The Growing Fintech Ecosystem: Sizing Up and Noting Trends for the Non-Bank Market

John Hecht, Jefferiesjhecht@jefferies.com415.229.1569

Agenda

Market Size & Trends

Macroeconomic Update

Key Topics for Fintech Lenders

Regulatory Update

Capital Markets Update

Closing Thoughts

Market Size & Trends

Limiting factors to success are access to capital, business model constraints, and

resources - not the market size

Focus should be on building a platform which can take the business to the next

level

Fintech lender penetration is now at a point where they can influence market factors - particularly in non-traditional

asset classes

Credit quality remains supportive, although reverting, as the macro-

backdrop is generally healthy

> $1 Trillion Total Addressable Market

Market Size & Trends|

Source: Jefferies, Federal Reserve Bank of New York Household Debt & Credit Report, PeerIQ, S&P Global Market Intelligence 2017 Digital Lending Landscape, and public company data from ELVT, ENVA, and CURO. TAM is loan balance for all sub-sectors with the exception of Small Business which is based on loan volumes (Source: Federal Reserve, 1/2/18)

Market Size & Trends|

Small Dollar Small Installment

Personal Loans (Installment) &

Refinanceable Revolving Credit

Student Loans Small Business

Avg. Loan Size $500 $1,000 $5,000+ $15,000 $50,000

Term 2 Weeks - 1 Month 6 Months - 3 Years 1-5 Years 5-15 Years 1-10 Years

Interest Rate/APR 300%+ 40%-300% 10%-36%L+200bps - L+1,400bps;

Government loans UST10+ spread and capped at 10.5%

Varies, typically 30%-40%

FICO <550 500-650 >550 670+ for private NA

Losses/Annualized NCOs 15%-40% 8%-15% 2%-8% 1.5%-3.5% for private 10%-15%

TAM (Balances) $3.6B $16B $762B $1,300B $250B

Source: Jefferies, company data

Market Size & Trends|

Small Dollar Small Installment

Personal Loans (Installment) &

Refinanceable Revolving Credit

Student Loans Small Business

Borrower Characteristics No or thin-file, underbankedLight credit file,

underbankedVaries, 'Near Prime' College student Small businesses

Use of ProceedsUnforeseen expenses including auto repair,

medical expenses, etc.

Unforeseen expenses, major purchases, auto repair, etc.

Loan consolidation, home/auto repair,

unforeseen expenses

Tuition, room and board, supplies

Capital needs

Underwriting ProcessMinimal underwriting -

pricing not credit-based. High credit risk

Modest scrutiny, with loan size, term and pricing based

on customer's income

Credit scrutiny, with loan size, term and pricing based on

customer's income

Higher scrutiny for private student loans.

Can be extensive for traditional lenders

Legacy Market ParticipantsEZPW, FCFS, Check-n-Go,

Check-into-Cash, Advance America, Ace Cash Express

RM, WRLDBanks, DFS, LEAF, OneMain,

RM, WRLD, AXP, BAC, C, COF, DFS, JPM, SYF

C, DFS, First Marblehead, Nelnet, Sallie Mae, WFC

Banks, credit unions, AXP, BDCs, SBA

New Market Entrants Enova, CURO, LendUp

Avant, Elevate, Enova, Oportun, Lendup, Marlette,

LendingClub, Prosper, Elevate, CURO

Avant, Enova, Lending Club, Oportun, Prosper, CircleBack,

Cross River Bank, Marlette, Upstart, Elevate, CURO

CommonBond, Earnest, SoFiONDK, PYPL, SQ, Kabbage,

Lendio

Borrower Profile & Loan Characteristics• Borrower Profile: challenged credit history, underbanked• Loan size: $100-$1,000• FICO: <550• APR: 300%+ APR• Loan Term: 2 weeks – 1 month• Annualized Losses: 15% - 40%

Legacy Market Participants• EZCORP, First Cash Financial Services, Check-n-Go, Check-

into-Cash, Advance America, Ace Cash Express

New Entrants• Enova, Curo, LendUp

Key Takeaways1) New entrant penetration is significant and likely

mature2) Relatively low growth potential remaining3) Moderate regulatory uncertainty at the state-level4) New Entrant market size = $1.7B; 8%% decline from

last year

Market Share & Total Addressable Market

Market Segment | Small Dollar

Sources: Jefferies, CFSA 2018 Presentation, and company data from ENVA and CURONote: Small Dollar TAM estimate based on 2017 CFSA data augmented with industry trends

$1.8B$1.7B

$3.6B

2016 2017 TAM

~8% decline

Borrower Profile & Loan Characteristics• Borrower Profile: Underbanked, thin credit file• Loan size: $1,000 - $5,000• FICO: 500 - 650• APR: 40% - 300%• Loan Term: 6 months – 3 years• Annualized Losses: 8% - 15%

Legacy Market Participants• Regional Management, World Acceptance Corporation

New Entrants• Avant, Elevate, Enova, Oportun, LendUp, Marlette,

LendingClub, Prosper, Curo

Key Takeaways1) New entrant penetration is meaningful2) Low to moderate regulatory uncertainty at the

state-level3) Strong, organic growth as consumers move into

product and are more willing to take on incremental debt

4) New Entrant market grew 30% in 2017 to $3.4 B

Market Share & Total Addressable Market

Market Segment | Small Installment

Source: Jefferies, Jefferies, PeerIQ, S&P Global Market Intelligence 2017 Digital Lending Landscape, and public company data from ELVT, ENVA, and CURONote: TAM reflects estimates of balances based on CPR-adjusted originations data supplemented with reported issuer balances

$2.6B$3.4B

$16.4B

2016 2017 TAM

~30% growth

Borrower Profile & Loan Characteristics• Borrower Profile: Varies, ‘Near Prime’• Loan size: $5,000+• FICO: >550• APR: 10% - 36%• Loan Term: 1 – 5+ years• Annualized Losses: 3% - 8%

Legacy Market Participants• Traditional banks, Discover, American Express, Capital

One, Synchrony, Springleaf, OneMain, Regional Management, World Acceptance

New Entrants• Avant, Enova, LendingClub, Oportun, Prosper, CircleBack,

Cross River Bank, Marlette, Upstart, Elevate, CURO

Key Takeaways1) New entrant penetration is significant and

maturing; but enormous growth opportunities persist

2) Relatively low growth potential remaining3) Low regulatory uncertainty4) New Entrant market growth is strong, growing 40%

to $36B last year

Market Share & Total Addressable Market

Market Segment | Personal Loans & Refinanceable Revolving Debt

Source: Jefferies, Federal Reserve Bank of New York Household Debt & Credit Report, PeerIQ, S&P Global Market Intelligence 2017 Digital Lending Landscape, and public company data from ELVT, ENVA, and CURONote: TAM reflects estimates of balances based on CPR-adjusted originations data supplemented with reported issuer balances. TAM Chart is not to scale.

$26.8B$36.3B

~$760B

2016 2017 TAM

~40% growth

Borrower Profile & Loan Characteristics• Borrower Profile: Students• Loan size: $15,000• FICO: 670+ for private• APR: L+200bps – L+400bps for private• Loan Term: 5 – 15 years• Annualized Losses: 1.5% - 3.5% for private

Legacy Market Participants• Citi, First Marblehead, Discover, Nelnet, SallieMae, Wells

Fargo

New Entrants• CommonBond, Earnest (Navient), SoFi

Key Takeaways1) New entrant penetration very remains low, but

rate environment is challenging and competition is increasing

2) Very large growth potential remaining3) Low regulatory uncertainty4) New Market entrant share grew nicely last year at

17% to $17.5B

Market Share & Total Addressable Market

Market Segment | Student

Source: Jefferies, Federal Reserve Bank of New York Household Debt & Credit Report, PeerIQ, SoFi, S&P Global Market Intelligence Digital Lending LandscapeNote: TAM reflects estimates of balances based on CPR-adjusted originations data. TAM chart is not to scale.

$14.9B $17.5B

~$1.3T

2016 2017 TAM

~17% growth

Borrower Profile & Loan Characteristics• Borrower Profile: SME enterprises• Loan size: $50,000 on average• FICO: NA• APR: Varies; typically 30%-40%+• Loan Term: 1-10 years• Annualized Losses: 10% - 15%+

Legacy Market Participants• Banks, credit unions, American Express, Business

Development Companies

New Entrants• OnDeck, Kabbage, Square, PayPal, Credibly

Key Takeaways1) New entrant penetration is still quite small

compared to the overall market2) Represents fast-growing segment of the market3) Low regulatory risk – however some uncertainty

around forward regulatory focus4) Strong growth for New Entrants last year at 32% to

$7.8B

Market Share & Total Addressable Market

Market Segment | Small Business

$5.9B$7.8B

~$800B

2016 2017 TAM

~32% growth

Source: Jefferies, Federal Reserve, PeerIQ, S&P Global Market Intelligence Digital Lending LandscapeNote: TAM reflects estimates of balances based on CPR-adjusted originations data. TAM chart is not to scale.

• Marketplace loan volume growth is outpacing industry growth rates and gaining share

• This has occurred despite volatility and idiosyncratic company issues

• In certain categories, fintechs are becoming important and influential issuers of ABS

Total Fintech Share

Marketplace Loans & Consumer ABS Issuance

Fintech Marketshare | Consumer ABS Volumes

Sources: Jefferies, Federal Reserve Bank of New Household Debt & Credit Report, PeerIQ Marketplace Lending Securitization Tracker, CFSA 2018 Presentation, S&P Global Market Intelligence, and public company data from ELVT, ENVA, and CURONote: Total TAM reflects estimates of balances based on CPR-adjusted originations data supplemented with reported issuer balances. Total Consumer securitizations reflect the summation of the credit card and consumer & specialty finance categories from Finsight

Key Takeaways• Credit spreads are tightening despite rising interest

rates and rising delinquencies• Marketplace loans now represent an important

share of total consumer ABS (~20%)• This is an important and institutional market now –

exhibiting historically successful adoption

$46.1B$58.9B

>$2.0T

2016 2017 TAM

~30% growth

>4x Larger

$0

$10

$20

$30

$40

$50

$60

$70

2017

MPL ($B) Total Consumer ($B)

Macroeconomic Update

Lending and Borrowing -

MacroFactors

Unemployment

Asset Values

Wages

Household Leverage

Spending

Tax Reform

Gas prices

Macro factors surrounding consumer lending are supportive for growth and credit performance

Consumers have recently exhibited a willingness to take on incremental debt

Macro factors surrounding commercial lending are also positive, however risk tendencies are higher

Consumer Macro Factors | Largely Supportive

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2000 2005 2010 2015

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17

18

19

1980 1985 1990 1995 2000 2005 2010 2015

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000 2005 2010 2015

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2000 2005 2010 2015

Initial Jobless Claims

Credit Card

Defaults

Financial Obligations

Ratio

Revolving Credit

Growth

Source: Jefferies, Federal Reserve

Key Topics for Online Lenders

Evolution of the OCC Fintech Charter |

State regulators are likely to renew challenges to the charter once initial applications are granted

Both the NYDFS and CSBS have issued legal challenges and we expect once the fintech charter is granted these legal challenges will be renewed

OCC Fintech Charter

September 2015• OCC announces

responsible business initiative

December 2016• OCC proposes a

special bank charter for fintechs

April 2017• State regulators

sue OCC stating it lacks legal authority

July 2018• OCC announces it

will begin to accept national bank charter applications for fintech companies

Fintechs successfully applying for the OCC charter will be vigorously reviewed, and would observe a simplified regulatory regime (but not less onerous)

The OCC’s intent with the charter is to foster innovation within financial services

15%

20%

41%

24%

More than once per day Daily A few times per week Once per week or less

Some of the largest US banks have seen significant growth in digital and mobile usageMobile app usage at Bank of America has more than doubled over the last 3 yearsWe believe mobile represents an opportunity for incumbents and fintechs alike

Daily Active Mobile Users (millions)

Mobile fin. svc. app user engagement

Fintech 2.0 | Evolving Business Models and Products – Going Mobile

Sources: Jefferies, S&P Global Market Intelligence 2017 Mobile Banking Landscape

US consumes value their mobile financial service apps more than ever and usage trends reflects these patternsThe value US consumers place on mobile apps suggests a strong digital platform can help fin-tech lenders maintain and grow their core customer base with a competitive product offeringOnce a nice-to-have, a strong mobile presence is now a must for any financial institution looking to attract tech-savvy US consumers

0

5

10

15

20

25

30

35

2014 2015 2016 2017

JP Morgan Chase Bank of America Wells Fargo

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

2013 2014 2015 2016 2017

Alternative lending products are taking share as exemplified by growth in installment revenues as well as migration to online channels

Online Installment & Revenue Growth

Lending Club Loan Volume

Fintech 2.0 | Evolving Business Models and Products

Sources: Online and Installment Revenue growth includes historical and forecasted figures for CURO, ELVT, and ENVA

Ongoing development of marketplace (or digital) lenders is a key trendMarketplace lending continues to attract capital and continues to exhibit growth – although business model weaknesses have been exposed We expect this market to refine lending models to ‘fix’ issues and regain momentum, but this will take timeMarket opportunities are large and don’t present a limit; rather, capabilities and resources are the obstacle

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

-

500

1,000

1,500

2,000

2,500

2016 2017 2018E 2019E

$M

YoY Growth Online Installment Revenues(CURO, ELVT & ENVA)

Regulatory Update

CFPB & Federal Environment|CFPB & Federal Regulations• General market perception is that we are in a regulatory ‘normalization’ period after several years of increased regulatory

scrutiny at the federal level

CFPB Small-Dollar Rule Postponed / Disrupted• Operators continue to prepare for some level of regulation although the timing is uncertain• CFPB appears open to changes to the Proposed Rule and the original timelines requiring compliance have likely been

delayed

Forward Thoughts• Markets are closely following the midterm elections as this will likely dictate changes to congressional policy and tone over

the near term• In the immediate term we anticipate less action out of the CFPB in terms of enforcement actions and CIDs however states

appear to be re-engaged as this migration occurs

State-level Activity|California• The California Supreme Court recently held borrowers may use the unconscionability doctrine to challenge the interest rate

on consumer loans of $2,500 or more, which were previously largely unregulated in terms of interest rates• Other activity in CA – increased disclosure for small business fin-tech loans, other proposals limiting credit usage along with

rate level limitations

Ohio• Recently enacted HB 123 known as the Fairness in Lending Act, which serves to limit certain types of lending• The legislation substantially limits small-dollar single payment loans in the state as will high-dollar installment loans due to

the 28% interest cap and restriction of CSO usage

Other States• We continue to monitor state attorneys general and state legislative activity as activity picks up following summer recess• We note activity has recently picked up in Maryland, New York, and Florida although no significant actions have taken place

in these states

Valuation Trends & Capital Markets Activity

• Markets appear focused on growth/expansion opportunities rather than fundamental or systemic risk

• Key measures of valuation dispersion appear related to growth opportunities rather than credit or competitive factors

• Credit risk is less of a concern/focus for investors• Stimulus program may enhance employment; tax reform may spur saving and

spending• CDS spreads have normalized to an extent and valuations reflect the more supportive

credit environment for the US consumer

• Valuations now appear to reflect the “growth and opportunity” rather than “regulatory” cycle within consumer finance

• Over past 2 years, most consumer finance companies have seen a positive re-rating. That said, overall valuations are below their 2007 peaks, suggesting continued conservatism within the market for alternative consumer stocks – and ongoing opportunity for positive valuation trends

Market Sentiment|

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

16.0x

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Underbanked/Fintech Forward PE Multiple

Pre-August 2015 regulatory sentiment was the primary concern for investors, credit was not a predominant driver

In late August 2016 through early 2016, investor focus shifted and credit and recessionary fears began to take hold

By late-2016 both regulatory concern and credit concerns were abated at the start of a new administration and continued economic strength

Currently market fears over credit and regulatory factors continue to remain muted and growth and fundamentals are the primary drivers of valuation

Source: Jefferies, Factset. Underbanked/Fintech peer group includes CSH, FCFS, EZPW, RM, WRLD, OMF, ENVA, WU, GDOT (note ELVT and CURO excluded due to timing of IPOs)

P/E Multiple Trends| Upward Trend

13.3x

10.2x

11.4x

9.8x

11.1x

18.2x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

20.0x

Underbanked Credit Card Auto Student Banks Fintech Lenders

Current P/E

Source: Jefferies, Federal Reserve Underbanked includes FCFS, ENVA, EZPW, RM, WRLD, CURO, ELVT. Credit card includes AXP, COF, DFS, SYF. Auto includes ACF, ALLY, SC, CRMT, CACC. Student includes NAVI, NNI, SLM. Banks includes BAC, C, JPM, WFC. Fintech Lenders includes ONDK, LC, GDOT, WU.

Subsector Valuations| Positive Valuation Trends

Current valuations have shown some degree of re-rating to higher levels -particularly among the underbanked consumer finance companies and fintech lenders

Stock price performance for Fintech and Fintech Lenders serving non-prime borrowers has been very strong the past year – up nearly 30% on average

Valuations for most subsectors are still below their pre-crisis averages; yet start to reflect ‘reasonable’ levels after several years of depressed levels

Public companies trade in a wide valuation range

7x to 21x CY19E P/E

Average P/E of 15x and EV/EBITDA of 10x

These are nearly consistent with long term averages

Fintech Public Market Valuations|Market CY P/ E

Company Name Symbol Price Cap ( $MM) 2018E 2019E 2020E 2018E 2019E 2020E

CURO Group Holdings Corp. CURO $29.42 $1,348.9 12.3x 8.5x 6.2x 8.3x 6.7x 5.4x

FirstCash, Inc. FCFS $80.81 $3,581.8 23.4x 20.6x 17.2x 14.0x 12.3x 11.3x

Elevate Credit, Inc. ELVT $7.91 $341.6 10.7x 6.6x 5.4x 5.7x 4.7x 4.2x

Enova International Inc ENVA $27.51 $939.6 11.5x 9.9x 7.4x 9.0x 7.7x 6.5x

Green Dot Corporation Class A GDOT $88.46 $4,651.1 28.7x 25.2x 21.9x 14.5x 12.7x 11.4x

GreenSky, Inc. Class A GSKY $18.28 $3,406.1 28.0x 20.2x 15.7x 17.6x 13.1x 10.4x

OneMain Holdings, Inc. OMF $33.50 $4,546.1 6.8x 6.1x 5.5x 11.4x 10.4x NM

On Deck Capital, Inc. ONDK $7.52 $557.6 17.5x 14.2x 12.5x 13.8x 10.1x 8.8x

Regional Management Corp. RM $28.58 $337.0 9.2x 8.1x 7.0x NM NM NM

LendingClub Corp LC $3.95 $1,665.5 42.3x 20.8x 14.0x 14.3x 9.2x 6.4x

Mean 19.8x 14.6x 11.9x 12.5x 10.0x 8.4xMedian 17.5x 14.2x 12.5x 13.9x 10.3x 8.8x

EV/ EBITDA

LowerPerceived Regulatory Risk

• Slower (or disrupted) roll-out of impending CFPB rules

• Threatened ability to aggressively enforce existing regulation

• CFPB structure and powers checked and potentially curtailed

• Expect more collaboration between business and federal regulators

LowerPerceived Credit Risk

• Tax reforms (and related stimulus) enhance borrowers’ ability to service debt

• Continued benign credit environment persists

• Retrenchment of CDS (credit spreads) for consumer lenders

• Positive unemployment and wage patterns

Sources: Jefferies

Drivers of Market Sentiment|

Forward Looking Thoughts

While the Single Pay Segment has Matured, Product Development and Technological Innovation Represent Ongoing Opportunity:

• Ongoing product innovation

• Focus on multi-payment products, risk adjusted pricing, customer loyalty (or reward) programs

Consolidation is occurring – with large players gaining market share

The regulatory climate has improved, although investors still require a focus on compliance as a core competency; while state level activity re-emerges

We expect further development of Marketplace/Digital Lenders; but business models need refinement along the way

• New and incumbent operators will continue to seek control of a specific/niche market or brand

• Access to capital and underwriting / credit performance increasingly important

Adoption of mobile technologies related to financial services is a clear secular trend supporting massive migration and growth opportunities for entities serving this segment

End market trends are supportive for alternative consumer lending:

• Traditional sources of capital remain restricted in providing credit to middle and low income borrowers (although they are slowly coming back)

• Middle and low income borrowers are experiencing wage growth and borrowing conditions have improved

The past 3 years have been a ‘positive pivot’ after several years of headwinds:– Reduced concerns pertaining to regulatory threats– Improving sentiment around credit risk– The market continues to move away from single pay lending and more

towards multi-pay, but this is due more to demand and technological capabilities and less to other factors

As a result, market valuations and market activity have improved:– Valuations have moved off lows and towards long term average multiples– Transaction volumes in M&A, debt and equity capital markets have

accelerated

Analyst Certification

I, John Hecht, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.Other Important DisclosuresJefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) group companies:United States: Jefferies LLC which is an SEC registered broker-dealer and a member of FINRA (and distributed by Jefferies Research Services, LLC, an SEC registered Investment Adviser, to clients paying separately for such research).United Kingdom: Jefferies International Limited, which is authorized and regulated by the Financial Conduct Authority; registered in England and Wales No. 1978621; registered office: Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)20 7029 8010.

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