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Alternative Lending in Japan

Koichiro (Kay) Okamoto Chief Executive Officer Yayoi Co., Ltd.

April 12th, 2016

© 2016 Yayoi Co., Ltd. All rights reserved.

Japan is the 3rd largest economy in the world

$17,968B (GDP, 2015*)

$4,116B (GDP, 2015*)

US Japan

2

$11,384B (GDP, 2015*)

China

* Gross Domestic Products, current prices in USD, estimates by IMF (2015/10)


Does it have a 3rd largest alternative lending market?

> $30B (New origination

in 2015*)

$0.54B (Cumulative origination

to date***)

US Japan

3

$151B (New origination

in 2015**)

China

* Estimate by LendAcademy at LendIt USA 2015 ** Figure by Wangdaizhijia.com *** Figures from 7 alternative lending companies (Maneo, SBI Social Lending, CrowdBank. Lucky Bank, Aqush, CrowdCredit and OwnersBook)

Converted to USD in 2015 average FX rate at JPY121.05 = USD1


Lending market itself is quite sizable

Consumer Business

4

Lending by banks in USD billions (converted from JPY at constant rate of JPY121.05 = USD1) Source: Bank of Japan

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Why hasn’t alternative lending taken off in Japan?

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Competition from traditional lending Legal constraints


Consumer lending business is extremely competitive■ Traditional banks are proactively attracting consumer borrowers with relatively

low rates

6

ORIX Bank @ APR 3.0%~ BTMU @ APR 4.6%~


Small businesses find it not so difficult to borrow money■ Government agencies (especially Japan Finance Corporation) often provide

“easy” money

7

Source: Small and Medium Enterprise Agency, “Small Business Whitepaper 2015”

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Product/business development (N=1,614)

Capital investment (N=3,714)

Working capital (N=3,762)

Difficult Neither Easy


There are two major legal constraints

■ P2P Lenders may be deemed as professional lenders and subject to Money Lending Business Act ◆ MLBA requires professional lenders to be

registered (in effect, have a license) ◆ It is not realistic for individual P2P lenders

to obtain license

■ Interest Rate Restriction Act caps interest rate (APR) to 15%~20% ◆ Caps are tiered* ◆ APR 15% for principal equal to or more

than JPY1,000,000 ($8,300) ■ Any kind of commissions and fees

are deemed as interest**

Money Lending Business Act Interest Rate Restriction Act

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* APR 20% for principal less than JPY100,000, APR 18% for principal less than JPY1,000,000 and APR 15% for principal equal to or more than JPY1,000,000 ** Except for expenses for concluding the contract and fulfilling the obligation


They make both P2P and Online (BS) lending difficult

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Money Lending Business Act

■ P2P Lenders may be deemed as professional lenders

Interest Rate Restriction Act

■ Interest rate is strictly limited to APR 15%

P2P Lending Online (BS) Lending

■ P2P Lenders cannot be “lenders” ■ Interest rate cap makes it difficult

to accommodate higher-risk borrowers

■ Interest rate cap makes it difficult to set interest rate that matches the lender’s risk ◆ e.g., 2% for the 1st month


There are possible workarounds but with issues■ There may be workarounds for Money Lending Business Act ◆ Offer as a bond/note (lenders will be bond/note investors): no example exists ◆ Trust (lenders will be beneficiaries of trusts) : no example exists ◆ Anonymous partnership (lenders will be limited partners of anonymous partnership(s))

• “Tokumei Kumiai” or “TK” • All current P2P lenders adopt this approach

■ Current approach, anonymous partnership (“TK”), significantly hinders the growth of alternative lending market in Japan ◆ Due to limitations of TK, borrowers are hand-picked ◆ From lenders’ standpoint, there are limited lending opportunities and it is not possible to

diversify their lending portfolio ■ As far as we can tell, there is no workaround for Interest Rate Restriction Act

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Alternative lending in Japan: New Hope


Yayoi is now a part of ORIX Group

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ORIX Corporation (TSE: 8591, NYSE: IX) ■ Diversified Financial Services ■ Revenue of JPY2,174.3B* and >30,000 employees

Yayoi Co., Ltd. ■ Accounting Software and Service Provider

Misoca Inc. ■ Cloud Invoicing Start-up

Acquired 99.9% of Yayoi’s outstanding shares in Dec. 2014

Acquired 100.0% of Misoca’s outstanding shares in Feb. 2016

* FY15


Yayoi is a dominant market leader for Japanese SBs

Others 8.8%

BizSoft 4.5%

BSL 8.2%

Sorimachi 15.8%

Yayoi 62.7%

Others 7.1%

CFSCI 7.7%

MF Cloud 9.8%

freee 24.9%

Yayoi 50.5%

Desktop application*(Accounting software)

Cloud application**(Accounting software for sole proprietors)

13

* Retail market share based on POS data (2015/1 – 12) from market research company BCN ** Market survey by market research company MM Research Institute (Jan. 2016)


Help Japanese small businesses to grow

Combining group capabilities

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Technology (Accounting)

Technology (Business

transaction)

Finance


Yayoi owns key resources

■ Yayoi customers ◆ 1,450,000 registered users

• 1,400,000 desktop • 50,000 cloud

◆ 500,000 users with recurring contracts • 450,000 desktop • 50,000 cloud

■ Misoca customers ◆ 90,000 registered users

■ Accounting Data ◆ B/S and P/L

• Data can be collected through Yayoi drive, Yayoi’s cloud storage service

■ Transaction Data ◆ Banking and credit card transactions

• Data can be collected through Yayoi Smart Connect, which enables automatic bookkeeping

◆ Quotation, Order and Invoice transactions • Data can be collected through Misoca EDI

Customers Data

15


Yayoi has significant presence in small business market

Small 3,342,814 (86.5%)

Medium 510,120 (12.7%)

Large/mid-sized 10,596 (0.3%)

Corporations 1,688,268 (43.7%)

Sole proprietors 2,175,262 (56.3%)

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Medium businesses • <= 300 employees • <= 100 in wholesale and services • <= 50 in retail and food

Small businesses • <= 20 employees • <= 5 in wholesale, retail, food and services

Secondary industry & tertiary industry in private sector Source: Ministry of Internal Affairs and Communications, 2012

Yayoi # of registered users ■ 1,450,000 Yayoi # of users on contracts ■ 500.000


Yayoi’s customers: small but stable■ Revenue ◆ More than 33% are <10M yen, and more

than 50% are <30M yen

■ Years in business ◆ More than 50% are in business for at least

10 years, and more than 90% are in business for at least 2 years

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Source: Internal, Yayoi Support Service CS survey (N=9,316)

~3M yen12.2%

3~10 M yen25.4%

10~30M yen17.3%

30~50M yen6.5%

50~100M yen7.8%

100~200M yen7.2%

200~500M yen7.3%

500M~1B yen4.2%

1~2B yen2.4%

2~3B yen0.7%

3B yen~1.3%

Not certain7.7%

~6 months1.7%

~ 1 year2.4%

1~2 years5.3%

2~3 years6.4%

3~4 years5.6%

4~6 years8.7%

6~10 years10.9%

10~20 years20.4%

20~30 years11.4%

30 years~26.3%

Not certain1.0%


There are demands■ Not all small businesses have solid

relationships with banks■ Not all small businesses rely on bank

loans* ◆ Half of who do have some grumbles

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46%

10%

27%

22%

27%

68%

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80%

100%

Corporation Sole proprietorSolid relationship with Banks Some Relationship with Banks

Limited relationship with Banks* Figures for short-term loans Source: Internal, Web survey to Yayoi registered customers (N=7,609)

49%

16%

36%

54%

15%30%

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Corporation Sole proprietorBorrowed from banks Not borrowed from banks No need for loans


Creating new generation of alternative lending in Japan■ Yayoi, jointly with ORIX, plans to establish a new entity that offers alternative

lending to Japanese small businesses

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Trends in global market

Alternative lending that is tailored to Japanese market Market environment in Japan

Legal constraints in Japan ■ Focusing on small businesses ■ Potential collaboration with banks ■ Target launch within 1 year


Thank you!

To be your “Business Concierge”

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