Fresh off adjustments that included lowering its return expectations, Zopa launches a new credit assessment model.
Peer-to-peer lender Zopa is going through a period of change. Last month, the platform’s chief product officer Andrew Lawson (pictured) wrote to investors informing them that the platform was expecting higher-than-anticipated losses for its outstanding loans, translating to lower return expectations. Lawson also signalled a planned reduction in the firm's higher risk lending.
These developments were attributed to a worsening outlook for consumer credit in the UK. That deterioration has been underlined by warnings from the Bank of England, the collapse of doorstep lender Provident Financial’s share price, and the UK’s “problem debt” regions, some of which Zopa is active in.
In an update on Zopa’s website, Lawson answered some of the questions that have been fielded by the platform since last month's update. Many of those questions were about what changes the firm is making to its risk management approach.
Lawson said that Zopa has just launched its new credit risk scorecard. The scorecard is used to determine the risk of a borrower – and drives whether they are accepted, and, if they are, what risk market they’re placed in.
“Our new model mixes proven traditional techniques with more cutting edge data science approaches that new technologies have unlocked, and replaces our previous model that we launched in April 2015,” he said. “The new model not only uses more advanced techniques, but is also built on more data, and more recent data – all of which means it improves our ability to assess loans in today’s market.”
Lawson’s update also included a note on how Zopa is managing risk for its non-safeguarded loans, which leave investors most vulnerable to losses. The platform’s safeguard tool – effectively a provision fund which covers investors if their loans default – is in the process of being retired. Lawson reminded investors that the platform has years of experience manging credit risk without the safety blanket of safeguard.
“Over the last 12 months 67 per cent of our lending has been non-Safeguarded, and as of the end of last month, non-Safeguarded loans accounted for 64 per cent of the whole Zopa loan book,” he said. “So, managing risk on non-Safeguarded loans is something we’re already doing (and did from 2005 up until the launch of Safeguard in 2013).”