As the payments industry continues to evolve in the face of economic headwinds, the story of Zopa, which began as a peer-to-peer lender and now operates as a bank, offers lessons for handling change and the cyclical nature of financial services. In this episode of Talking Banking Matters, payments expert and McKinsey senior partner emeritus Vijay D’Silva talks with Jaidev Janardana, the CEO of Zopa. The following edited transcript presents highlights from their conversation.
Vijay D’Silva, McKinsey: When Zopa was launched in the UK in 2005, the iPhone hadn’t yet been introduced, only one in six people in the world had access to the internet, and online banking was still a novelty. And nobody dreamed that a global financial crisis was around the corner.
Zopa’s claim to fame was that it invented digital peer-to-peer lending between borrowers and investors. Over the next several years, Zopa not only survived the financial crisis, but by 2017 it had enabled £2 billion of loans on its platform. That’s when Zopa also received full authorization from the Financial Conduct Authority, and in 2020, the company received a full UK banking license. It started to pivot into banking products like credit cards, auto loans, and savings accounts, and eventually discontinued P2P lending. Last October, the company raised $300 million, making it a unicorn with a $1 billion valuation. This year, at a time when fintech valuations have dropped by 80 percent or more, and investors now want earnings more than revenue growth, Zopa became one of the subset of fintechs that actually breaks even.
The architect for much of this change is Jaidev Janardana, my guest for this session. Jaidev joined Zopa in 2014 after spending 12 years at Capital One. He’s been Zopa’s CEO since 2015. Jaidev’s banking background is evident in our conversation. He started by describing Zopa’s approach and its journey from peer-to-peer lender to becoming a regulated bank.
Jaidev Janardana, Zopa: We are focused on UK consumers and really focusing on meeting their borrowing and savings needs. What we have seen over the years is that income inequality has grown and so consumer credit has been an important way of how people have managed to balance their life needs with their finances.
The role of credit has become more and more important. What people do with credit and with savings has a huge impact on their financial life, and we at Zopa want to help them make better choices with them, and really use data and technology to help them build a better financial future. We also think that by focusing on those two aspects of their life, we’re able to create a business model that’s far more efficient, and actually has a much clearer path to profitability and sustainability than some of the other models of fintech that exist.
As we look back, Zopa was born with the idea of trying to make borrowing more efficient by almost creating a new asset class, or an asset class that existed but making it available for individuals who are willing to invest in consumer debt. When I joined, my thinking was, how do we build a best-in-class lending capability? Because that allows the business to create a set of assets which we could then monetize in different ways.
We started achieving high levels of growth, and high levels of customer satisfaction just getting UK consumers to take customer loans from us. We relied on transparency of rate and certainty of decision making, which effectively meant that customers were choosing not to go with their banks by coming to us.
But we figured that the model itself of actually funding them through a peer-to-peer method had a lot of limitations, which then limited how much money we could make out of the business, and in turn limited the flexibility we had with our business, because we were reliant on other people’s money, effectively.
And we were also constraining ourselves to short-term consumer lending, as opposed to things like credit cards. And that’s what got us to the idea that we need to effectively own our destiny more. One path available to us was to become a big wholesale-funded lender. Maybe partly colored by my own 2008 experiences, I felt that a better, more stable, and more sustainable path was to get a banking license—the UK regulators had defined a well laid-out path for us to go down.
Vijay D’Silva: Many companies launch new products depending on whether they see themselves as platforms, product specialists, or broad customer franchises. Zopa today has a mix of lending and savings products, a far cry from its initial roots as a peer-to-peer lender. But it has stayed away from current accounts. The company has been trying to factor customer input, data on customer behavior, and lifetime economics into these decisions.
Jaidev Janardana: When I came to Zopa I thought, how do we create a great lending product? We decided, let’s start from the basics: what do customers want when they look for a credit product? It’s typically with acceptance and affordability: how much do I have to pay and will I get this thing or not? And we said, how do we build a technology engine and data-based decisioning that presents that information in front of the customer as quickly as we can?
We applied the similar principle on deposits or easy-access savings. We talked to customers and asked, what is it that you are missing? As we’ve thought about the economics of a current account (and I think a lot of the other fintechs are kind of finding this out, sometimes to their own peril), the fact is that when you launch a current account, it’s actually not that hard to attract a reasonable number of customers. But you tend to attract very low balances. Typically, a challenger bank or new digital bank’s current accounts in the UK on average have something like £500 of balance. The cost to operate them is far higher, and in particular this is something that is more specific to Europe but even more stringent in the UK, where there’s an additional capital requirement.
So the economics for us just didn’t add up, even when we factored in some generous cross-sell “gold dust” on top of that. And I feel that is something that the investor community, particularly the tech investor community, has missed: there probably is more downside for some of the valuations of the current account–led models.
Coming back to the idea of customer engagement, what we have seen is that, despite the lack of a current account, we see some very strong repeat behavior. For our fixed-term savings, half of them actually resave when the thing matures.
If I look at my loans, about half of our customers will take a loan again with us within five or six years of having taken the first one. And when they do that, they actually come directly back to us. We are not spending marketing money on that.
One of the things that I was very keen on and have been very satisfied that we’ve been able to do over the last two years is actually maintain a strong momentum of innovation, launching product variance, new products, and scaling them.
Vijay D’Silva: Many of us were surprised when Zopa announced its buy-now-pay-later product at Money2020 this June. After all, higher inflation, higher rates, rising delinquencies, and the recent entrance by Apple have caused valuations of buy-now-pay-later players to drop by over 80 percent from a year ago. Here’s how Jaidev explained the company’s move.
Jaidev Janardana: At Zopa what do we think about BNPL? People often say, “Oh, it’s not debt!” But it is debt. And it is, for a large proportion of the customers who are using it, a way of managing cash flows and actually taking on debt.
For us, when we tried to dissect the popularity of BNPL, we came up with a few reasons. One of them is of course, zero percent—who doesn’t like zero percent, right? The second is the fact that a lot of these customers didn’t have access to credit. Which is why it was so much more popular with the 18- to 30-year-old group. People thought it was some new millennial thing. In fact, when we talked to customers who’ve taken it, it’s very evident that they don’t have access to any other credit.
And there’s a third aspect, which is the one which we thought was actually more sustainable in the long term, which is most customers are increasingly telling us that, in a fragmented financial world, they like the discipline of having things in compartments and being able to pay off things in a way that lets them think, “I bought this, I want to pay this off in six to 12 months.”
We’ve seen the same things in savings, where they say, “I have a pot, I want to put money into that pot, and then I will do something with that money.” That is a clear customer mindset we are hearing, and I think it’s here to stay. So our BNPL offering says, “Yes, it is credit, we should treat it as credit.” We think it makes sense to take credit if the ticket size is large enough, if you’re getting enough utility from the thing, it makes sense to pay it over six, 12, 18 months. But we are not fooling ourselves that this is not credit. What it does give us is a different distribution network.
Vijay D’Silva: One of the critical functions for any lender is credit-risk management. It’s actually pretty easy to lend money, especially in good times—the problem is getting paid back! And the graveyard of lenders is full of players who misjudged credit risk. I asked Jaidev about what made his approach to risk models and underwriting to different.
Jaidev Janardana: The thing we focused a lot on is strong capabilities in data, which have enabled us to create models based on machine-learning techniques way back into 2015. We now have seven years of outcomes on that. And what we have been able to demonstrate is credit losses coming in incredibly close to what we predicted, typically within plus or minus 10 percent of our forecast. And actually producing strong returns.
And what we are able to do here, which is unique even today in the UK, is actually deal with millions of credit applications, and turn them around within five seconds. At the core is this investment we have made in really understanding lending, really understanding credit loss risk management, and using technology to do that. Ninety-eight percent of our decision making is automated, and 95 percent of those decisions can happen in five seconds. Which means if I’m partnering with a retailer, the experience that I can offer on a checkout journey is incredibly slick. But I’m not doing that by sacrificing credit rigor, or not doing credit checks, or not validating income. We have all of that stuff. That is the biggest source of our competitive advantage.
Vijay D’Silva: The introduction of open banking in the UK has introduced a new source of data for lenders. Since its launch four years ago, more than 4.5 million customers have started using open banking services which have given lenders new insight into consumers.
Jaidev Janardana: For those who don’t know, CATO is current account turnover data. We have been using that for a long time to validate income, which is a regulatory requirement here. And that’s been one of the strengths of how we have been able to automate a lot of the underwriting that we have done before or particularly for verification.
Open banking, where we can look into somebody’s current accounts and all the transactions that go within that, is another innovation in the UK. It came into effect I believe in 2016 or 2017. But it really has gained traction over the last two or three years.
We were the first to use an open banking–based score card to really reach out to people who are building credit on the credit card side of things, and actually build a credit card origination model that was using largely open banking data.
And we’ve seen that it actually continues to translate risk very well. We’ve also been investing over and above the credit bureau data, in a bunch of other data sources that help us drive decision making. To give you a very topical example, one of the things we are all worried about is the cost-of-living crisis right now.
So we have plugged into an API that allows us to understand size of home and thus, approximate energy bills. And through that we can understand whose energy bills are going to increase a lot more come October in the UK. This was the next-closest approximation we had to it. Again, we are trying to balance a lot of rigor with innovation when it comes to credit-risk management.
One of the advantages of our being a bank born actually just after COVID hit is the fact that we never had the luxury of not being cautious.
Vijay D’Silva: Even with these advantages, one worries that doubling down on lending is a risky proposition in an economy that many economists believe could be headed toward a recession. Jaidev was careful to calibrate how he was thinking about growth in the current environment.
Jaidev Janardana: You cannot wish away the fact that it is fundamentally a cyclical business. One of the advantages of our being a bank born actually just after COVID hit (we launched two years ago) is the fact that we never had the luxury of not being cautious.
When we started in June 2020, the vaccines hadn’t come and everybody was forecasting a humongous recession. The underwriting that the bank launched was incredibly cautious. That really helped us through last year where everybody had credit losses perform much better than expectations. Ours was as high as 65 or 70 percent, beyond expectations, which accelerated our journey toward profitability.
But it also has meant that we have gone from worrying about one thing to the other, to the other, to the other. That’s where I look at the quality of the book. We have never actually operated in a pre-pandemic policy throughout that period.
And that’s actually why the book is reasonably resilient to a degree of shock. My learning has been that to be deliberate, and cutting early, helps you save, rather than having to take knee-jerk actions in the future.
So we hit profitability in March, and we are forecasting that credit losses are going to be worse. Nobody knows how much, so we’ve picked a number based on a bunch of modeling and some guess work. And thus we are saying, for that worse economic scenario, let’s make sure that we, A) only take on assets that are going to be profitable, but, B) also continue to run the business in a way that is actually above break-even.
When your balance sheet is growing rapidly, you have to take on a lot of provisions. When your economic outlook is worse, that provision number is further higher. Thus, we are actually saying no to a lot of customers who we feel might actually be resilient to a reasonable degree of shock.
So we are leaving some money on the table, but we think that’s the right thing to do at this time of the cycle. And if you’re proven wrong, and the cycle turns out to be better than we expected, I don’t think we’ll regret it too much.
But it also hopefully then allows us to actually accelerate out of the other end, whenever the other end might be. It might be a year down the line; might be two years down the line.
I’d rather focus on building a better partner with the business in the UK first, which then gives us the capability to go beyond.
Vijay D’Silva: While many successful companies are appropriately cautious, our research shows that, during downturns, longterm winners are able to move quickly to take advantage of both organic and inorganic growth opportunities. I’ve found that that the three typical growth vectors are new capabilities, new products, and new geographies.
Jaidev Janardana: For example, car finance is a business that we started about two, three years ago. There was a huge shift to digital in terms of how the purchase journey works. We are actually the only car finance provider in the UK, and we have an end-to-end digital journey where you can get a car without ever having to get on the phone with someone.
There are things that others do well that we would be very happy to consider acquiring at the right price. These could be propositions that help people manage their spending better. We are focused on credit, and so a proposition that helps people manage their spending better, and actually drives more engagement for our customers, that would be of interest for us.
Also, of course, things like transaction accounts where people can actually spend. Current account–like capabilities could be interesting offers if the economics added up. For me, geography expansion is probably the last of the three. I do feel that a lot of companies have been in too much of a hurry to plant and fly flags.
There’s so much opportunity. I don’t see why I should go out and try to understand something entirely different. I think people who go international too quickly are doing so because there’s a poverty of opportunity in front of them—and thus are trying to replicate something that works at small scale in many countries. I’d rather focus on building a better partner with the business in the UK first, which then gives us the capability to go beyond.
Vijay D’Silva: As became clear during our conversation, Jaidev doesn’t talk about his business like a tech entrepreneur. His personal journey to leading Zopa is a bit unusual, in that his first job out of business school was at Capital One, and after 12 years there he dove right into leading Zopa.
Jaidev Janardana: Capital One was an excellent employer, and really helped me ground in a few ways. Really understanding the lending business and the various aspects of it. Having the experience of actually managing credit risk for the UK business through the financial crisis was incredibly stressful at that time but really helpful when I look back. It really helped me think about crisis, and really how to have a few sets of frameworks and tools that you can apply to work through it, whether it’s COVID or some other crisis. And the importance of culture: culture that is about truth seeking, a culture that promotes company success is something that I learned there, or I learned the value of that quite a bit at Capital One.
Coming to Zopa was largely an emotional decision. After 12 years at Capital One, I was looking for a new adventure. I could see all the technological advances that were happening and how to apply them to the world of lending. In fact, one of the last few projects I had done there was actually using a decision tree–based credit-risk model, and then not being able to deploy it because our technology stack would not run fast enough to actually operate it at the time.
What was unique about Zopa for me was there was a huge customer centricity in the culture, but it also had nine or ten years of data, which was stuff I knew I had something to build from. And it had shown an understanding that when you’re in the lending business, it’s not like growing an internet business. Not all growth is good, and you have to be prudent. And just in the track record, you could see that is something they had achieved. So that was interesting for me, and I said, “Let’s take a plunge and see how it works.” And, you know, eight years later, I’m still here.
Vijay D’Silva: That level of prudence and Jaidev’s banking experience will come in useful in the next couple of years as companies like Zopa navigate an uncertain economy and credit and funding environment. As investors continue to shy away from growth stories toward companies that actually make money, Zopa might just be able to get that balance right. One learning from firms like Zopa is the discipline of being regulated, the emphasis of strong data and insightful analytics, the role of through-the-cycle decisioning, and culture as foundations to build from.