The pandemic forced the entire economy to move online, with Zoom and Skype usage skyrocketing. London’s financial services space was no exception, leading to a vast uptake in online banking services.
One online lender that obtained its UK banking licence in June of last year, at the height of the pandemic, is Zopa, bringing a range of products to an already crowded market, including a fixed term saver and a credit card.
City A.M. sat down with London Bridge-based Jaidev Janardana, the bank’s CEO, to reflect on the last twelve months and to discuss what is next for digital financial services, especially as the pandemic may slowly come to an end.
It’s a year ago that you obtained your banking licence, in June of last year, in the midst of the pandemic. How is it going?
The last year has been monumental. Launching a bank is one thing, but doing it during a pandemic was something we couldn’t have foreseen. As it turned out, it actually acted as a catalyst for us to be able to help more customers and grow faster than we had anticipated. We moved quickly to launch new products including our credit card, savings product and new tools within our app.
Give us some numbers, to get an idea of how things are going.
Sure, in the last nine months, we have attracted nearly £300m in deposits [in April 2021], and become a top 10 credit card issuer in the UK in terms of new customers originated. Credit performance has been exceptionally strong, at about 40 per cent above expectations. Additionally, we recently announced a fundraise amongst our existing investors of £20m to enable us to continue to grow our balance sheet at the accelerated rate we’re experiencing.
The pandemic has impacted every sector and industry. How have the Coronavirus outbreak and subsequent lockdowns affected your clients?
At the outset of the pandemic, the focus was on our existing customers, some of whom were concerned about whether they could continue to pay their loans. We offered a wide range of support throughout the pandemic, including payment freezes and repayment plans. As the pandemic evolved, we also saw that in some cases, consumers found it difficult to access lending as providers struggled to respond to changes in the market.
A year into the pandemic, some customers’ finances have been negatively impacted and to support them, we have launched a range of tools to help them to repair their financial position. At the opposite end of the spectrum, some customers have seen their financial situation improve over the last year as their discretionary spending has reduced. Many are looking for competitive savings accounts to lock up money they may have saved.
We have also seen consumers’ needs and behaviours change as restrictions ease. We have seen an uptick in credit and loans to make home improvements, buy a car, or even revive postponed wedding plans.
As we move to a less restricted lifestyle, we’ve seen a significant amount of buoyancy from many customers and strong demand for our savings, loans and credit card products. As a result of this focus on customers, by September 2020, we were already adding more customers as a business then pre Covid and that number has grown by 50 per cent since.
Many analysts told me the pandemic has accelerated the use of Open Banking across the financial industry. Do you agree?
Open Banking was launched in 2018 and I remember saying back then, that while this is an incredibly important initiative, it will take time to catch fire. And the pandemic has indeed been the spark that it was waiting for.
Customers have embraced digital means more, and at least with some providers, customers are seeing the benefits of it.
We’ve been using Open Banking since its inception and believe that it has plenty of further potential for us. We started with using it as a tool to verify customer’s income, thus increasing the speed at which we could make a decision on applications for credit.
There is a lot of talk about interest rates: what will this mean for digital banks like yours?
We make more than 90 per cent of our revenues through interest charged on customers taking loans and credit cards from us. These rates are set within the context of the wider market and relate to an individual’s credit worthiness and macro-economic outlooks rather than being solely influenced by the Bank of England base rate. Our lending is funded from diverse sources including fixed term savings accounts as well as P2P investments. Negative interest rates would make these products more attractive relative to other options, making it easier and cheaper for us to acquire savers and investors.
Glad you touch on negative interest rates, a very timely topic in recent weeks.
Yes, the main impact of negative rates will be felt in particular by those banks that both provide current accounts and don’t have a significant lending offering. Such banks hold a significant amount of customers money in current accounts. The bank in turn usually invests these funds in products like bonds or gilts or leaves it with the Bank of England. The interest rate on these products closely follow the BoE rate. Hence, if negative rates were introduced, any money left with the BoE or held in bonds or gilts will become a cost instead of a source of revenues.
Let’s look ahead, life after lockdown, the market post-Covid. What are your thoughts on the recovery process?
While there are still unknowns, if we look to the future with the mindset of today, we’re extremely optimistic about the recovery that we should see later this year. Initiatives put in place by the government, including the furlough scheme and Business Bounce Back loans, have given individuals and companies vital financial support during the pandemic.
As more of the population receives its second vaccination and Britain moves closer to fewer restrictions in July, we are optimistic about the future.
That being said, we recognise that there will be bumps along the road. As a country and as individuals, we need to monitor the data closely and adjust our behaviour accordingly. Most economics are forecasting a big bounce back in customer spending and an associated growth in customers coming back into the borrowing market.
What I keep hearing from any digital lender, bank or financial firms is the changing role of technology, and its increasing importance. How are technological developments impacting your work and the way you serve your customers?
Technology has been the core of our business and one of key competitive advantages at Zopa. We have embraced developments in technology like cloud computing, machine learning techniques to pioneer key innovations: like instantaneous preapprovals and real rates for loan customers. The Borrowing Power feature in our app uses a combination of these to give insight to customers on how they can improve their financial health and access better and cheaper credit.