in pledges alone, its largest campaign
raised $17+ million

9. The Growth of FinTech
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
0
2
4
6
8
10
12
14
Year 2013 Year 2014
InvestmentinBillionsofUSD
Investment in FinTech Firms
27%
16%
57%
Breakdown
Consumer Lending Business Lending Others
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor

10. Lending
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Business
Models
Models:
• Balance sheet lenders
• Marketplace lenders
• Hybrids
Focus on:
• P2P lending, Small business lending, Leveraged lending, Student lending,
Mortgage lending, Commercial Real Estate Lending
Key
Characteristics
• Unsecured lending
• Either mediated or direct flow of funds
• Retail or institutional investors
• Innovative credit scoring models
• Low cost structure and more accurate pricing
• Less regulatory obligations and capital requirements than bank
counterparts
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
Practice of lending money to borrowers without traditional financial intermediary

11. Market Segments, Business Models, and the Main Players
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Lending
Merchant and e-Commerce Finance
Invoice Finance
Supply Chain Finance
Trade Finance

13. Lending
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Lending Club and Prosper had 129% CAGR in collective originations 4Q09 to 3Q14
Main Players Description
• P2P lending platform founded in 2006, IPO’d in 2014 (LC)
• Biggest player, yet only has 2% of market share ($4bn in
$240bn market)
• Founded in 2005, focuses on P2P lending and remains
private
• Took 8 years to reach first billion, only six months to reach
second
• Founded in 2006, focuses on business lending
• Quarterly origination volume grew from $61mn/qt in 4Q12
to $313mn/qt in 3Q14; currently has $433 million in loans
outstanding
• Founded in 2011
• Offers refinancing options for students
• No residual risk on originated loans

15. Lending
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Enablers for
Growth
• Data availability
• Supportive regulation
• Risk-taking investors
• Educated borrowers
• Effective platforms
• Third-party service providers
• Socialization of finance
Risks
Outlook
• Investors’ lack of experience
• Making access to capital too easy
• Sustainability and stability still to be tested
• Systemic rick arising from unregulated sector; regulation likely to increase
• Millennial small business owners are 5 times more likely to use
P2P lending than Boomers
• Consolidation
• Internationalization of payments
• Industry formalization
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor

16. Lending
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
How Does it Work?
Lending
Club
Partner Bank
(not owned by lending platform)
Investors, banks, institutional
whole loan buyers
Borrowers
(1) Application
(2) Commitment
(5) Cash
(9) Loan Note
(8) Origination Fee
(6) Cash
(7) Loan Note
(4) Loan Note
(3) Net loan proceeds

17. FinTech Firms in Lending Benefitted from Changes in Regulation
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Changes in regulation are driving businesses out of traditional banking system and into new players
Lending Product Regulation Impact Opportunities
Personal
• CARD Act
• Stricter capital requirements
Diluted returns for banks from higher
capital requirements
Increased credit card interest rates
Non-banks not subject to higher capital
requirements
Can price below banks
Small Business
• CCAR
• Focus on concentration and pricing
Regulated banks unable to price risk
in lower credit loans
Non-banks can change to higher rates
on loans with higher risks
Leverage
• OCC Guidance, “Skin in the game”
rules for securitizers, CCAR
Regulated banks unable to take on
riskier deals
Non-banks tap into riskier deals
Commercial Real Estate
• Basel III
• CCAR
Diluted returns for banks from higher
capital requirements
Other lenders can tap into more
complex deals
Mortgage Banking
• Basel III, Home Mortgage Disclosure
Act, Qualified Mortgage rules for
underwriting, “Skin in the game”
rules for securitizers
Banks have to sell MSRs and decrease
number of mortgage originations
Non-banks have doubled their market
share in mortgage origination
Student
• More oversight by CFPB, 2010
elimination of FFEL loan program,
possible student loan bankruptcy
reform
Big banks stopped originating student
loans, divesting into run-off portfolios
Marketplace lenders’ business model
focused on refinancing student loans at
lower rates
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor

18. Lending
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Market Overview
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
FinTech lending platforms accounted for $60-70
billion in outstanding loan volumes in 2014
Loans worth $40 billion in China and $5
billion in the U.S.
Total addressable unsecured consumer loan
market estimated at $270 billion, out of
which Lending Club and Prosper, the two largest
players, have 1.8% market share

19. 0
2000
4000
6000
8000
10000
12000
14000
Crowdfunding Wealth Management Payments Unsecured Personal
Lending
Small Business Loans Student Loans Annual Loan
Origination of
Mortgages
Market Size (bn)
Immediately Addressable (bn)
Factors Enabling the Industry’s Growth
Sources: “The Future of FinTech: A Paradigm Shift in Small Business Finance” World Economic Forum. Oct, 2015. and “The Future of Finance” Parts I-III by Nash, Ryan and Beardsley, Eric. Goldman Sachs. March 2015
Broad Opportunities
Millennials are 5 times more likely than Boomers
to use P2P lending for their small businesses
HENRY’s: Tapping into
under-served markets,
the High Earners, Not Yet Rich
Business
Models
Market
Segments
Going
Forward
Major
Players
Growth
FinTech
Disruptor
$4 trillion of immediately addressable revenue in
the socialization of finance sector
50% of Millennials
believe tech start-ups will
overhaul banks
33% of Millennials believe they will
not need a bank in 5 years and only 50%
expect to use cash on a weekly basis by 2020

20. Risks Going Forward
• Regulatory Response as FinTech firms become large
• Funding Sources
• Lending Laws
• Operational Structure – technology risk, data protection,
relationship with traditional banks
• Incumbent banks will respond – JP Morgan & OnDeck
• Consolidation

21. Regulatory Uncertainty Going Forward
China
People’s Bank of China: Online Payments
China Banking Regulatory Comm: Peer to Peer (P2P)
China Securities Regulatory Comm: Crowdfunding
China Insurance Regulatory Comm: Online Insurance