Zopa’s discontinuation of peer-to-peer lending could signal a risky future for industry innovation

Zopa’s decision to abandon his peer-to-peer lending (p2p) business to focus on banking last month sparked headlines wondering if this heralded the demise of the industry he started and created.

As a member of the original team of researchers and entrepreneurs who helped create Zopa, it is sad to see his departure from the p2p loan. But the p2p loan was just a “new 2,500 year old idea.”

Since the dawn of Western democracy, people have formed lending and borrowing networks to provide more equitable livelihoods and financing among citizens – the alternative in the old days was to borrow on terms. onerous to the aristocracy, with a penalty for lack of slavery for yourself. or your family.

While researching and writing our book Crowdfunding and the democratization of financeI and my co-author found evidence that the structure of our financial system has a direct influence on the health and resilience of democracy as a whole.

A financial system built around the idea that stability comes from centralized power and institutions, rather than encouraging more diverse and diverse networks, can often find itself in conflict with citizens who want a larger agency. and more control over their money and what their money does.

Zopa has used technology and innovations to make p2p lending “bigger and better” and provide a real alternative to the conventional bank lending model. Ultimately, however, it was increasingly difficult to scale the business profitably. A full banking license acquired in 2020 offered new avenues to profitability and ultimately returns for its shareholders.

What future for p2p?

Zopa explained that growing regulatory pressures and uncertainty contributed to the decision, as well as the effect of high-profile failures by p2p lenders and unregulated investments.

The exit of this player and other big players in the industry raises questions for the Financial Conduct Authority (FCA) about whether the response to the high-profile but individual platform failures has been proportionate, and what that means for the another statutory objective of the regulator. promote competition in financial markets.

More Ethical money

Since the original idea of ​​Zopa, p2p loans have diversified considerably, allowing individuals to invest in a wide range of different assets. My own platform, Abundance Investment, successfully applied for p2p loan authorization in 2020 to provide investors in community municipal investments a low risk alternative to diversify their holdings into their Innovative Finance Isa.

But the pace of innovation in the sector has slowed considerably in recent years, with more than 16% of authorizations withdrawn or rejected and an ever-changing set of rules and guidance, undermining fintech investor confidence in due to regulatory risk.

These apps may not have been up to the task, but the cost in time, effort and money required to get cleared has increased dramatically as the regulator reacted to scandals both inside and out. -beyond its “regulatory perimeter”.

Zopa’s exit should also make us wonder if we view the role of our financial regulator too narrowly, considering it only to keep our money ‘safe’ when we need one that promotes it. innovation and competition for the benefit of clients – allowing them to take risk, and the chance for higher returns, while making sure they understand that risk.

If all we want is money to be ‘safe’ everyone in p2p and crowdfunding should give up investing and join the ranks of banks. But history shows that the effect of such a shift, effectively putting investment decisions in the hands of a very small number of professional investors, could be profound for the health of our democracy and our society.

Zopa’s exit from p2p loans raises very real questions as to whether the financial regulator is doing enough to encourage innovation that makes money useful to society instead of sitting in bank cash deposits.

Does the regulator’s continued pressure for new rules discourage innovative companies? Away from more democratic and equitable models of lending and borrowing – going back to the days when banks dominated the financial streets? For the sake of our democracy, let’s hope not.

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