P2P money was the first to break the news that Zopa was launching a bank on Wednesday. The reaction from experienced lenders on the P2P Independent Forum has been mixed, with some accusing Zopa of going over to the dark side. The user hendragon wrote:
I understand that things move on and evolve. Zopa began as a market where borrower and lender met in the middle (Zone Of Potential Agreement). Loans were approved by underwriters before they were allowed on the market. Where applications were rejected the potential borrower could appeal directly to lenders via an auction process. This has now evolved to Zopa classic and plus. There is also the fact that Zopa is trying to become a bank and enter the establishment it set out to disrupt.
Latter day Zopa has strayed so far from P2P that it seems to want to become an entity that has left its original purpose behind. There must be severe pressure to start making profits and becoming a bank is one way to do it. As Zopa was the originator of the whole sector I cannot help but feel sadness at this outcome.
The user sl75 wrote:
It was clear that was the direction they were going in when they launched safeguard...
That was the point where it seemed to me that Zopa stopped looking at innovation, and instead sought to imitate the traditional banking system.
The question then is whether acquiring a banking licence will ultimately be used to allow the P2P side to become more innovative (branching out into new and innovative ideas that would scare off the mass-market investors who are more comfortable with something that looks like a bank, and even more comfortable with something that actually is a bank), or if the P2P side of the business will then simply be allowed to wither away and die over the following few years as the remaining P2P loans get paid off.
(compare with how Safeguard was originally introduced as an alternative to what were then "standard" P2P loans, and very quickly become the only available option).
So why would experienced lenders be wary of such a move? Zopa launched in 2005 as a lending exchange - matching borrowers to lenders like a financial dating website - cutting out the middleman. The big idea, taken from Zopa's website in 2006, was all about removing the bank from the process:
Here's the way the world works (and it must be right because it's been like this for hundreds of years...)
People who have spare money give it to a bank. Banks then do whatever they like with it. Some of it they lend to people who need to borrow. Some of it they give to their shareholders. Some of it they gamble on the price of tin, or the dollar going down, or whether there'll be floods in Asia. Banks make lots of money from all this, a fraction of which they give back to their customers.
Zopa though lets people who have spare money to lend it directly to people, like them, who want to borrow it. No bank in the middle, no huge overheads, no unethical investments.
To minimise any risk, the money each lender puts in is spread amongst at least 50 borrowers (and likewise each borrower gets their money from a number of different lenders).
Zopa is, therefore, for people who want to be a part of something new. Who want to join a community of like-minded individuals and lend to them and borrow from them in a trusting but secure way.
Zopa is for people who are looking for a better rate of return. Zopa's interest rates aren't squeezed by middlemen (the banks) because there are no middlemen - that's the Zopa idea.
Zopa is for creditworthy people who earn money in new ways, in ways that banks don't always recognise. People who are self employed, people who have peaks and troughs to their income, people who would be invisible to a bank's credit rating system but are seen and validated by Zopa's.
When Zopa launcged it targeted both lenders and borrowers who were looking for an alternative to banks. Zopa offered great rates to both lenders and borrowers and made finance interesting and personal again. It is perhaps reasonable to assume that these original lenders would look at the idea of Zopa launching a bank as a betrayal of its founding principles.
However there are more rational reasons to support this move. A number of innovative FinTech challenger banks are launching that are closer technologically and ethically to Zopa, than they are to classic banks. It is therefore only reasonable for Zopa to look at this as an opportunity for diversification and growth. Given than peer-to-peer lending is now regulated by the Financial Conduct Authority, the incremental effort to obtain a banking licence will not be as great as it would be for a new challenger bank.
It is likely the new Zopa bank and Zopa P2P platform would be separate companies under the Zopa unbrella. There is also the possibility that other top tier P2P companies such as Funding Circle could go down the same route, but it is unlikely to be a trend for peer-to-peer companies in general at this stage.
The world's first peer-to-peer lending platform - Zopa - is planning on launching a bank in 2018. Zopa has come full circle, having started in 2005 as an alternative to banks, and it is now launching its own bank, in addition to its current peer-to-peer platform. The Zopa bank will offer FSCS protected deposit accounts and overdraft "alternatives" to borrowers.
Jaidev Janardana, CEO of Zopa said:
“We launched in 2005 to create a richer life for everyone by making money simple and fair. We have lent over £1.8bn and inspired a £100bn global industry. We have built a profitable, scalable and viable business. Yet we’ve only just begun. We want to launch a next generation bank to drive greater choice for borrowers, savers and investors, which is good for consumers and good for the economy”
“We are uniquely placed to re-define customer expectations of what a bank should deliver in the 21st century. Over the last 11 years we have delivered great value to borrowers and investors whilst prudently managing credit risk. Combining our pioneering data and tech-led culture with an obsession with fairness and customer experience, we are best placed to shape the future of personal finance in the UK.”
Below is a copy of the email sent to lenders:
I wanted to write to you, on behalf of everyone at Zopa, to share some important news.
We launched Zopa in 2005 to create a richer life for everyone by making money simple and fair. Since then, we have lent over £1.8bn, inspired a £100bn global industry and helped our lenders earn over £75m of interest. We have built a profitable, scalable and viable business. Yet we’ve only just begun.
We want to offer consumers even more choice, which is why, subject to regulatory approval, we are planning to launch a next generation bank to complement our existing peer-to-peer products.
We will continue to offer our peer-to-peer investment products.
Launching a bank, to sit alongside our existing peer-to-peer business, will allow us to create new and innovative savings and borrowing products. At launch, Zopa will offer FSCS protected deposit accounts to savers and overdraft alternatives to borrowers.
As an existing Zopa customer, we will give you the first opportunity to try out our new products. We will also actively welcome your input as we shape them.
The application process should take about 15-24 months, and we will keep you updated when we have news to share.
We believe we are uniquely placed to re-define what you should be able to expect from personal finance products in the 21st century.
Over the last 11 years, we have built an innovative, profitable and well-managed business. We have proven that we can deliver great value to borrowers and investors whilst prudently managing credit risk.
We know how to originate quality loans seamlessly online and meet our risk expectations. No new bank has that track record, and no incumbent bank has the digital expertise that we do.
We put our customers at the heart of all our decisions and obsess over how we can use technology to offer you simple, smart choices. We are looking forward to offering more products to even more people in the UK.
For now, thank you for investing through Zopa. I look forward to sharing this exciting journey towards the next generation banking we all deserve.
Zopa have also published a press release.
LendingCrowd has become the peer-to-peer business lending platform to receive full FCA authorisation moving on from interim permission.
Here is the email sent to lenders today:
Hot on the heels of our recent funding partnership with Scottish Investment Bank we are delighted to announce that we have moved from interim to full FCA authorisation from 1st November 2016. We are the first peer-to-peer business lender to move from interim to full authorisation status and the second in the industry to do so.
This means that LendingCrowd has demonstrated that it meets the rigorous statutory requirements of the FCA.
FCA authorisation matters for a number of reasons and indicates that we:
- have been subjected to detailed due diligence
- are committed to treating customers fairly
- have robust operational processes in place.
Full authorisation also paves the way for the launch of our Innovative Finance ISA product offering investors peer-to-peer investment opportunities within a tax-free wrapper.
Our CEO Stuart Lunn commented: “Peer-to-peer investing is growing in popularity every day. We are supportive of industry regulation and we’re extremely pleased that LendingCrowd has reached this milestone. It unquestionably adds credibility and trust in a relatively young marketplace in which our aim is to be a major player. It also means that we can look to launching our ISA product both direct to investors and through investment platforms, several of which we are already engaged with.”
Yesterday I received an email from a peer-to-peer lending platform concerning some changes to their lending model. The platform states that these changes have been requested by the FCA in order to make their lending model compliant with the relevant legislation under Article 36H of the Regulated Activities Order 2014.
Some of the notable points are below:
- Any security for loans will be taken through a trustee company who will hold security on trust for lenders.
- In the event of a default by a borrower the platform will enforce any security, although lenders will no longer vote on such matters.
- The platform will issue a Loan Facility Agreement to the borrower. This agreement is written so that when the auction fills up the loan is novated (transferred) to the individual lenders for their loan parts.
The platform stated that their legal team had advised that it was against Article 36H to give lenders voting rights when the borrower has defaulted. A few peer-to-peer platforms currently give lenders a vote, weighted on their loan amount, for further action when a borrower has defaulted. Could this change disenfranchise more hands-on lenders?
A number of platforms, such as Wellesley & Co, fund the loans directly, then sell loan parts to lenders through their peer-to-peer platform, rather than the lenders funding the loan directly. It will be interesting to see how these platforms adapt to the FCA requirements, or if they will be treated as a collective investment scheme.
Funding Empire has advised lenders that they will not be issuing any new loans until they have received full authorisation from the FCA which is expected in January 2017. Funding Empire have also been sold back to the founding team, who should a majority stake holding to Paratus AMC Limited in July 2015.
Should lenders be concerned with either development? At this stage lenders should not overly be concerned. It is likely there is a question mark over FCA authorisation otherwise the platform would not have suspended lending back in September, however companies are required to provision for running down the business in a controlled manner. The takeover of Funding Empire when new loans are not being issued possibly indicates that Paratus AMC Limited did not see a way forward to realise Funding Empire's value in its current form.
Here is the email sent to lenders yesterday evening:
Further to our last communication on 22/09/16, this is to let you know that we have now completed a management buyout, and that the founding team have acquired all shares held by Paratus AMC Limited and are once again the sole owners of Tally Marketplace Lending Limited (Tally), the company which operates the ‘Funding Empire’ platform.
Please rest assured that this will not at all impact the service you receive as a lender on the ‘Funding Empire’ platform and we will continue to service your current loans as we have always done. However, we will not be issuing any new loans until we know the outcome of our FCA application which is expected in January 2017. This is an internal decision that was made by the management team.
If you have any questions about this, please email me and I will endeavour to reply to your questions where possible.