Zopa Bank targets current accounts and SME lending as London listing beckons
Times are changing for the UK’s neobanks, a crop of digital-only challengers that burst onto the scene in the 2010s.
Having weathered a drop-off in fintech funding, more are hitting profitability – no doubt helped by recent interest rate hikes but also their swelling customer bases.
Within the mix, a smaller name heralded its first annual profit in April. Zopa Bank notched a profit of £15.8m for 2023, swinging from a £26m loss in 2022. Its customer base stands at more than 1.2m, while it hit £4bn in deposits last month.
The London-based bank has deep roots, founded in 2005 as a peer-to-peer lender. That side of the business closed a year after it secured a full banking licence in 2020.
Now, it is set on stepping up its challenge to bigger rivals Starling, Monzo and Revolut with an expanded suite of products ahead of a hotly-anticipated stock market float.
“We are different,” chief executive Jaidev Janardana tells City PM, with the bank focusing on lending funded by savings accounts, rather than rapidly acquiring customers through current accounts.
“Some of the other names are getting a huge benefit from having a current account franchise funded at zero per cent,” he adds. “Our profitability is not dependent on that. In fact, we believe that as the rates start to come down, which I eagerly anticipate, our profitability will improve.”
Janardana considers Zopa a “number one player” for consumers stepping outside of their main banking provider and aims to grow the lender’s customer base to five million by 2028.
“We see more customers willing to try things beyond their main bank,” Janardana says. “Seven years ago, about 10 per cent of personal loans were made outside your current account franchise. That number is now more than 20 per cent and growing.”
Challenging the challengers
Among a slew of new products, Janardana says Zopa will launch current accounts for existing customers by the end of this year as the “first and most important priority” before expanding the offer to new customers in 2025.
“We believe that for a customer seeking value and ease, that combination is missing today in the market, and thus we can bridge a gap there,” he adds.
“There is an unmet need for people who want a more fragmented banking relationship, but then get value for what they do, and can do that easily… I think if we stay committed, in two to three years we will be fairly established.”
Still, Janardana admits the market is fiercely competitive. Fintech investors are paying particularly close attention to whether neobanks can grow their share of primary bank accounts, which often receive salary payments, relative to the bigger names.
As a “follow-on” product, an investment offering is next on Janardana’s list. While tight-lipped on details, he expects to launch the product as soon as the second half of 2025.
Janardana is also targeting lending to small and medium-sized enterprises (SMEs), eying up a void left by the incumbent players.
“SME lending is an interesting sector,” he says. “I think you can see particularly for businesses on the smaller end of the SME scale, the large banks are not serving them well.”
The majority of SME lending now comes from outside the big banks, with alternative lenders grabbing a lucrative slice of the market and boosting their bottom lines. Zopa plans to enter the space as early as next year.
As UK neobanks mature, more are turning their focus to international expansion. Starling is taking the first steps of franchising out its tech stack to banks in other countries, while Monzo announced this month that it would set up an office in Ireland to move into continental Europe.
Janardana hints at possible options for overseas growth but insists there is still plenty of work to do at home. “My first priority will always be growing within the UK and getting each of our products double-digit market share,” he explains.
“From an international standpoint, I would say our strategy will be more opportunistic – if there is a partnership, acquisition, merger that makes sense, then we would do that.”
IPO ‘green shoots’
While several UK neobanks are expected to launch stock market listings in the coming years, Zopa has been more vocal than most, even before turning a profit.
Janardana is watching the landscape closely. “There are some green shoots in the Raspberry Pi IPO, which was well priced and a good performance,” he says. “Hopefully that’ll continue, but we’ll need a bit more of that kind of IPO happening before the fintechs start hitting the market.”
He has yet to be fully convinced that banking stocks are mounting a comeback after years of languishing at heavy discounts. Several have rallied this year on bumper earnings and an improving economic picture.
“Despite that rally, the banks are, particularly from a price-to-earnings multiple standpoint, at historical lows,” he says. “So we will need to see that recover. If that happens… then London becomes a reasonably attractive location for us.”
Still, he doesn’t let a looming IPO distract him from the immediate challenge of proving Zopa’s first profit was no fluke.
“What we are much more focused on is building a business that is sustainable, that’s doing well for its customers and doing well for its shareholders,” Janardana says. “And if we continue to build that, I’m sure a liquidity event will follow.”
With fintech valuations still broadly struggling since a peak in 2021, analysts predict increased consolidation is more likely than a wave of IPOs in the near term.
“Consolidation will be beneficial because a lot of us have built relatively narrow product ranges,” Janardana says. “There’s a lot of fintechs where the product offering is very narrow, and it’s very hard to sustainably do that. Given the investment climate, I would suspect that would promote consolidation.”
Traditional UK banks are also seeing more M&A activity, with several mid-sized tie-ups set for this year – most notably Nationwide’s agreed £2.9bn acquisition of Virgin Money. Janardana welcomes the gaps in the market these deals are set to leave behind.
“I would see that as a positive thing for the banking sector, because hopefully you create a bank that is more efficient and better for shareholders, and thus the public market valuations of UK banks improve,” he says. “And separately, I think it means more growth for us. So we encourage more of it.”