Q&A: How peer-to-peer lending is disrupting financial services

In the last ten years, peer-to-peer lending has grown to be a serious disruptive influence on the financial services landscape.

Jaidev Janardana, CEO of Zopa, the world’s first and UK’s leading peer-to-peer lending platform, discusses why the industry has proved so disruptive and what the future holds.

How did Zopa come about and what does it do?

Zopa came about on the basis of a simple observation that financial services firms weren’t serving customers very well: borrowers were being charged very high rates, returns were weak for investors, customer experience was poor and the intermediaries were not very efficient, At around the same time, eBay was taking off and the founders realised there was potential for connecting borrowers and lenders online and creating better value for both.

From this, Zopa was born in 2005. The platform directly connects borrowers and lenders, and is supported by an award-winning customer experience. It’s been growing ever since, and last August became the first UK peer-to-peer platform to lend its billionth pound.

What are the big 2016 developments for the peer-to-peer industry?

The peer-to-peer lending industry is growing rapidly and is now becoming more mainstream. In 2016, we expect this trajectory to continue. Industry analysts are predicting a UK total of £4.3 billion of peer-to-peer loan origination, and Zopa expects to have lent its second billion before the end of the year.

In April, peer-to-peer lending will receive favourable tax treatments in the form of the Innovative Finance ISA and the inclusion of returns in the personal savings allowance. This is not only great for peer-to-peer lenders but is a big vote of confidence in our industry from the government and will help drive wider awareness of the industry.

Where do you see peer-to-peer lending in five years’ time? Will it have displaced bank loans?

Peer-to-peer lending volumes have doubled in the last year and are projected to do a similar level in 2016. In five years’ time I think we will be well on the way to a situation where the majority of lending is done via peer-to-peer with Zopa having around 30-40 per cent of the unsecured personal loans market.

However, I don’t think this spells the demise of the banks themselves. Increasingly, banks are recognising the value that specialist fintech firms are offering and are looking for ways to partner with them. An example is Zopa’s partnership with Metro Bank.

VC investment in the sector is booming and more and more fintech companies are being set up. Is the fintech sector, as some commentators suggest, in a bubble?

We are in very favourable economic conditions, not just for fintech but for the whole financial services sector. Consumer credit quality has been improving, there's a strong demand for credit and economic conditions are benign. The whole sector, including peer-to-peer is growing strongly. As with all sectors, there are some parts that are less well-run than others and are looking into riskier areas, but I think there is genuine growth potential.

Why have fintech companies been so successful in disrupting the financial services sector?

I think the existing financial sector has made two fundamental errors, which fintech companies have been able to step in and address. Firstly, they stopped putting customers at the core of their decision-making processes and secondly, they tried to become all things to all people.

By picking one service (like Zopa with its focus on consumer loans or Funding Circle and business loans) fintech companies have been able to create a solution that is better and more efficient than the one offered by the banks and offers superlative customer experience in that one area. This specialist, customer-focused approach stands in contrast to the financial services incumbents, and has allowed us to disrupt the market and enabled us to create a technology platform that is more agile and supports rapid innovation.

What are the most pressing tech challenges in keeping up this disruptive pressure?

Technology is the most critical enabler for fintech firms like Zopa. As an online-only company, offering the best user experience is crucial for differentiation (and therefore disruption), as is finding ways to use the most advanced machine learning techniques to make smart decisions that will guide the way the business develops. Underpinning this, it is important to create a platform that is secure, reliable and yet allows for constant innovation and improvement. To achieve these things (and keep iterating them for the better) we need to attract the best tech talent and empower them to work efficiently.

With this is in mind Zopa has recently restructured into cross-functional teams so that we are in line with the latest thinking on tech delivery. We’re hiring more developers and recruiting for a new CTO to keep the pressure on!

As a relatively young industry, how are you tackling challenges that even established players struggle with, for example data security?

We take data security very seriously and we have an excellent in-house team, comprising of financial and technology experts, that looks to both prevent breaches as well as reduce the impact if a breach were to occur. We have developed a number of proprietary technologies and also collaborate with some well-known firms who have deep expertise in data security to make sure that our prevention and response strategies use the best available resources.

In this space, what will distinguish the successful companies from the also-rans?

I think there are several things that mark out the successful platforms of the future.

Firstly, they are the ones that keep their customers at the heart of everything they do. Secondly, they are committed to using data to drive their business decisions and to making sure their technology is market-leading, particularly in delivering a superlative user experience.

Driving success in all these areas is specialisation. You can only truly understand your customer needs, build the data you need and create optimised user journeys if you are focused on a few things rather than trying to be all things to all people.

Jaidev Janardana, CEO of Zopa

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