Zopa aims for enough growth to stop explaining its name

Giles Andrews wants everyone to know that Zopa stands for “zone of possible agreement”, a negotiating term denoting the range of feasible prices that a buyer and seller can agree on.

On his office wall is a painting of another Zopa – Lama Zopa Rinpoche, a Tibetan Buddhist scholar and mediator. “It’s not one of those made-up names,” Andrews, the co-founder of the peer-to-peer (P2P) lending company, insists. “The name does actually stand for something.”

Zopa was founded by Andrews and four colleagues in 2004, with the idea of creating “an eBay for money”. It bypasses banks by matching individual borrowers looking for lower-rate loans with people wanting to lend money and benefit from higher rates of interest than those available from savings accounts.

Zopa reported £11.5m of revenues in 2014, more than double its £5.4m total the previous year, and executive chairman Andrews expects the 2015 figures to show revenue of £21m. More than 50 applications for regulatory approval for peer-to-peer lending have been made to the Financial Conduct Authority, prompting fears of a bubble.

The ex-chairman of the Financial Services Authority, Lord Turner of Ecchinswell, said last month that the losses that will emerge from peer-to-peer lending over the next five to 10 years would “make the bankers look like lending geniuses”.

However, Andrews, 49, says: “I don’t think he was talking about us. He was specifically talking about small and medium-enterprise lending and high-risk consumers and we don’t do either.” Jaidev Janardana, Zopa’s chief executive, adds: “Our consumer profile has always been people who can get loans from anywhere else. They’re not the people the banks are turning down.

“Anyway, the P2P sector is too small to cause a crisis anywhere like the one in 2008. You’re talking about total UK P2P lending of £4bn. The unsecured consumer lending market every year is more than £150bn. Our business model is very different and it does not create systemic risk.”

Zopa is challenging high street banks
Zopa is challenging high street banks CREDIT: CHRIS RATCLIFFE/BLOOMBERG

Zopa claims to have invented P2P lending and remains the largest of Britain’s new generation of P2P lenders, with total lending so far of £1.3bn, putting it ahead of rivals including Funding Circle, MarketInvoice and RateSetter.  Some £530m of this lending took place last year alone, double the total of 2014.

About £650m of the loans are still outstanding. Zopa’s 60,000 personal lenders advance between £1,000 and £25,000 on the platform. “Just over half of the money lent on our platform is by people aged over 55,” Janardana says. “It’s people with a bit of extra capital who are maybe taking money out of their pension allowance and not wanting to put it into the stock market or into cash savings or an ISA.”

The company’s average loan is £7,500, all the loans are unsecured and it makes its returns by taking a fee from both lenders and borrowers. Zopa’s interest rates are set by algorithms based on borrowers’ credit history. Its current interest rates for borrowers range from 3.3pc to 29pc, with an average rate of around 10pc.

Zopa’s lenders get a return of 5pc for long-term loans and 3.8pc for short-term lending of less than three years. The P2P sector has drawn concern because P2P platforms do not come with the state-backed guarantee carried by bank accounts.

However, Andrews is sanguine, citing a default rate of less than 1pc for last year, against about 3pc for UK banks. Zopa is 70pc owned by the venture capital groups Bessemer Venture Partners, Wellington Capital, Augmentum Capital, Arrowgrass Capital and Runa Capital, and has 170 staff based in London.

Its losses more than doubled from £2.6m to £5.6m in 2014. However, the company made profits in 2011 and 2012 before raising funds and deciding to invest in the business.

When might it make a profit again?  “It depends on potential,” Janardana says. “Our current business plan looks towards profits in 2018 but it’s possible that we accelerate that if things change. It depends on our investors’ appetite for further growth.”

Zopa now plans to enter the car loans market, as well as other secured lending. If successful, it may no longer have to explain its name. But with a downturn forecast for credit markets, it promises to be a bumpy road ahead.

The article first appeared in the Telegraph