LFP021 – Special Episode! Consumer Credit and P2P Deep Dive with Giles Andrews CEO of Zopa

Giles and friends have really set one of the all-time Financial Services innovation high water marks with their invention of P2P – online lending and borrowing without a bank. They literally created an industry and changed the mould globally as we have seen with multi-billion$ IPOs in the US in December 2014. As they were […]

Giles and friends have really set one of the all-time Financial Services innovation high water marks with their invention of P2P – online lending and borrowing without a bank. They literally created an industry and changed the mould globally as we have seen with multi-billion$ IPOs in the US in December 2014.

As they were the first they have always had a core of “getting it right” – aka not losing customers money – aka getting “high quality consumer credit right”. This they have certainly done as they still produced positive returns through the mega-consumer crisis of 2008.

Not just that but they really get 21stC customer-focused business and have won the “best loan provider award 5yrs in a row”. 51,000 lenders to date have put money through the platform for a total of £750m lending business.

On this show we dive into a number of key issues:

– the role of the Alfa Romeo Alfasud Ti in our lives

– the idea for P2P, where it came from, the insights into consumer behaviour in FS in the 21stC and what the motivations were behind the foundation of Zopa in 2005

– a deep dive into the experience of the loan book portfolio in 2008

– why unsecured consumer lending has been such a good asset class – outperforming what one might have imagined over the past ten years; the psychology and practicalities behind consumer decisions to repay their debts

– the importance of not assuming there is such thing as a “safe asset class” – as all we have  is the performance of platforms where there is a strong “survivor bias” – only the ones that manage the credit well survive and thrive

– credit scores, credit agencies, credit data suppliers and the evolution over time of P2P models from being “near” supplier scores to further away from them using the platform’s own data.  The importance of tracking not just the loans you do do but the loans you don’t in building a more accurate credit model over time

– the importance of understanding “hard search” versus “soft search” (re applying for credit in the UK), the banking industry as a whole still tending to rely on hard search (compared to soft search in P2P as an industry)

– the challenge over prospective returns (that one sees being compared across platforms) all including a model/estimate of credit risk (& therefore there is a marketing benefit towards not being over-conservative on modelling to avoid unnecessarily depressing “prospective” potential returns). Zopa’s attitude towards this

– the story of a platform that just copied wholesale Zopa’s information and approach :-O (without understanding sufficiently what happens “beneath the bonnet” – an Alfasud without the flat-four boxer is just a car that falls apart :-D)

– the relevance of the experience of banking’s Basel internal models approval process and the possible comparison of credit models/expected defaults across P2P platforms

– the importance of transparency across the whole of P2P, especially around the nature of the asset one is acquiring; some platforms don’t even have that level of transparency

– re P2P Risk in general Giles refers to the recent articles I have written for AltFi News on Risk in Alternative Finance: Deja-Vu All Over Again; Control Is An Illusion – 3 Vital Lessons from 30yrs of City Risk Management; Those Who Don’t Know History Are Condemned To Repeat It

– we wrap up with Zopa’s positioning, strategy and tactics for the next decade

Overall I came away with an appreciation for Giles kind-of informal role as “father of P2P” (my words not his) – his fluency, insight and command of the whole scene is rare in any industrial sector.

A must listen for anyone interested in P2P!