The State of Consumer Finance: Why the Time is Now for Marketplace Lending

A L G O L D S T E I N , C E O AVA N T

The lending industry is overdue for disruptionPo

tent

ial f

or D

isru

ptio

n

Timing of DisruptionFar-Out Near-Term

Low

Hig

h

Mortgage

International Remittances

In-Store Payments

SMB Loans

Wealth Management

Digital Payments

Deposits

Personal Loans

Consumer

Education

Real Estate

Small Business

Companies are being established to address various product segments

Investors believe marketplace lending can create substantial disruption

Venture Capital Funding for Lending Startups

$0

$625

$1,250

$1,875

$2,500

2010 2011 2012 2013 2014 2015

$2,366

$1,003

$315$301$320$179

85% of institutional investors are

interested

But, headwinds have emerged

Systemic risk exists for large tech startups as investors question valuations

Accessibility of the capital markets has diminished

Regulatory uncertainty remains a key concern

Yet, the environment for the middle class consumer continues to improve…

Chart Title

0.0%

2.5%

5.0%

7.5%

10.0%

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Unemployment RateOil

~$37.00 / Barrel

= $700 annual savings Household Debt Service Payments to

Disposable Income

9.0%10.0%11.0%12.0%13.0%14.0%

Jan-84 Jul-87 Jan-91 Jul-94 Jan-98 Jul-01 Jan-05 Jul-08 Jan-12 Jul-15 Jan-19

And credit performance shows no sign of deterioration

0.0%

4.5%

9.0%

13.5%

18.0%

5 6 7 8 9 10 11 12 13 14 15Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015

Avant Cumulative Gross Charge-Off Rate by Cohort (%)

Nevertheless, some compare the rise of marketplace lending to the period leading up to 2008…

What went wrong in 2008?

Favorable capital markets resulted in high corporate leverage

Dol

lars

in T

rillio

ns

$0.0

$0.8

$1.5

$2.3

$3.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Debt Equity

US household debt reached an all-time high of $12.7 trillion in 2008

40%

60%

80%

100%

120%

140%

Mar-59

Jul-6

2

Nov-65

Mar-69

Jul-7

2

Nov-75

Mar-79

Jul-8

2

Nov-85

Mar-99

Jul-0

2

Nov-05

Mar-09

Jul-1

2

Recessions Household Liabilities as a % of Disposable Income

Financial systems became increasingly complex

0

150,000

300,000

450,000

600,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Other Structured Credit

Structured Credit Collateral

RMBSCMBSABSCMOCLOCDOCDO2

CDS

2008 was the worst year for the S&P 500 since the Great Depression

0

625

1,250

1,875

2,500

2019201820172016201520142013201320122011 201020092008200720072006200520042003200220012001 20001999199819971996199619951994

During 2008 & 2009, nearly 10% of Americans lost 50+ points of FICO

It can take nearly 2 years to recover a loss this severe

$5,000 Credit Card LimitABC BANK

Lester AndersonH O M E S T E A D , F L 2 0 0 7

$175,000 MortgageCOMMUNITY BANK

$55,000 salary

Married with kids

2002 Compact Car

8 years employed

FICO Score: 700

$5,000 Car LoanCARS R US

*This is a fictitious character, not an actual customer, created and used to illustrate a typical customer of Avant

$5,000 Credit Card LimitABC BANK

Lester AndersonH O M E S T E A D , F L 2 0 1 0

$55,000 salary

Married with kids

2002 Compact Car

11 years employed

FICO Score: 650

No Refinancing Options

No Car Loans Available

*This is a fictitious character, not an actual customer, created and used to illustrate a typical customer of Avant

47% of Americans < 700 FICO

~150 million people

How Marketplace Lending is Bridging the Gap

Demand

Technology Capital

Demand

US consumer credit market presents a $12 trillion opportunity

Card$659B

Mortgage$8,691B

Student$1,111B

Auto$875B

Personal$315B

~$22 trillion consumer credit opportunity across US and Europe

Borrowers find that marketplace lenders better meet their needs

Net Promoter Score0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 0 1 0 0

The middle income consumer remains largely underserved

Tech

nolo

gy &

Ana

lytic

s C

apab

ilitie

s

Consumer Credit RangeSuper Prime Near Prime

Low

Hig

h

Non-prime consumer losses are more resilient through downturns

1% 4%

5% 10%

28%17%

3.00x

2.60x

1.75x

1.40x

Super-Prime

Prime

Near-Prime

Subprime

> 770

710 - 770

650 - 710

< 650

0.2% 0.7%

Capital

$1.2 Trillion

The amount of additional capital US banks are required to maintain

Portfolio returns of the ‘80s and ‘90s may not be repeatable

Average 5-Year Return (%)

1980 - 1999 2000 - 2013

5.2%

13.8%

Investor interest has fueled growth across the industry

$0.0

$1.0

$2.0

$3.0

$4.0

2008 2009 2010 2011 2012 2013 2014

1.78841.6244

0.8154

0.33250.15330.06070.0897

Individuals Institutions

Loans Purchased ($Bn)

20252015

$15 Bn

$150 Bn

Total Origination Volume

Technology

100% Online & Mobile

Real Time Approval & Next Day Funding

Regression is an outdated method of credit modeling

Machine learning models allow quicker, more accurate credit decisions

Marketplace lenders are more effectively pricing risk

Credit Risk is Priced Tight on Cards

0.0%

5.0%

10.0%

15.0%

20.0%

3-Year Treasury Bloomberg US High Hield

17.0%

9.0%

4.0%

1.0%

Marketplace Lender Yields Outpace Bonds

0.0%

10.0%

20.0%

30.0%

40.0%

Average Credit Card Penalty Rate

Average Credit Card Rate

Average Digital Lender Rate

12.6%

18.0%

28.8%

How are Banks Responding?

Partnership versus competition…

Not only Avant

Significant partnerships on capital side

The Avant Difference

P O W E R E D B YP O I N T O F S A L E

Reta i l Hea l t hca reAu to Home

O n l i n e / M o b i l e

Products

Channels

Customer Tools

Differentiated funding model with recurring revenue

~ 50% On-Balance Sheet

~50% Off-Balance Sheet

ABS Securitization

New Product Facility

Bank Warehouse Forward Flow

Managed Fund Vehicles

Skin in the Game

& Random Allocation

No up-front fees = Transparent products

that are easy to understand

Consumer Credit Spectrum

550 850700 800750650600

• Low Cost Digital Platform• Engineering and Technical Depth• Machine Learning Underwriting• Marketing Analytics & Automation

• Powerful Brand & Branch Network• Low Cost Capital & Industry Expertise• Loyal & Diverse Customer Base• Customer Data & History

✓ Reduced Acquisition Costs✓ Multi Product (Consumer, Auto)

✓ No Cannibalization Risk✓ Alignment of Interest

Complementary partnership offering

So how does this impact Lester?

Simple Application

Check rates in 6 minutes or lesswithout impacting credit scoreFast Service

Real-time automated loan approvals and next business day funding

Transparent Policies

What you see is what you get

Lester AndersonH O M E S T E A D , F L 2 0 1 6

Great consumer experience driving long term adoption…

lowering the costs and barriers of borrowing

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