Zopa, the UK’s leading peer-to-peer/marketplace lender, today becomes the first alternative finance platform in the world to announce plans to launch a bank. Chief executive Jaidev Janardana wrote to customers today to inform them of the news. The company will apply to the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) for its banking licence.
For Zopa, the path to a licence has been paved by digital banks such as Atom, Starling and Monzo, as well as by challengers like Metro Bank before them. But despite suggestions that many of them may look increasingly like banks, no marketplace lender has ever gone so far as to apply for a banking licence – until now.
“The regulatory authorities in the UK have created an environment that encourages innovation, the adoption of new technologies and an increase in competition in the banking sector,” said Janardana. “We are responding to the positive regulatory environment and building on our experience to bring yet more choice to the market.”
Upon launch, Zopa’s next generation bank will offer FSCS protected deposit accounts to savers and overdraft alternatives to borrowers, to complement its existing consumer loan focused investor and borrower products. The bank will be digital-only, meaning there will be no branches.
“We are uniquely placed to re-define customer expectations of what a bank should deliver in the 21st century,” continued Janardana. “Over the last 11 years we have delivered great value to borrowers and investors whilst prudently managing credit risk. Combining our pioneering data and tech-led culture with an obsession with fairness and customer experience, we are best placed to shape the future of personal finance in the UK.”
Zopa anticipates the banking licence application process taking between 15 and 24 months, so the launch is not imminent. The platform is already waiting on the FCA for full authorisation as a peer-to-peer lending platform, as are the vast majority of its competitors. Peer-to-peer lenders must be fully authorised in order to become ISA managers, and thus the present regulatory logjam has also stalled the full-scale launch of the Innovative Finance ISA, which allows peer-to-peer investments to be held within an ISA wrapper.
In announcing its intention to pursue a banking licence, Zopa said that becoming a bank would allow it to further diversify its funding sources, combining savings deposits with individual and institutional investment capital. The company says that this diversity of funding will offer “a strategic advantage over pureplay banking”. But some might also say that the move to become a bank ("next generation" or otherwise) is also an implicit acknowledgement of the shortcomings of the pure marketplace lending model.
2016 has been a difficult year for the marketplace lending sector globally. The funding structure has come under increased scrutiny after institutional demand for online loans in the US fell off a cliff earlier on in the year, causing origination volumes to dry up at some of the world’s largest platforms. But while significant losses were endured by some firms, Zopa points out that it has in fact been profitable since September of this year, after posting an £8.9m loss in 2015.
Speaking to AltFi, Janardana said that Zopa is not becoming a bank, it is launching a bank, and is doing so from a position of strength. “If we had stuck to marketplace lending we would have continued to do well,” he said. “The reason for doing this is to be able to sell products that we cannot sell easily in a peer-to-peer framework.”
The Zopa boss explained that many of Zopa’s customers would like to use the platform to access products such as a revolving credit facility, but that such demands are difficult to satisfy in a peer-to-peer lending framework due to maturity transformation issues.
Zopa has lent a total of over £1.8 billion to UK consumers to date, with a little over £600m coming in 2016 alone, according to the Liberum AltFi Volume Index UK. Launched way back in 2005, Zopa was the world’s first peer-to-peer lender, and is one of the few to have weathered a major recession.
“We launched in 2005 to create a richer life for everyone by making money simple and fair,” said Janardana. “We have lent over £1.8bn and inspired a £100bn global industry. We have built a profitable, scalable and viable business. Yet we’ve only just begun. We want to launch a next generation bank to drive greater choice for borrowers, savers and investors, which is good for consumers and good for the economy.”
The needs of a customer will drive that customer’s experience on the Zopa of years to come. The platform will encapsulate a broader range of financial services and customers will be able to pick and choose between these. “Marketplace lender” will cease to be sufficient as a descriptor for the company. Janardana conceded that he’s yet to conceive of an alternative tag line, but said that he is open to suggestions.