P2P Lenders Draw A Parallel Banking Industry Amid Covid-19 Crisis

Summary

• P2P Lender Zopa Group to enter mainstream banking landscape in the United Kingdom
• Zopa Bank to offer deposit accounts and credit cards
• The banking products and services would be backed by FSCS

One of the oldest P2P (peer-to-peer) lenders, Zopa Group was recently granted a full banking license by the UK’s Financial Conduct Authority (FCA). The Fintech Group would be marketing its banking products and services through its digital platform.

Technological advancements have bridged the gap between lenders and borrowers. The banks have literally lost their monopoly position and are getting competition from other corners. The emergence of this sector would certainly disrupt the banking sector operations, at least to some extent.

Couple of years ago, the emergence of cryptocurrencies also posed a grave threat to the banking sector with the concept of a global currency. However, with passage of time, cryptocurrencies started to be looked upon as a mere investment vehicle by the people.

The Fintech Group would offer banking services as a separate vertical under the name Zopa Bank, in contrast to its existing P2P lending services. The offerings of the new bank would be backed by the FSCS (Financial Services Compensation Scheme) scheme, which is a statutory deposit insurance and investors’ compensation scheme. Zopa Bank would deploy its own proprietary technology to offer savings accounts, credit cards, personal loans, money management tools and P2P investment products.

According to Zopa Group, a significant chunk of UK’s population struggled for banking services and investment guidance during the unprecedented crisis induced by the novel coronavirus. Zopa Group aims to fill this gap through is technology powered delivery model.

Zopa Group, the pioneer in P2P lending services, acquired a provisional banking license, way back in 2018. The P2P lender provides around one billion pounds of personal loans through its online platform every year. UK is one of the biggest P2P banking markets in the European region. There are many other P2P lenders in the UK market such as Loanpad, CapitalRIse, Landlordinvest, and a few others.

Zopa Group started in 2005 as a P2P lender. In a P2P framework, lenders can lend money to borrowers without any intermediary or a financial institution. This lending is facilitated through online platforms. Both secured and unsecured loans are offered under this framework. The platform assesses the risk of the borrower through the online loan application made by the applicant and is assigned with the appropriate interest rate as per his credit rating. Upon successful validation and approval of the loan application, the borrower gets access to potential investors or lenders.

P2P lending has its own advantages. In most of the cases, P2P provides higher returns to lenders in comparison to other debt instruments. P2P lending has a deeper penetration in comparison to conventional purpose driven loans offered by the banks. It is easy for the borrowers with lesser credit score or financially excluded people to avail loans under the P2P framework. Zopa Group aims to cater to this segment of the population.

However, P2P investments are subjected to much higher credit risk in comparison to conventional debt instruments. Since there is no financial intermediary in between, the lender should be aware of the default probability of the borrower.

P2P lenders have started to carve out a niche for themselves in the sphere of Banking

During the coronavirus crisis, P2P lenders have playing a vital role in the economic recovery by helping the borrowers through their platforms or providing access to coronavirus business interruption loan scheme (CBILS). For instance, Funding Circle and Assetz Capital have facilitated CBILS through their platforms.

The Bank of England has reduced the interest rates to all time low, lowering the return on savings. However, P2P lending platforms are providing MUCH higher returns for investors. This would deter investors from parking their surplus money in convention deposit products.

Further, P2P lenders have an absolute advantage of technology over conventional banks. During the ongoing coronavirus crisis, P2P lenders are well-placed to adapt to remote working as they have excellent technology to bolster their deliverables. People, at the comfort of their homes can access money. The niche segment seems to have proven its metal so far, in the coronavirus induced crisis. Meanwhile, the conventional banks are chalking out plans to bring the workforce back to office.

Given the prevalent conditions in the economy, innovative products like P2P lending could drive growth and investment opportunities, which would eventually help UK in beating the recession. In addition, the flourishing industry could create more employment opportunities in the times to come.

Let us discuss the stock performances of some conventional banks in UK.

Barclays Plc (LON:BARC)

On 24th June 2020, at the time of writing (before market close, GMT 11:20 AM +1), Barclays Plc shares were 2.48 per cent down against its previous day closing price and were trading at GBX 114. Stock's 52 weeks High and Low is GBX 192.99 /GBX 73.04. The beta of the company stood at 1.37, reflecting higher volatility as compared to the benchmark index. Barclays Plc’s total M-Cap (market capitalisation) while writing stood at £20,272.38 million. The company’s delivered a negative price return of 36.88 on YTD basis.

Lloyds Banking Group Plc (LON:LLOY)

On 24th June 2020, at the time of writing (before market close, GMT 11:28 AM +1), Lloyds Banking Group Plc shares were 2.25 per cent down against its previous day closing price and were trading at GBX 32.01. Stock's 52 weeks High and Low was GBX 67.25/GBX 27.73. The beta of the company stood at 1.24, reflecting higher volatility as compared to the benchmark index. Lloyds Banking Group Plc’s total M-Cap (market capitalisation) while writing stood at £23,167.78 million. The company delivered a negative price return of 48.60 on YTD basis.

Royal Bank of Scotland Group Plc (LON:RBS)

On 24th June 2020, at the time of writing (before market close, GMT 11:32 AM +1), Royal Bank of Scotland Group Plc shares were 2.67 per cent down against its previous day closing price and were trading at GBX 120.25. Stock's 52 weeks High and Low was GBX 261 /GBX 101.75. The beta of the company stood at 1.55, reflecting higher volatility as compared to the benchmark index. Royal Bank of Scotland Group Plc’s total M-Cap (market capitalisation) while writing stood at £14,980.49 million. The company delivered a negative price return of 49.43 on YTD basis.

Stock price comparative chart: BARC, LLOY, and RBS

(Source: Thomson Reuters)