British peer-to-peer lender Zopa tried to disrupt the banking system. Now it wants to join it.
The online lender said Wednesday it is applying for a banking license, an unusual move in the financial-technology world that has long trumpeted the advantages of not being a fully regulated lender.
Zopa's main business now is charging a fee to match groups that want to borrow money with those who want to lend. Most of the loans are made for a year of longer. The group wants to get a banking license so that it can offer more short-term unsecured loans, such as overdrafts.
It wants to "get more diversity in our product set," said Jaidev Janardana, Zopa's chief executive. The move would also diversify the platform's sources of funding. Once regulated,it will take deposits.
That may surprise some industry watchers. These companies, which are also called marketplace lenders, are lightly regulated compared to banks because they don't take customer deposits and don't take on the risk of lending money directly. They only act as online conduits for credit.
Mr. Janardana played down the effects of more burdensome regulation associated with becoming a bank and said he was hopeful Zopa would be a fully licensed bank in just over a year.
There are several reasons why some firebrands in the so-called fintech sector may want to morph into banks. Traditional lenders benefit from lower funding costs than most marketplace lenders because they pay very little interest on their deposits. Furthermore, their source of funding is much steadier because bank customers are less likely to yank their deposits in times of uncertainty.
"Any operating cost advantage that [marketplace lenders] may have is insufficient to offset the banking model's material cost-of-funds advantage," a recent report by consulting-firm Deloitte said, adding that if interest rates rise the advantage could diminish further.
Meanwhile, in the U.K. the regulator has made it easier for companies to apply for banking licenses, said Stephen Morse, a partner at consulting firm PwC LLP.?
Some banks are piggybacking on the marketplace lenders' platforms, whose algorithms judge creditworthiness and whose websites attract credit-hungry customers more efficiently than their own systems. In 2015, for instance, Metro Bank sealed a deal with Zopa to lend funds via the peer-to-peer group's platform.
In the first half of the year, U.K. net consumer lending by marketplace lenders increased to £ 121 billion ($150 billion) from £ 115 billion the year before, according to Moody's Investors Service. That is still a tiny chunk of the overall British lending market. Zopa, which was founded in 2005 and is the U.K.'s oldest marketplace lender, has handled more than £ 1.8 billion in loans.
Write to Max Colchester at email@example.com
(END) Dow Jones Newswires
November 16, 2016 14:25 ET (19:25 GMT)
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