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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