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Why now could be the right time to launch a digital bank

Launching a bank during a global crisis is fraught with risk, but an established customer base, experience, agility and diversification could help Zopa do just that

News of fintech businesses putting expansion on hold and investors holding back have become common during the Covid-19 pandemic, but there are advantages for those in a position to set up during the beginning of the new normal.

UK-based peer-to-peer lending pioneer Zopa is one such company. It has been working on establishing a bank since 2016, but has chosen to launch now. The bank has started with a savings account, which like a many digital consumer services can be set up in minutes.

The Covid-19 pandemic created an environment that turned out to be a successful global proof of concept for online banking services, but at the same time created a challenging business environment. While online and mobile banking figures surged during global lockdowns, investment in fintechs actually dropped as investors held back amid uncertainty.

Even established digital banks such as Monzo were forced to make cuts. Peer-to-peer lender LendingClub, which like Zopa was an early market entry after being launched in the US in 2007, also announced it was laying of hundreds of staff as demand for its peer-to-peer lending service falls during the Covid-19 crisis.

A survey of fintechs carried out by Qadre in May found that 68% of UK businesses had lost out on funding, with the average amount lost £1.2m. But while managing finances became the core task for many, others saw an opportunity to prepare for the expected bounce back when the economy recovers.

Russ Shaw, founder of tech startup network Tech London Advocates, told Computer Weekly in April: “Most companies are battening down the hatches, furloughing people if they can, laying people off or people taking pay cuts or not being paid at all,” he said. “This is due to uncertainty and the fact they are seeing softness in their business.

Zopa was launched in 2005, so has built a strong business with 300,000 customers and a diverse product range. The company’s own surveys show that now is the time to offer more online.

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Didier Baclin, chief product officer at Zopa, previously an Amazon employee, is driving the tech project underpinning the bank. He said Zopa’s own research has shown that over half of people are now more likely to use online financial services, while 54% said they are less likely to use a bank branch.

“In that context, offering a fully online digital proposition has never made more sense,” he said.

He said the current pandemic could allow Zopa to flex its digital muscles. “A challenging environment can always offer a potential opportunity. It is possible that we could grow faster in this kind of market, because other companies might be holding back.”

“At the very least it will drive take up,” added Baclin.  

The company’s longevity also increases its chances of success, with a large customer base and the previous economic turmoil weathered. “We have always managed risk carefully and have been through economic cycles before. Risk management is one of our core values and will allow us to navigate this tough period well.”

Right moment

Zopa has had a bank in its plans for years but has waited for the right moment to launch. The fintech also has a track record in using tech to deliver financial services, beginning with peer-to-peer lending in 2005. “The bank is the fruit of 15 years’ work at Zopa,” he said.

Baclin said diversity will also help the bank compete. “When looking at the digital banks the breadth of our offering is wide, with credit cards, investments and loans. For this diversity you would have to go to the more traditional banks.”

For a bank that is trying to be as easy to use as digital entertainment platform Netflix, this is important. “Netflix doesn’t work if you only have one show. You have to have something for everyone.”

Fintech pioneer Matthias Kroner agreed that times like these are often an opportunity for some, and he has experience. Kroner founded digital challenger bank Fidor back in 2009, during the height of a major crisis in the global financial sector. “This reminds me of when we founded Fidor, which was right in the middle of the financial crisis. People were asking then whether it was a good time to set up a bank,” said Kroner. “I think these moments of crisis offer us the opportunity to do something better.”

Changing habits

Kroner said the fact that Zopa is being established during a time when the banking habits of consumers and businesses are changing as a result of Covid-19 will give it an advantage over already-established banks. “The current period is an opportunity to set up with the new normal in mind, because it’s not like they have to change: they will be born into this. It’s harder for established banks and fintechs to adapt to the new normal.”

Going forward, the launch of a bank will be good for Zopa’s overall business growth. “I always admired Zopa starting in lending, because at Fidor we started deposit-taking and we found it hard to get into lending. Taking deposits will now support Zopa’s growth.”

All banking services will be available on the Zopa app, which was launched in 2018. It initially enabled borrowers to track loans, but Zopa decided the app would host all products and services going forward. Its services are delivered from the Amazon Web Services cloud.

Zopa decided to build the tech platforms for its banking products in-house because of its extensive internal tech talent, with experience in building a peer-to-peer lending platform. It has about 500 staff, with some 100 working directly with technology, such as software developers and data scientists. Around one-third of its employees work at least partly with technology.

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