More so than any other peer-to-peer lender, Zopa has been wrestling with the base rate, which was cut to its all-time low of 0.25 per cent in August 2016. Zopa then faced a choice: compromise on its credit criteria to pursue riskier borrowers, or stick to its guns and cut rates in order to remain competitive in a crowded market of prime consumer lenders.
It opted for the latter course, several times dropping its interest rates, and so too its target returns for investors. In fact, Zopa has doubled down on that strategy in recent months, pledging in August to cut back on its riskiest loans, with losses growing beyond expectation.
While it’s all seemed like fairly sensible batting from the UK’s oldest peer-to-peer lender, it has nevertheless caused an issue: Zopa’s platform-wide 12 month trailing net return is currently at an all-time low of 3.94 per cent, according to AltFi Data*.
Zopa representatives have said time and again that its rates are not directly linked to shifts in the base rate. But the rates charged by banks, with which Zopa competes for borrowers, are. Ergo, whether or not the 0.25 per cent increase will have an impact on Zopa is really a question of whether or not it will have an impact on the banks.
The 0.25 per cent hike has been seen by many as negligible. Angus Dent, who is CEO of another P2P firm, ArchOver, said that it was “largely symbolic”. But some have suggested that further rate rises might be on the horizon.
If that turns out to be true, it could be good news for Zopa and other peer-to-peer lenders, due primarily to their ability to pass value onto their customers.
“At 0.25 per cent the rate increase is a small one and we don’t expect it to have a material impact,” said Jaidev Janardana, CEO of Zopa (pictured). “We operate in the spread between what banks pay to their depositors and charge to their borrowers. While we expect that spread to widen, we don’t believe the banks will be passing the benefit on to consumers equally, which creates an opportunity for us.”
“Since the last time rates rose, the savings sector has been transformed,” he said. “We are not confident that traditional players will respond and pass on rate rises to savers. But online marketplaces like RateSetter will respond much more quickly, finding a new equilibrium as the monetary policy environment changes.”
*We have previously written that Zopa’s net return hit an all-time low of 2.69 per cent in August 2017. AltFi Data has since changed its return methodology, making 3.94 per cent the new low (as at the time of writing).