Zopa, one of London's oldest fintechs, has had a bumpy 12 months.
Its setbacks over the past year include a 47% drop in its valuation, the arrest of a board member, nearly losing its provisional bank licence, seeing its 2021 IPO hopes dampened and to top it off the coronavirus slump — which the company estimates will slash annual revenues by up to 25%.
But the fintech — which pioneered peer-to-peer lending over a decade ago and serves over 500,000 customers — now has an opportunity to turn it around. After almost four "tortuous" years, Zopa was finally granted its official UK bank licence last week.
That means Zopa will soon launch savings accounts to finance its consumer-lending business; reducing its reliance on the struggling peer-to-peer marketplace (which allows retail customers to borrow money from other retail investors).
“We’re definitely looking at a 'Zopa 2.0'," says Zopa's chief executive Jaidev Janardana in an interview with Sifted. "The bank licence really allows you to offer more products... Losing the licence would have been terrible for me."
So with Zopa entering a fresh chapter as a retail bank, can Janardana leave the past year behind? And will the next 12 months offer respite — and renewed momentum — to the veteran London fintech?
Life as a bank
Zopa Bank will need to make a splash to compensate for the mammoth, multi-year investment it made to get the licence.
The plan is to offer various fixed-savings accounts to build up a deposit-base which Zopa can independently lend out to 'prime' retail borrowers hoping to buy a car or for home renovations, in sums of £10,000 a pop on average.
Fortunately, Zopa shouldn’t struggle to find people to lend to. It already has 15 years and £5bn in lending experience, alongside an established pool of UK borrowers previously accessing the funds from Zopa’s "peer" community of retail investors and institutional financiers.
Yet now Zopa wants to inch out the community and fund the loans itself more cheaply, meaning the main challenge will be finding customers to give Zopa their savings. Zopa lacks the brand recognition of its peers like Monzo or Revolut, and the savings space is competitive; driven largely by comparison-site rankings.
Nonetheless, one advantage Zopa has here is that most neobanks don’t offer their own fixed-term high-interest savings accounts, having instead focused on current accounts. That means the Monzos of the world aren’t direct competitors to Zopa, and instead might look to partner; funnelling their millions of interest-hungry users in Zopa’s direction in return for a fee (Monzo’s incoming CEO actually mentored the unwaveringly cool-headed Janardana when they were at Capital One, so don’t be surprised if a partnership emerges here).
In fact, the complementary synergy between these players has led investors to predict one of the challenger banks will buy Zopa.
"[Zopa] has got a business model that other neobanks would love to have,” one key investor in the business tells Sifted, adding that while a 2021 IPO is likely off the cards, Zopa could make an attractive acquisition target thanks to its full-blown bank licence and propriety lending engine.
Janardana too is confident — he expects the bank to be operationally profitable by this time next year.
In the meantime, Zopa will focus on growing its customer base — now constituting both borrowers and big savers — by trading on its integrity, promising “no catches” and upfront pricing around fees and benefits.
“We have a strong commitment to products that have no catches," Janardana tells Sifted. "We don't punish early repayment... We don't punish loyalty.... [And] when we do credit cards — we'll keep it simple."
Janardana — who took over at Zopa's helm from founder Giles Andrews in 2015 — has spoken openly about seeing his father get heavily into debt as a young adolescent, giving the chief executive more credibility than most when he says he's committed to disrupting misleading pricing.
Still, investor pressure on Zopa to deliver revenue growth will ultimately determine Zopa’s commitment to transparency. Even Monzo couldn't stick to its promise of "customer-first" overdrafts, initially charging a steep 50p per day until regulators stepped in.
The added pressure of coronavirus may also push Zopa to be more aggressive; the company has had to furlough staff amid the economic slump and Janardana estimates revenue prospects have been cut by around 25% as lending slows.
Out with the old
Now standing on its own two feet as a retail bank, it begs the question — what will become of Zopa’s original peer-to-peer (P2P) business?
Despite being initially heralded as a serious rival to banks, the P2P sector has seen a fall from grace following a series of scandals and tougher regulation.
"It's clear [P2P] marketplaces were overvalued; the premium associated with that is gone. You need to be more than a one-trick pony," one investor in Zopa told Sifted.
In the same vein, there are several signs Zopa’s P2P business will dwindle in importance over the next year (assuming the launch of savings accounts doesn’t flop).
Janardana predicts P2P capital will make up around 30% of Zopa's total pool of funds going forward, with the bank's loan book making up the remaining bulk (ultimately competing with the P2P side to serve as many borrowers as possible).
It's also telling that the company says it has plans to brand itself primarily as a "digital bank" — drifting away from its P2P roots.
Moreover, Janardana admits Zopa has been hit in the crossfire of the sector's battles, suggesting this was partly behind its valuation cut in December last year, amid its £140m fundraise.
"By no fault of ours, but due to a variety of a reasons — including the performance of our public peers — [P2P] was slightly less in fashion," he notes. "What others do around us has an overall impact [on us]."
Nonetheless, it’s worth flagging that Janardana is reluctant to completely abandon Zopa's passé P2P business — in large part because it’s proven profitable since 2017. He rejects the idea that becoming a retail bank involves a full-blown pivot away from P2P and insists "Zopa 2.0" will remain open to its ~60,000 retail investors; allocating loans at random between them and the bank.
Only if retail investors tire of Zopa first, will the bank "have to revisit,” Janardana says.