There was extensive media coverage in October of last year surrounding Zopa, the largest consumer-focused peer to peer lender in the UK, and when it will re-open its doors to new investors who have been waiting in the Zopa lending queue – some since early 2017. One headline read: Peer-to-peer giant Zopa is hoping to re-open its platform to new investors by the end of the year. It’s the turn of 2018, and some members in the queue may be seeing signs of promise. An associate of ours was emailed recently, stating that their ‘wait is nearly over…’ and that they’ll be emailed in the ‘coming weeks’ with an invitation to open an account. There are 26,000 people in the Zopa “wait list” (as of 9th January). With approximately 60,000 active customers, this influx will represent a 43% increase in lenders at the platform; impressive, given the time it’s taken the platform which was founded in 2005 to acquire its existing customer-base. But, why was the queue developed; what is Zopa doing to manage it; and what are the effects?
What caused the Zopa lending queue
In August last year, Zopa sought to comfort customers by addressing rising concerns levelled at the consumer credit market. The P2P lender re-structured its product-set and drew a line under its strict lending policies.
To give some context, stress tests were performed last year revealing that lenders may be underestimating exposure to the ballooning consumer credit market. In a severe stress test scenario, the Bank of England Financial Policy Committee judged that, “the UK banking system would, in aggregate, incur UK consumer credit losses of around £30 billion, or 20% of UK consumer credit loans”.
As the largest consumer-focused P2P lender in the UK – £2.9bn cumulatively lent since 2005 – Zopa was compelled to make alterations in light of these concerns. The platform reduced lending to higher risk borrowers in their D-E markets, contained within the Zopa Plus product, and increased the proportion of lower risk, lower return A and B-rated loans to mitigate increased borrower default concerns. The resultant effect on investors in the Core and Plus products has been a compression in the target return rates: Core product rate dropped from 3.9% to 3.7% and Plus from 6.3% to 4.5% (at time of writing).
With sustained demand from investors and a ballooning and competitive consumer lending market, Zopa chose to restrict access to borrowers and form a “wait list” (queue) in order to maintain the balance of origination and not compromise its underwriting policies by lending to riskier borrowers.
You can read more about the changes to Zopa’s products in Zopa lending update: product changes to the P2P platform
Zopa lending queue management
Wait list to open an account
If you have signed up to the wait list to open an account with Zopa, you will have likely received progress updates via email. There is not a lot of information on the website, however, and each case will be dependent on the time of signing up to the wait list. In the example in the opening paragraph, our associate signed up to the wait list middle of last year and has just been informed that it will be a couple of weeks before they’re invited to open an account.
Get an in-depth insight into Zopa’s loan book with Orca’s free analytics:
New money investment queue – for existing Zopa investors
It’s not just prospective account holders who have been queued, but existing customers who want to make new deposits have also had funds queued (not unusual across the P2P market). There’s more information on Zopa queue management on the platform’s website, including information about their secondary market. You can also check your ‘Weekly Update’ sent by Zopa for information on lending times.
Here’s Zopa’s queue management policy, lifted from the website:
We thought we’d take this opportunity to give you a little insight into how our queues are managed:
- How quickly we can lend your money is linked to demand: demand from approved borrowers, and demand from other lenders.
- The sizeof the queue depends on how much demand there is from other lenders like you.
- Speed of lending depends on demand from borrowers that meet our criteria for sensible lending.
- Only new money goes into the queue. Your repayments, if you have relending switched on, are recycled back into the system and matched to borrowers ahead of new money. This is the reason for different queue lengths by product.
- New money is queued per the date it was funded into Zopa.
On a slight side-note, it was announced via email that ISA transfers into the Zopa ISA are accepted. Access, however, is not guaranteed as this feature is being phased in, but it is expected that ‘being able to transfer an ISA will be available on all ISA investor accounts shortly’, according to the Zopa website. The phasing process is necessary to minimise potential impact on product lending queues, i.e, matching funds to borrowers.
You can check if you’re is eligible for ISA transfer by logging into your Zopa account (if you have one).
Will Zopa weather the concerns?
Consumer-focused lenders faced certain scrutiny amidst the rising consumer debt concerns last year, and still do. Zopa took mitigating measures as outlined above. The effect on borrower defaults is too early to measure, but the platform has made forecasts and is continuing to grow origination despite increased competition for borrowers.
Zopa default rates
Zopa’s default rate forecasting has been fairly accurate over the years. The differential between the estimation and actual rate has rarely been more than 1% per year – suggestive of reliable credit modelling and forecasting. Moreover, with the exception of 2008, 2014 and 2015, the platform has recorded lower actual default rates than its estimates (Zopa founded in 2005). For 2017, the estimated default rate stands at 4.89%, the highest default estimation by the platform in its history. The actual default rate for 2017 is currently 0.77%, but while 80% of loans are still in circulation with principal outstanding, this default rate will inevitably increase over time.
See graphic below for Zopa default rates over time.
Source: Orca Analytics, Zopa estimated versus actual default rates by year
Increased loan origination
Despite restricting access for new investors, Zopa still increased its lending in 2017. As recorded at end December 2017, £985 million was lent across the platform in the year. This compares with £689 million in 2016. This growth in origination suggests that Zopa is maintaining a healthy pipeline of borrowers even in the face of increased competition.
See graphic below for Zopa’s 2017 ‘Amount Lent’ and breakdown of ‘Amount Lent and Assets Under Management’
Source: Orca Analytics, Zopa total amount lent over time
Invest across multiple major UK P2P lending platforms from one dashboard
If the media attention from late last year is right, then Zopa’s doors should be opening to new investors very soon. From personal experience, this seems accurate. However, what is not clear, is, when all members of the wait list will be on-boarded – if you signed up to the Zopa lending queue late last year, for example, could it be months before you are able to open an account? Editorial revision from original: Zopa has been contacted to find out more about this but no response has been received yet (original). Zopa has been contacted and informed that some members have been waiting as long as 10 months to become a new customer, and that if someone signed up today they’d be expecting to wait while others in the wait list have been on-boarded in batches (updated). What is evident, is that Zopa has not suffered a drastic reduction in origination after its major changes last year, quite the opposite. And if the platform’s accurate default forecasting over time is to be relied upon, then the actions taken by Zopa to mitigate consumer credit concerns, such as compressing yield and reducing allocation to riskier borrowers, could ensure rising defaults don’t have a severe, unexpected impact.