Zopa, the peer-to-peer lender that is in the process of also creating an online bank, has succeeded in just beating its deadline to meet regulatory capital requirement by securing a £140 million investment round. It is reported that the fresh capital needed to meet the requirements was secured with a matter of hours to spare. Zopa secured a conditional license a year ago but that was due to expire before the restrictions were lifted when the capital hit its accounts.
The money, which comes from the UK-based unit of private investment group IAG Capital is, however, still subject to final approval by the banking sector’s regulators. Nonetheless, Zopa CEO Jaidev Janardana released a relatively bullish statement on the news the financing had been secured, saying:
“This means we have concluded the fundraising phase of our bank mobilisation”.
If the conditional banking license is approved by the regulator now the required capital buffer has been secured the company will be able to start offering bank accounts and other retail-facing financial services such as credit cards and potentially even consumer loans. If the deadline had been missed, the conditional license would have expired, meaning Zopa would have been forced to start the process again from scratch.
IAG already held an equity stake in Zopa as a minority investor. However, putting up the £145 million capital for the latest investment round will, it is being reported, see the investment group become the fintech’s majority shareholder. The company refused to be drawn on questions pertaining to rumours that in order to secure the new IAG investment, Zopa had agreed to lower its valuation compared to that achieved during its previous round, which took place last year.
Having been founded in 2005, Zopa is now 14 years old and is believed to be the first ever company to introduce the peer-to-peer lending model. It weathered the economic storm of 2008 well and reported only a small dip in the returns achieved by investors lending through the platform. The sector boomed in the years after the international financial crisis and new arrivals such as Funding Circle, which went public with an IPO in 2018, also created a name for themselves. But the sector ground breaker, Zopa, has also retained its position as one of the market leaders. It has provided over £5 billion in unsecured loans to individuals, worth between £1000 and £25,000. Investors have earned around £250 million in interest as returns.
In the peer-to-peer lending model individual investors, rather than traditional lenders, put up the capital to fund loans applied for. Zopa focuses on loans to individuals but other peer-to-peer lenders work only with SMEs. The investor’s returns are the interest the borrower pays on their loan, which is usually higher than a traditional bank loan, and the peer-to-peer lending platform’s revenues come in the form of an intermediary fee.
The model has recently come under criticism as a result of a number of peer-to-peer lenders, the highest profile of which was Lendy, collapsing, leading to investor losses. However, investors with successful p2p lending companies have largely done well and default rates have proven to be relatively low. Nonetheless, the sector, the longer track record of Zopa excepted, has yet to go through the stress test of a significant economic downturn, which would be expected to increase default rates. P2P investors are advised to spread their investments across numerous loans so as to avoid significant exposure in the case of any one borrower defaulting.
The sector’s growth has, however, slowed in recent years. Zopa’s pivot towards becoming a digital bank has been viewed in some quarters as a tacit admission that only operating as a P2P lender was not proving enough to offer the growth it desired. The company’s difficulties in securing its latest funding round, with the attempt coming through at the last minute, is also believed to be influenced by the recent issues impacting the wider P2P sector.