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Online SME Lending: Going Mainstream Down Under
February 29th, 2016
© Copyright 2015 OnDeck. All rights reserved.
Agenda
Opportunity
Why does online SME lending make sense in Australia?
How might the market develop, what are the
ingredients for success?
2
OnDeck
Who is OnDeck and what are we bringing to
the market?
Onward!
Why does online SME lending
make sense in Australia?
3
Like Everywhere, Australian Small Businesses Want to Grow
4
Hire StaffHire Staff
Purchase InventoryPurchase Inventory
Manage CashFlows
Manage CashFlows
Acquire Customers
Acquire Customers
Develop ProductDevelop Product
PurchaseEquipment
PurchaseEquipment
Also like Everywhere, Finding Business Credit is a Problem
FRUSTRATIONS FOR SMALL BUSINESSES
• Time consuming offline process
• Non-tailored credit assessment
• Product mismatch
• Rigid collateral requirements
5
Meet Dave Anthony
6
• Wanted to grow his business from a plumber to a multi-trader
• Dave sought a loan from his long time bank
• Process involved a lot of time / effort – going to branch
• In the end it was a “no” unless security or collateral provided
Traditional Loans are Onerous…Discouraging SMEs
71. Source: Small business survey conducted by the U.S. Federal Reserve Bank of New York, Spring 2014
Apply Offline
33 Hours1
ManualReview
Weeks / Months
Get Funding
Several Days
While approximately 60% of Australian businesses say they need finance, only 20% of small business owners actually applied for finance (Source: MYOB)
Australian lending to small businesses has only grown by 2% CAGR in the last 4 years, while online SME lending in the US grew 68% last year (Source: Morgan Stanley)
• Diverse businesses require manual underwriting
• Technology and data limitations
• Lack of standardized small business credit score
Why is SME Lending Challenging?
CHALLENGES FOR TRADITIONAL LENDERS
Cash Flow ProfileRestaurant
Landscaping Company
Plumbing Company
8
Q1 Q2 Q3 Q4
A Massive and Underserved U.S. Market
9Sources: U.S. SBA, FDIC 09/30/15, Oliver Wyman, How “New-Form Lending” Will Shape Banks’ Small Business Strategies, 2013
$80-120BnUnmet
Demand for Small Business Lines
of Credit
$80-120BnUnmet
Demand for Small Business Lines of Credit in U.S.
$186BnBusiness Loan
Balances Under $250,000 in
the U.S. in Q3 ꞌ15
28MMU.S. Small Businesses
Not just in the US, but Globally
10Source:The Future of Fintech – Paradigm Shift in Small Business Finance – World Economic Forum, Oct 2015
$80-120BnUnmet
Demand for Small Business Lines
of Credit
45-55% of SMEs globally have no overdraft, but would need one45-55% of SMEs globally have no overdraft, but would need one
~125-150M formal SMEs globally~125-150M formal SMEs globally
~$2.4T in global unmet credit demand~$2.4T in global unmet credit demand
Total Global SME lending = $14-$18T Total Global SME lending = $14-$18T
Australian Market Opportunity Is Substantial
11
459
286
$101
56
1. Source: Morgan Stanley Blue Paper, Global Marketplace Lending: Disruptive Innovation in Financials, May 19, 20152. Source: ‘Unmet demand for credit could be worth up to $70Billion’ (according to Macquarie & RFI Banking Series Report)
Global SME Lending TAM, $B1
$70B
$95B1
2
Who is OnDeck and what are
we bringing to the market?
12
$4 Billion+ total originations1$4 Billion+ total originations1
Scalable financial modelScalable financial model
5th Generation proprietary credit scoring model 5th Generation proprietary credit scoring model
45,000+ small businesses served45,000+ small businesses served
76 net promoter score 276 net promoter score 2
62% y-o-y originations growth62% y-o-y originations growth
A Leading Online Platform for Small Business Lending
131. Occurred subsequent to December 31, 2015.
2. Based on Q4 2015.
2014 2015 4Q '14 4Q '151,158 1,874 369 557
Originations$MM
2014 2015 4Q '14 4Q '15158 255 50 68
Gross Revenue$MM
62% Growth
51% Growth
61% Growth
34% Growth
2014 2015 4Q '14 4Q '1573 160 25 42
Net Revenue$MM
117% Growth
67% Growth
It’s Been a Long (and Eventful) Journey
2007 2014201320122011201020092008
Founded by Mitch Jacobs
Noah Breslow joins as
employee #1
Noah Breslow appointed as CEO
First online SMB loan application
$100mm in loan
originations
$1 billion in loan
originations
2015 2016
14
$3B $4B
What is OnDeck bringing to the Australian market?
15
SME Credit
Solution
SME Credit
Solution
SME Credit Score
SME Credit Score
SME Lending
Scale
SME Lending
Scale
Online Minutes1
Automated Review As Fast As Immediately3
As Fast As Same Day
The OnDeck Solution for Small Business Lending
16
1. Application time depends on customer having the required documentation available.2. Source: Small business survey conducted by the U.S. Federal Reserve Bank of New York, Spring 2014.3. Approximately 1/3 of customers are subjected to secondary, manual review process.
FundApproveApply
Offline
33 Hours2
Manual ReviewWeeks or Months
Several Days
Traditional Lending
Use Case
Size $10,000 – $150,000
Term 6 – 24 months
Payment Automated daily or weekly payments
Availability Renewal opportunity at ~50% paid down
OnDeck Australia Term Loan Solution
Term Loan – OnDeck Australia(Launched in 2015)
Term Loan – OnDeck Australia(Launched in 2015)
HiringNewStaff
Buying Inventory
Marketing
17
The OnDeck Score®Proprietary and Purpose Built for Small Business
100+ external data sources
100+ external data sources
5th Generationproprietary credit scoring model
5th Generationproprietary credit scoring model
10 Million+ small businesses in proprietary database
10 Million+ small businesses in proprietary database
2,000+ data points per application
2,000+ data points per application
18
Score
A
B
C
D
E
Risk G
rad
ing
• Probabilistic record linkage
• Dimensionality reduction
• Ensemble learning
• Exhaustive cross validation
• Feature engineering
• Adaptive learning
• Probabilistic record linkage
• Dimensionality reduction
• Ensemble learning
• Exhaustive cross validation
• Feature engineering
• Adaptive learning
Proprietary DataAnalysis Platform
Public Records
Credit
Data
Social
Data
Proprietary
Data
Transactional
Data
Accounting
DataF
OnDeck Score Personal Credit Score Random
Acceptance Rate (%)
Resulting in Funding Significantly More Loans for the Same Risk…
More Accurate than the Personal Credit Score at Predicting Bad Credit Risk1…
We Rely on the OnDeck Score for Greater Accuracy, Predictability and Access
191. Analysis on OnDeck Score v5 using actual OnDeck loan performance data.
90%
100%
0%100% 40% 20% 10% 0%
% o
f D
efa
ults
Elim
ina
ted
10%
Random Personal Credit Score OnDeck Score
10
20
40
OnDeck Score
OnDeck Score
Reaching Scale is not Easy
20
At OnDeck This Has Taken Us Nearly 10 Years
21
$4 Billion+Total Originations1
9 Million+Customer Payments
80,000+Total Loans
Quarterly Originations Volume1. Occurred subsequent to December 31, 2015
How might the Australian market
develop and what are the
ingredients for success?
22
We’ve Seen the US Market Follow Three Phases(with a likely fourth phase on the way)
2007 2014201320122011201020092008 2015 2016
Scepticism StampedeLow
Awareness
Number of unique lenders marketing directly to SMBs in the US:
2010: Approximately 10
2015: Approximately 60 (!!!)
2020: Attrition / Consolidation Likely as Sector Becomes Mature
Australia May Get There Faster!
24
More concentrated market
Higher customer expectations
Faster technology adoption
Early involvement of large players
Regulatory approach & best practices
Positive data and credit environment
2018
Awareness?
2016
Adoption? Mainstream?
2020
Key Ecosystems for Market Growth
25
Funding Ecosystem
26
Investor Type Investors Seeking Fixed ReturnsInvestors Seeking Variable
Returns
Venture Capitalists, Angel Investors, Corporate Sponsors,
Private Equity
Flexibility Scalable as Originations GrowGreater Product and Investor
Flexibility Greater Product and Investor
Flexibility
Cost Low Cost Execution Profitable Revenue StreamHighest Cost -
Share of Future Profits
ResiliencyCapital-Light Structure, Equity Contribution Aligns Interests
Diversified Risk Exposure, Servicing Fee Aligns Interests
Highest – Committed Capital
Loan Securitization / Warehouse
Loan Securitization / Warehouse
LoanMarketplaceLoanMarketplace
Venture Capital / EquityVenture Capital / Equity
Data and Payments Ecosystem
27
$80-120BnUnmet
Demand for Small Business Lines
of Credit
Reliable Payments NetworkReliable Payments Network
Credit Bureau DataCredit Bureau Data
Public Records DataPublic Records Data
Cash Flow DataCash Flow Data
Distribution Partner Ecosystem
28
Online Affiliates
SMESolutions*
Merchant Referral
Banks
Online SME Lender
SME Solutions = Accounting, Payroll, Merchant Processing, Point of Sale System, etc.
29
30
Ecosystem
Funding
Data & Payments
Partner Ecosystem
= Industry Growth (Mainstream)
Lenders
Emerging +Traditional
Mass Market Adoption Requires a Healthy Ecosystem
FinTech + Ecosystem + Scale Economic Growth
31
With over 1 Million Australian SMEs like
Dave…
2 0 2 0
Every $1 of incremental Online SME Lending1 leads to over $3 of economic output!
$80-120BnUnmet
Demand for Small
Business Lines
of Credit
InvestingInvesting
GrowingGrowing
ManagingManaging
StartingStarting
…Mass adoption of online SME lending can help the
economy grow!
1. The Economic Impact of OnDeck’s Lending, Prepared by Analysis Group, November 17, 2015
Online SME Lending: Going Mainstream Down Under
February 29th, 2016