To P2P or not to P2P: P2P lender Zopa receives full UK banking license

July 7, 2020

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2 min read

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What's going on here?

Zopa, the world’s oldest peer-to-peer (P2P) lending platform, is set to become the first hybrid P2P lending and digital banking platform in the UK.

What does this mean?

Founded in 2005, Zopa is a veteran of the P2P market. P2P lenders connect borrowers directly to investors,  from one “peer” to another, providing an alternative to traditional banks and promising lower interest rates. Zopa matches borrowers looking for low interest loans with lenders looking for returns that beat other investments; borrowers take out loans between ÂŁ1,000 and ÂŁ25,000 while P2P investors earn between 3.4 – 6% on these loans. 

In recent years, Zopa has been moving towards digital banking as an additional revenue stream for its business. Since 2018, Zopa has operated under a provisional UK banking license. Last year, Zopa had to raise £140 million in order to meet the Prudential Regulation Authority’s (PRA) final regulatory capital requirements to become a bank. As of Wednesday 24 June 2020, Zopa Bank has a full banking license.

By the end of the year, Zopa will offer a Financial Services Compensation Scheme (FSCS)-protected savings account and an “innovative” credit card, making Zopa the first hybrid P2P lender and digital banking platform available for consumers.

What's the big picture effect?

The P2P loan sector has come under pressure from both increased regulatory scrutiny and waning demand from investors. To combat these pressures, the Zopa Group has decided to diversify its revenue streams.

What were once revolutionary features like card freezing and real-time notifications are now table stakes for challenger banks. Zopa’s “innovative” new credit card proudly offers in-app pin management, instant card freezing, automatic monthly payments and no fees when travelling abroad. This may be novel for the credit card industry, but it is hardly stuff that gets your pulse racing. Besides, it won’t be long before established credit card providers catch up with Zopa’s “innovations”.

In terms of consumer trust, Zopa has been voted “Most Trusted Personal Loan Provider” in the Moneywise Customer Service Awards for the past six years. However, this will by no means guarantee trust in Zopa’s banking products. Monzo, Revolut, Starling, Curve, etc. are all very “likeable” but this does necessarily translate to trust.

Imagine the following scenario. Both a traditional bank and a financial services “challenger” brand were offering you exactly the same product. Which product would you choose? YouGov research found that 45% of respondents trust the traditional bank but only 7% would pick the challenger bank.

Looking forward, the best-case scenario for Zopa is to successfully cross-sell the new savings account and credit card to their 470,000 existing customers. Innovation alone is unlikely to secure success for Zopa Bank. Trust also remains a limiting factor in digital banking. Ultimately, the success of Zopa Bank will be based on how compelling and credible their alternative proposition is amongst a crowded market.

Report written by Thomas Farrell

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