Zopa, backed by SoftBank, and LendingClub, which is priced at $ 3 billion, are some of the companies that allow individuals to lend directly to SMEs or consumers. By dispensing with costly bank branches, they hoped to offer investors higher rates, while providing borrowers with quick and competitively priced loans. Individuals contributed over $ 1 billion per year to the LendingClub platform in 2015-17. But after having bought a bank in 2020, the American group no longer accepts retail money between individuals. British company Zopa will also focus on banking.
While the pandemic didn’t help, institutional investors had already started moving retail money to some platforms. Attracting people requires expensive advertising, and customers can only invest a few thousand dollars at a time. Hedge funds and insurers often sign multi-million dollar loan agreements.
Then there are the regulators. Following LendingClub’s purchase of a bank, they said it should reserve capital against P2P (peer-to-peer) lending even after transferring exposure to investors. It destroyed profitability. Zopa’s lenders had to pass knowledge tests, and few passed them. The lesson for fintech, especially cryptocurrencies, is that regulators can make life difficult for companies trying to create a new asset class.
Also, don’t forget that it’s hard to beat the banks. P2P pioneers speculated that they would eventually match their funding costs. It was always going to be difficult. Since banks finance most of their balance sheets with deposits, their total costs are very low. Instead, Zopa’s lenders charged 4%. This matters for companies like Affirm and Afterpay, which rely on wholesale funding. When rates rise, these costs tend to rise faster than deposit rates, allowing lenders to fight back with their own installment loans. Making stylish websites is possible; Another thing is that the loans are cheaper.