Zopa aims to launch its bank next year with a series of products based on simple, flat pricing – and a direct challenge to the industry’s traditional strategy of milking their large “back books” of existing long-term customers who rarely switch or shop around.
Jaidev Janardana, Zopa’s chief executive confirmed in an exclusive interview that credit cards and auto-finance would be among the first products, and would charge a single rate for all customers, instead of ultra-low teaser offers that flip to high rates after a fixed term, catching borrowers who do not switch. “It’s about creating products that do not rely on inertia but on customers making the rational choice to stay with us because we are giving them the best product,” said Janardana, “products where you don’t have that difference in pricing between the back book and the front book.”
He pointed out that Zopa already follows this approach in its P2P lending with all investors receiving the same rate, and returns changing for everyone simultaneously. The company expects to apply to the Prudential Regulation Authority for its banking licence later this year.
The decision to move into banking will effectively turn Zopa into a hybrid P2P/balance sheet lender. Janardana, who previously worked at Capital One, explained that Zopa wanted to expand beyond personal loans into areas including credit cards, auto-finance, point-of-sale lending and overdraft-type products, but did not believe the P2P model offered the right funding source. “We find these markets attractive but they don’t necessarily lend themselves to a P2P model and that leads us to say that we probably need to be doing balance-sheet lending,” he said, arguing that deposits were the best way to fund “low-risk consumer lending”.
The aim was to create a company that combined the best of both models – a capital-light P2P operation with a high return on equity but lower margins, and a capital-hungry bank with a lower ROE but higher margins and profits in cash terms. “That mix gives you a reasonable amount of flexibility and thus it’s in our interests to have both businesses at reasonable scale,” he said. “When you have a bigger revenue stream it allows you to invest more, be that in brand building, people or technology. I think the bank enables us to do that more than P2P historically has done.”
The bank would fund personal loans originated via the P2P platform, he said, but would invest via its institutional whole-loans market on the same terms as any other institution. Individual P2P investors will continue to lend via Zopa’s separate fractional market.
The approach of Open Banking, via the implementation of the second European Payment Services Directive (PSD2) is another major reason for Zopa’s decision to go into banking. By the first quarter of next year, the biggest banks must allow customers to share their transaction data via open APIs that should allow a frictionless flow of real-time information, giving other providers a detailed view of each customer’s current account and therefore their financial situation.
There is still some doubt about whether banks will be ready to deliver Open Banking by Q1 2018, but when it happens PSD2 should open the door to further product launches, such as Zopa’s alternative overdraft facility.
Janardana argues that overdrafts are high-cost products that are extremely profitable for banks but that once customers give Zopa access to their current account data, it will be able to anticipate when they are likely to go into overdraft and offer an alternative short-term line of credit to tide them over. “If they can confirm with us that the line of credit that we are going to give them is lower-cost than their overdraft facility, then we can just push the money in and tell them through an in-app notification,” he says. To minimise their costs, borrowers would be prompted to repay when their salary was due.
The ability to access data from customers’ current accounts means that entrants such as Zopa do not need to offer a current account of their own. Instead, Zopa can simply simply overlay its services on top of its customers’ existing current accounts, drawing on the data they generate. This starts to overturn the notion that whoever provides the current account owns the customer relationship because the current account is the gateway to other product sales that generate most of the profits in banking.
Zopa believes that PSD2 offers the opportunity to break that traditional link, which explains why it has no plans to start offering a current account of its own – provided it can gain access to the data from its customers’ current accounts held elsewhere, there’s no need. Instead, it aims to “create a more meaningful integration” of the data from the various products they have with different providers.
Persuading customers to share their financial data depends on winning their trust, an area where Janardana believes Zopa’s strong customer trust scores will prove invaluable. Research published this month by Deloitte suggested that around half of mobile banking customers would trust a mobile app from a digital payments provider for managing their financial accounts and services, while 43 per cent would trust a mobile app from a traditional retailer.
“Tech companies, retailers and price comparison websites could become major banking brands,” Deloitte declared.
Janardana says: “Thanks to PSD2, I am able to simplify [the customer’s] total financials and help them take control. Because we understand them and we understand the data we are able to present it in both insightful but also intuitive ways that they can understand and play around with. Within that they might choose to get our products or they might choose to find different products but we will facilitate that and help them get better control of their finances.
“The people who can do that better should start owning the customer relationships – and we won’t be the only people trying that.”
He concedes that Zopa’s belief in flat pricing for new and existing customers is likely to mean that its bank grows more slowly than it otherwise might, but he argues that in the age of Open Banking, the result will be a more sustainable business that does not depend on customer inertia for its profitability. “The banks will have to be extremely brave to say ‘I am going to act in the interests of the customer and give them the right nudges and the right information to help them lower their cost and improve their return’ – because they are the beneficiaries of that inertia.”
“That’s why I think the banks cannot do it. It’s either us or another trusted third party.”