Zopa says it is on track to reach full profitability by the end of December, only 18 months after getting its banking licence. But, it wants to concentrate fully on banking and wind up its P2P operation by the end of January 2022.
The pioneer of peer-to-peer lending Zopa is to shut its P2P platform after 16 years in a bid to focus on its growing bank and credit card business, AltFi can exclusively reveal.
Zopa Bank, the company’s 18 month old neo bank business, will be buying the retail P2P loan portfolio at face value from the firm’s c.60,000 investors who will receive their investment balances back by the end of January 2022.
Zopa CEO Jaidev Janardana told AltFi in an interview regarding the closure of its peer-to-peer business that the twin effects of tighter regulation of the P2P lending sector since 2018 and growing negative retail investor sentiment towards P2P during the pandemic largely explain the decision.
“We just don't see a way of actually commercially viablely continuing to offer this product while giving the right returns to investors. It was a very difficult decision for us. It's a business that we're proud of, in fact, we invented it, we were the first ever!” he said.
“We are very proud of the performance of the business in terms of what we have delivered to investors - which has averaged 5 per cent annually - through two different economic crises, the financial recession, as well as the pandemic,” he added.
Janardana notes over the last few years, particularly during the pandemic, but before ut also, the reputation of the industry suffered after a number of platform failures such as Lendy that left thousands of investors out of pocket to the tune of millions of pounds.
"We've had some platforms that were potentially not well run fail. As a result, we've seen customer sentiment for the industry suffer and a lack of trust, that has come through. We haven't seen that necessarily in our customers but we've definitely seen that in our ability to attract new customers. We have seen increased costs associated as a result,” he said.
“There has been tighter regulation, which has increased the costs of running the business as well as hampered the ability to attract new customers with appropriateness tests and so on, which increased the friction for customers,” said Janardana.
That means, he says, that the cost of running the business on an ongoing basis was increasing and had become less commercially viable as time went on.
“We saw a reasonable reduction in conversion, as well as there was continuing re-certification that was needed, which meant that the friction associated with the product increased,” he said.
“We want to make a reasonable profit out of this. We'd have to reduce returns for investors to a point where we thought we don't think that's appropriate for the risk-taking, and thus, we had to make the tough decision of actually not continuing with the business and then actually winding it down."
Zopa launched in 2005 as a consumer marketplace lender funded by retail investors. Since then it has lent over £6bn. It applied for a banking license in 2016 which three years later in December 2019, it received after a lengthy delay.
Since then it has gone on to launch savings accounts and a credit card. Last month, it scored a $300m investment from Softbank’s Vision Fund 2 ahead of an expected IPO in the final quarter of 2022 to further build out its growing banking business.
Janardarna says the deal was not contingent on winding down the P2P business but that the new cash will allow the buying back of the loans to go ahead.
“It allowed us to buy the book back because it meant that the bank had the requisite capital over and above its growth plans to be able to do that. That being said if we didn't have that capital, we would have been looking at other ways of winding down the business,” he said.
In particular, this will mean that investors holding Zopa loans through ISA wrappers will be better off as they will be able to re-invest immediately through their ISA rather than having to wait for a wind-down over a number of years.
“We are very glad that having the capital has enabled us to give this positive outcome to our customers so that they can have their money back and figure out where to invest that in a very short window,” he said.
Zopa will be doubling down on its expansion of recent years through its bank, however. In 2022 that will be particularly focusing on building deposits as it nears becoming fully profitable by the end of 2021.
"Our path to profitability has been very short. When we look at it on a pre-provision basis we've already hit profitability in August, but we expect to hit profitability by end of this month fully," he said.
“Our immediate focus for the next year and a half is to continue to provide competitive alternatives for savers focusing on fixed-term savings, but also helping to build the habit of savings for those who have smaller amounts, and making those products compelling,” he said.
In the medium term that customer base could be further offered access to other investment products such as in-house stocks and shares trading, Janardana says.
While Zopa will continue to fund its growing loan book through its own balance sheet as deposits increase, it will also continue to court capital markets and see its balance sheet benefit from the Bank of England's term funding scheme
"We have always wanted a diversity of funding source sources. That is one of the reasons that this was a tough decision for us to make in terms of winding down peer to peer lending."
"We would expect to also be using the wholesale markets in the future. Either in late 2022 or early 2023, I would think that we would consider more wholesale funding sources in terms of securitisation."