Better, boring banking has always been the aim for ‘P2P’
Zopa’s application for a banking licence is a clear vindication of a long-recognisable trend — as online lending platforms mature, they look to adopt the traditional models that they once appeared to shun.
Zopa’s “Next Generation” bank will sit alongside the firm’s existing marketplace platform and offer deposit accounts protected by the Financial Services Compensation Scheme as well as overdraft products. The approval process is expected to take 15-24 months.
In case there were any lingering doubts, this is a clear sign that the pure peer-to-peer model of online lending is very much a thing of the past.
The market has been heading in this direction for some time. It quickly became clear that online lending platforms could not scale significantly with retail capital alone. They had plenty of borrowers, but the queue of potential lenders was limited.
Institutional capital has become a growing proportion of platforms’ funding plans, as they have launched listed funds and securitization transactions.
And many platforms were already building deeper connections with existing high street lenders, to funnel customer deposits through their marketplace models. Major platforms are also jostling for approval from the Financial Conduct Authority to launch “Innovative ISAs”, a tax shelter that could lead to a flood of retail capital into their platforms.
Setting up their own bank, with their own deposit base, is a logical next step in this approach.
It seems ironic that a market that once seemed a disruptive force in finance — one that positioned itself as vastly different to the banking model — has decided that retail banking is a good thing after all.
But this has always been the goal of online lenders — to do banking better than the high street incumbents, which are weighed down by antiquated IT systems and an expensive branch network. In the early years, the capital-light, low regulation regime provided an ideal incubation environment for lenders to develop the IT systems and underwriting methods that they hope enables them to do credit better than the incumbents
Establishing a retail bank is the final piece of the marketplace model’s puzzle. By connecting the existing ‘P2P’ platform to a network of insured retail deposits, Zopa aims to benefit from the flexibility of being able to combine its marketplace model with the higher returns available in lending from a leveraged balance sheet, and from maturity transformation.
What remains to be seen is how flexible such an organisation can be. After bursting into the financial markets as dynamic, lightly capitalised businesses, having a retail bank and the accompanying regulatory attention could slow down their adaptation to market conditions and adoption of other new technologies. To succeed at their mission of doing banking better than high street incumbents, online platforms will have to demonstrate that they can remain nimble, processing loans faster and more efficiently than existing banks can (and with better credit quality).
It will be no easy feat. But having built slick — though largely untested in a downturn — credit underwriting models from the bottom up, the biggest and best online lending platforms are well placed to mount a challenge to high street banks.