Zopa co-founders speak out against fintech’s peer-to-peer exit

The original founders of peer-to-peer lending pioneer Zopa spoke out against the firm’s decision to exit the industry, arguing that the transition to focus solely on banking goes against the startup’s early ethos.

Zopa was conceived in 2004 by three former employees of the UK’s first internet bank Egg — Richard Duvall, David Nicholson and James Alexander — who gathered together in a Hertfordshire barn to brainstorm business ideas. The team was later expanded to include former Zopa chair Giles Andrews, alongside former chief technology officer Tim Parlett and ethnographer Bruce Davis among others.

Zopa announced its decision to wind down its peer-to-peer arm on 7 December, saying the model was no longer commercially viable.

Speaking to Financial News, Nicholson, Alexander and Davis all expressed significant dismay at the move. The three executives pointed to Zopa’s application for a banking licence in 2016 as a sign that the transition had been planned for several years.

“I don’t think any of us knew that this was coming quite so brutally. To wake up and check my email and see the announcement basically terminating it with immediate effect was pretty shocking,” said Nicholson, now chief executive of business coaching firm LiveHive.

“When we started, we didn’t necessarily set out to sort of decry that all banks were evil and must be destroyed, but we were very clearly not a bank. That was a big part of our process. We wanted to be a much fairer and much more human place.”

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Peer-to-peer lending takes money from retail investors and lends it to individuals and companies. It offers the investors higher returns than savings accounts, while allowing businesses to take on riskier loans. However, it tends to generate lower returns for the firm than conventional bank loans, as most of the profits are passed on to those who put the money in the pool.

Zopa was the first to champion the concept of peer-to-peer when it officially launched in 2005. It has long been at the forefront of the field, but was the last remaining firm still to be offering that form of lending in 2021, while rivals such as RateSetter and Funding Circle had been acquired or stopped allowing new investors onto their platforms.

Duvall, who led the fintech firm in its earliest days, died suddenly of pancreatic cancer in 2007. His death left a large hole in the business, Alexander and Nicholson said, prompting the entry of an external CEO that then cemented their departure from the startup shortly afterwards.

“Put simply, you make more money as a bank than as a peer-to-peer player. If I was charitable, I’d call it a sound commercial decision. If I was being harsh, I’d call it greed,” said Alexander, who remains a shareholder in Zopa alongside Nicholson and is now director at innovation think-tank Future Agenda.

“I’ve now lost what was actually a very useful, valuable product to me,” said Nicholson. “[Zopa] really has turned into the thing that we set ourselves out deliberately not to be, and in doing so, it has removed choice from the market for people who wanted to earn a safe, stable return on their money.”

The two co-founders pointed to a significant increase in waiting times for Zopa lenders to have their funds pushed out to borrowers as evidence of continued demand for the model. Zopa introduced a waiting list for new investors to join the firm in December last year, and Nicholson cited long delays before existing funds could be invested prior to the platform’s shutdown.

“This is one of the things that we’ve all been upset about in terms of the market positioning of this exit, which has been saying that the confidence of the market was impacted by a number of high-profile failures,” Nicholson said.

“Well, if that’s the case, then how come it’s still been taking six or seven weeks to get money lent out through this open platform? That doesn’t sound like investors running scared from peer-to-peer.”

In response to the co-founders’ comments, Zopa chief executive Jaidev Janardana said the decision to shut the business had been taken due to “changing customer sentiment and evolving regulatory environment”. He said the platform lost money in 2020, and is expected to do so this year as well.

“While demand from existing investors remained strong, the industry as a whole has struggled to attract new customers. It is indicative that the number of our peer-to-peer investors peaked around 60,000 in 2017,” Janardana said in a written statement to FN on 13 December.

“To offset these increased costs and ensure we have a sustainable and profitable business, we’d need to reduce investor returns to a point where they’d no longer be attractive and commensurate with the risk that investors take on. That wasn’t something acceptable to us.”

Regulatory crackdown

Davis, who was present for the early days of building Zopa and now manages social impact investing firm Abundance, said increasing scrutiny from regulators such as the Financial Conduct Authority had made it difficult for peer-to-peer to succeed.

Scandals such as the collapse of mini-bond firm London Capital & Finance forced the watchdog to get tough, he said, adding that Zopa’s exit as the last remaining major peer-to-peer platform “highlights the level to which the FCA has put a handbrake on innovation and competition in alternative finance”.

“[The FCA has] gone completely the other way. It’s often the way that regulators swing like pendulums. We’re now in a position where even as an existing authorised firm seeking to get an extension of permission, it can take up to two years to get that done,” Davis said.

Peer-to-peer reached the peak of its hype curve in the mid-2010s, which attracted several “bad actors” to the sector, Nicholson said. The consequent introduction of stronger regulation in 2016 and 2019 has since made it difficult to market the model to new investors.

“[The FCA has] continued to ratchet that regulatory pressure up, and as a result of some of these high profile fallouts where the FCA is very publicly being accused of pretty much being asleep on the job… I think it’s just decided to really tighten the screw probably too far,” he added.

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Now, Zopa is headed towards an initial public offering in 2022 after raising $300m in funding from SoftBank earlier this year.

“That would be a real vindication — there’s not many people who get to say they started the company that then does an IPO. That would be great. I just wish they’d been able to find ways to do that and stay a little bit true to our original vision,” said Nicholson.

In a separate statement as the only co-founder to remain directly involved with the business, Andrews said that he fully supports the transition away from peer-to-peer lending, and towards what he calls “Zopa 2.0”.

“Change is what drives innovation and creates new value; it is also probably the only thing one can predict with certainty. Ignoring the power of change would be a mistake,” he said.