The pandemic has forced the entire economy to move online, with the use of Zoom and Skype exploding. London’s financial services space was no exception, leading to widespread adoption of online banking.
One online lender who got his banking license in the UK in June last year, at the height of the pandemic, is Zopa, which offers a range of products in an already crowded market, including a fixed-term saver and a credit card.
City AM spoke with Jaidev Janardana, CEO of the bank, based in London Bridge, to reflect on the past twelve months and discuss the future of digital financial services, especially as the pandemic could slowly end.
It’s been a year since you got your banking license, in June of last year, in the midst of a pandemic. How is it going?
The past year has been monumental. Starting a bank is one thing, but doing it during a pandemic was something we couldn’t have predicted. In the end, it actually acted as a catalyst for us to help more clients and grow faster than we anticipated. We quickly launched 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.
Of course, in the last nine months we have attracted almost £ 300million in deposits [in April 2021], and become one of the top 10 credit card issuers in the UK in terms of new customers generated. Credit performance was exceptionally strong, around 40 percent better than expected. In addition, we recently announced a fundraising from our existing investors of £ 20million to allow us to continue to grow our balance sheet at the accelerated rate we are experiencing.
The pandemic has affected all sectors and industries. How has the coronavirus outbreak and the lockdowns that followed affect your customers?
At the start of the pandemic, the focus was on our existing customers, some of whom were concerned about whether they could continue to repay their loans. We have offered a wide range of support throughout the pandemic, including payment freezes and repayment plans. As the pandemic evolved, we also found that in some cases consumers struggled to access loans as vendors struggled to respond to changes in the market.
A year after the start of the pandemic, the finances of some customers have been negatively impacted and to support them, we have launched a range of tools to help them restore their financial situation. In contrast, some clients have seen their financial situation improve over the past year as their discretionary spending has declined. Many are looking for competitive savings accounts to lock in the money they may have saved.
We’ve also seen consumer needs and behaviors change as restrictions ease. We have seen an increase in credit and loans to improve homes, buy a car, or even jumpstart postponed wedding plans.
As we move to a less restricted lifestyle, we have seen significant dynamism from many customers and strong demand for our savings, credit and credit card products. As a result of this focus on customers, in September 2020 we were already adding more customers as a business than before Covid and that number has grown by 50% since then.
Many analysts have told me that the pandemic has accelerated the use of Open Banking in the financial sector. 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 was indeed the spark she was waiting for.
Customers have adopted more digital means, and at least with some suppliers, customers are seeing the benefits.
We have been using Open Banking since its inception and believe that it still has a lot of potential for us. We started by using it as a tool to verify client income, increasing the speed at which we could make a decision on credit applications.
There’s a lot of talk about interest rates: what does this mean for digital banks like yours?
We earn over 90 percent of our income from interest charged on customers who contract us for loans and credit cards. These rates are set in the context of the wider market and relate to an individual’s creditworthiness and macroeconomic outlook rather than being solely influenced by the base rate of the Bank of England. Our loans are funded from a variety of sources including fixed term savings accounts as well as P2P investments. Negative interest rates would make these products more attractive compared to other options, making it easier and cheaper for us to acquire savers and investors.
Glad you brought up negative interest rates, a hot topic in recent weeks.
Yes, the main impact of negative rates will be particularly felt on banks which both offer current accounts and do not have a significant credit supply. These banks hold a significant amount of their customers’ money in checking accounts. The bank in turn usually invests these funds in products such as bonds or gilts or leaves them with the Bank of England. The interest rate on these products closely follows the BoE rate. Therefore, if negative rates were introduced, any money left at the BoE or held in bonds or gilts will become a cost instead of a source of income.
Let’s look to the future, life after confinement, the post-Covid market. What do you think of the recovery process?
While there are still unknowns, if we look to the future with today’s mindset, we are extremely optimistic about the recovery we should see later this year. Government initiatives, including the vacation program and Business Bounce Back loans, have provided individuals and businesses with vital financial support during the pandemic.
As more of the population receives their second vaccine and Britain moves closer to fewer restrictions in July, we are optimistic for the future.
That being said, we do recognize that there will be some bumps along the way. As a country and as individuals, we need to closely monitor the data and adjust our behavior accordingly. Most economists forecast a significant rebound in customer spending and associated growth in the number of customers returning to the debt market.
What I keep hearing from any digital lender, bank, or financial company is the changing role of technology and its growing importance. How are technological developments impacting your work and the way you serve your clients?
Technology has been at the heart of our business and one of Zopa’s main competitive advantages. We’ve embraced technological developments like cloud computing and machine learning techniques to launch key innovations: like instant pre-approvals and actual rates for loan clients. Our app’s Borrowing Power feature uses a combination of these elements to give customers insight into how they can improve their financial health and access better and cheaper credit.