There’s no-one better placed to discuss the rise of peer-to-peer lending than Zopa co-founder Giles Andrews (pictured). The industry veteran talks to Andrew Saunders about regulation, Brexit and why this is the most exciting time for Zopa…
“It’s the most exciting thing we’ve done since the day we launched the business. I say that tiresomely often to the team.” It may be 12 years since the world’s oldest peer-to-peer lender Zopa made its first loan, but co-founder, former chief executive and now chairman Giles Andrews is full of the energy and enthusiasm of a start-up entrepreneur.
What’s getting him so fired up? Zopa’s plan to launch a bank – admittedly a bold project given the stringent, costly and time-consuming tests involved. But also perhaps a counter-intuitive move for the business which set the whole P2P ball rolling in the first place. Isn’t the point of the sector precisely that the companies involved in it are NOT banks?
Andrews is having none of it – the original aim was to disrupt finance by doing things better than they had been done before, he says, and this latest move is simply the next step on that journey. “It will be a radically simple bank,” he says. “We will be offering term deposits, which are very simple and make the treasury function easier, but we won’t have a current account. We don’t think that is the right way in.”
Current accounts are regarded by the traditional banks as the gateway product, he says, but what that means in practice is that no-one makes much money from them and thus that customers suffer from the hard sell as a result. Witness the PPI scandal, with costs at £40bn and counting. “We don’t want to do that, we want the product you buy when you first join the bank to generate a profitable relationship in and of itself, so there will be no pressure to sell you other things,” he explains.
The firm announced its application to the Prudential Regulation Authority (PRA) for a banking licence in November 2016 and although the duration of the process is uncertain, Andrews seems confident both of the outcome and of the progress made so far. “We don’t know how long it will take,” he admits. “But we are a good way along and have done the vast majority of the thinking and documentation.”
Zopa’s experience of working with the Financial Conduct Authority (FCA), both when drafting the regulations that now apply to P2P and during the authorisation process, has helped prepare it for this latest bout of regulatory tennis, he says. “I am not saying that being regulated as a bank by the PRA is not materially more rigorous than regulation as a P2P lender by the FCA, but we had started that journey already. We had created a compliance function, for example. So it is less daunting for us than it would be for a complete start-up.”
The move is also surely a reflection on increasing competition in the P2P sector, with dozens of rivals where previously there were but a handful. Turning yourself into a bank has the great advantage of being pretty hard to copy. “I don’t think we’ll be the only one but I don’t see a rush to it,” asserts Andrews.
“You need a certain scale to make the regulatory journey affordable. It’s not a trivial undertaking and the fact that [the FCA] know we have a profitable business and the credibility to raise further funds… it’s just not an option for many, it’s not something we could have done five years ago.”
Zopa stands for ‘Zone of Possible Agreement’, a negotiating term describing the pricing window where a potential deal can be made that works for both parties. Having come up with the idea for an ‘eBay for money’, co-founders James Alexander, David Nicholson and Richard Duvall – who all came from internet bank Egg – quickly brought Andrews on board for his fundraising acumen. After starting his career with car dealership Lookers, he had become something of a start-up angel investor and had learned how to shake the magic money tree. They wanted to raise £30m, he said they’d have to make do with £5m.
Despite – or perhaps because of – such thrift, it worked. They got their first funding from Benchmark Europe (now Balderton Capital), whose US parent also backed eBay, and Wellington Capital. Zopa opened for business in 2005, broke even in 2011 and in January this year Zopa became the first P2P lender to pass the £2bn lending mark, having made a total of 300,000 loans matched between 246,000 borrowers and 75,000 investors.
The platform originates unsecured consumer loans for purchases such as new cars and home improvements. The platform’s default rate in 2017 to date stands at 0.08 per cent. The highest default rate the platform has recorded so far was 4.21 per cent in 2008, in the aftermath of the financial crisis.
Zopa is now lending at about £80m a month, more than it did in the whole of its first five years in business. There’s plenty more to come, says Andrews. “We will do a billion pounds this year, we’re far enough in to be confident of that.”
But – there’s always a but isn’t there? – success comes with a few strings attached. In a world of near-zero interest rates, there is too much money chasing too few loan opportunities. An imbalance between supply and demand means that Zopa’s platform is currently closed to new retail investors. How will it go about finding more suitable borrowers?
One thing it won’t do, says Andrews, is lower its lending standards. “There are always constraints on business, those are the things that the marketers try to overcome,” he states. “That’s part of the rationale of starting a bank, to allow us to expand.” It has also done partnership deals with the likes of Uber, to finance car loans, mobile phone provider Unshackled and money management app Pariti.
Would he like to see a time when there are no restrictions on new money? “If we can do it in a way that is consistent with our lending standards and that will provide the long-term returns that people are looking for,” he says. “We’d love to have matched supply and demand but it is challenging to deliver.”
The ultimate aim in becoming a bank, he says, is to be able to offer its customers credit cards – a market that is larger than P2P lending but tricky to finance without balance sheet operations. “The credit card in your pocket could have no balance on it, or it could be up to the credit limit. The card provider has to make that money available to you whether you have spent it or not.” But that will have to wait until the bank is open and has taken sufficient deposits to fund the operation.
Another constraint Zopa faces, common to many technology businesses these days, is finding affordable, capable developers to work on its platforms. It’s a situation which Andrews fears may be made worse as a consequence of Brexit-related restrictions on immigration, and so the business has taken the defensive step of opening a tech centre in Barcelona.
‘It’s always been a constraint, talk to any tech business in London,” he affirms. “Opening the Barcelona office is an acknowledgement of the challenge of recruiting highly skilled developers in this country, and a concern that the situation might get worse because of Brexit. I don’t think it makes you a radical pessimist to say that now.”
There is currently a team of about a dozen people in the Spanish office, working partly on the existing platforms and partly on new ones for the bank. But why Barcelona, and not one of the more usual European tech hubs like Warsaw, Bucharest or Berlin?
“Because it’s very international,” Andrews explains. “There are lots of people there from all over the world, in the same way that there are in London. Also, it’s really important that these operations are very well integrated and there is more enthusiasm from the people here to spend time in Barcelona than there might have been for some of those other places.”
Having spent eight years as the chief executive, in 2015 he handed the hot seat over to Jaidev Janardana and became chairman. Making that switch from running the company to running the board is notoriously tricky. How has he found it? “I was incredibly fortunate in being able to recruit someone in Jaidev who could become my successor,” he says. “He joined as chief operating officer, but [the succession to chief executive] was clearly in both our minds.
“But having found that person you have to step away, which can be difficult. But we both got lucky in that we built a relationship of trust very quickly. You can’t take that for granted – without that trust I would have found it impossible to step away.”
He’s also taken on the role of chairman at invoice finance platform MarketInvoice, leading to some speculation that a tie-up could be on the cards. He deftly deflects the question, saying only that “it’s a reflection of the fact that I spend less time here. It’s another fintech platform, although not P2P, on a journey but younger than us so they haven’t got so far. It’s a part-time role around chairing the board and mentoring the founders. You’ll have to ask them if I am helping or not.”
How does he think Zopa will fare, especially in view of the gathering clouds of gloomy data around consumer finances? “The sector will continue to flourish, although there will be headwinds – lending is a cyclical business,” he says. “There is no question that some pockets of consumer lending have deteriorated a bit – sub-prime car finance and sub-prime credit cards – but they are not the kinds of things we do.”
(In the weeks following the interview, Zopa announced that it had reduced its exposure to higher-risk loans due to the UK’s worsening consumer credit outlook, suggesting the cycle might be turning already.)
So who’s going to be the first £3bn lender, I ask as our time draws to a close – consumer lender Zopa or small business lender Funding Circle? “It’s a friendly rivalry because we don’t compete,” he grins. “They are doing more a month right now, but I think you’d probably get better odds on us.”