Peer-to-peer may have changed banking, but banking still won

Zopa, the world’s oldest “peer-to-peer” lender, is launching a bank. It’s not quite *becoming* a bank. No, that would be too simple. It’s launching a bank, which will run alongside its existing business.

The industry has been moving in this direction, if not exactly to this destination, for some time. The pure peer-to-peer model has slowly adopted the products and practices of traditional finance, and fresher entrants into the sector eschewed the idealistic approach of its pioneers.

In the US, for example, no-one except Lending Club and Prosper Marketplace sells directly to retail investors.

The question of why is an age-old one of what happens when ideas meet reality. The idea of asking the crowd to underwrite loans crashed into a number of problems in the real world. One is prejudice; another is inefficiency; a third is the inability of ordinary people to properly price risk, a task that even professionals are prone to do badly, for reasons these startups encountered too.

But the most audacious idea was that the people didn’t need the banks. This was a thrilling thought and one that really took hold after the global financial crisis as the events of 2007 and 2008, and the disclosures since then, showed how the banking sector had failed to serve anyone but itself.

And, yet, here we are. Zopa was founded in 2004 and now, more than a decade on, a new chief executive hired last year is bringing Zopa full circle, back into the world it set out to disrupt.

Jaidev Janardana isn’t the only one making moves like this. Affirm, a US online lender, recently said it wanted to become a bank. Student lender SoFi is exploring how it can become a bank while not being entirely a bank. Venture capital investors themselves seem to have decided just investing directly in banks might be better than funding competitors.

The world of banking, tech challengers have found, is not like other worlds. Disruption doesn’t come easy and, for the most part, startups have had to play by the rules. Rules like: short-term funding is fickle.

So now Zopa the “peer-to-peer” lender will become Zopa the bank and “peer-to-peer” lender. If all goes to plan, the bank will be launched in the first half of 2018. The company will be restructured with the P2P business as one corporate entity, the bank as another, with a holding company on top.

Borrowers will see one brand, but loans will be allocated to either the bank’s balance sheet or retail and institutional investors through the P2P platform, depending on what proportion is most profitable. For example, the cost of holding capital against a loan on the bank’s balance sheet may mean more are sold through to P2P investors. “Historically people have done this through securitisation, we think there’s a better way,” said Jaidev Janardana, Zopa’s CEO, by phone. (Though one imagines Zopa may also do traditional securitisations.)

He said the company is launching the bank, in part, to offer a wider range of products to borrowers, like revolving credit such as overdrafts or credit cards, which he explained were too difficult to fund with a P2P model. The P2P business will be retained, he added, partly because of history, partly because of “strategic flexibility” and partly because of the economics. “The [return on equity] on the P2P side is better than on the bank side, but the profit amount on the bank side is better than the profit amount on the P2P side,” he said.

But there may be other reasons too. The banks, finally, are starting to make determined steps into the online loan space. Goldman, in the US, has got the most attention with its new consumer loan brand, Marcus, but others are also imitating the features that have distinguished online lenders, like faster approval times and painless application processes.

And Zopa has been around for quite a while now. It originated £532m in 2015 in a consumer credit market where £1.4bn was lent to individuals in September this year alone. In its core market, prime personal loans, it competes directly with banks who have a lower cost of funding. One way to gain market share is to move into riskier loans, which it has been doing to an extent; another would be to change your model to offer new products.

There’ll be many questions to answer in due course. Like whether regulators will allow Zopa’s P2P business to remain regulated under the lighter rules created specifically for that sector, or if it will be treated as part of the bank. Janardana said he would be “very comfortable” if the Prudential Regulatory Authority, which regulates banks, decided the P2P business fell within its remit too.

But for now, it seems the P2P dream is over, at least for the company that pioneered it. Banking may have been changed, but it still won in the end.

Related link:
Wake me up when online lenders are done turning into banks — FT Alphaville

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