EXCLUSIVE: “Credit where it’s due” – Merve Ferrero, Zopa Bank in ‘The Fintech Magazine’

Zopa Bank’s Chief Strategy Officer Merve Ferrero explains what a responsible BNPL product looks like

Buy now, pay later and achieve profitability. This could be UK neo Zopa Bank’s story in 2023.

The former peer-to-peer finance pioneer, which morphed into a savings and lending bank just three years ago, believes that its BNPL offer, bolstered by the acquisition of fellow British lendtech DivideBuy in January, will boost revenues by at least 20 per cent as consumers battle a cost-of-living crisis. But, just as it blazed a trail when it launched the world’s first P2P lending platform back in 2005, this new incarnation of Zopa will be doing things slightly differently – this time in the POS instalment loans space.

“BNPL exploded in the pandemic as people looked to push out costs over a longer period for safety and security,” says chief strategy officer Merve Ferrero. “Now, Juniper Research estimates the economic downturn will drive a 157 per cent increase in BNPL use and that BNPL users will surpass 900 million by 2027. We have to make sure this growth is sustainable and responsible.”

To that end, last year Zopa Bank set out a vision for what it calls BNPL 2.0, introducing credit checks and data sharing in an as-yet-largely-unregulated lending space to stop consumers burying themselves in debt.Ferrero says the acquisition of DivideBuy, with its strong product offer and modern technology stack, was a clear fit in achieving a digitally native suite of responsible BNPL products, which puts customer protection first. Staffordshire-based DivideBuy already had 400 participating merchants – many in the soft furnishings and beds space.

Shoppers can spread the cost of purchases over a two to 12-month period, interest free, and it claims to improve checkout conversion rates by around 40 per cent. Its focus on higher-value items matches Zopa Bank’s existing strategy to offer BNPL loans of between £250 and £30,000.

“Unlike most BNPL offerings, we are focussing on big-ticket items and our customer communications are designed to be fair and not misleading,” says Ferrero.“While with BNPL shoppers are not usually charged interest on their purchases, they are still at risk of overextending themselves with debt. And they are not entitled to forbearance or compensation if things go wrong because providers are not yet regulated in the UK.

“It will take some time before the Financial Conduct Authority starts overseeing the sector, so, until then, we must ensure customers are treated fairly and understand the impact of BNPL on their financial positions.

BNPL 2.0 is an evolution of today’s model. It gives consumers access to affordable credit but with clear protections in place.”Zopa Bank’s BNPL product draws heavily on its experience in data analytics and risk assessment programmes, built by teams in-house teams in London and Barcelona. Just as with its other lending decisions, the system runs credit checks and affordability assessments before giving customers an automated decision on an application for BNPL in seconds.

Crucially, that loan decision is also shared with credit rating agencies so other lenders have a fuller picture of the consumer’s debt position. And, to support the borrower, Zopa Bank provides proprietary online tools so they can better manage those financial commitments.

With a product portfolio that features personal loans, savings accounts, car loans and credit cards, Ferrero stresses the bank does not operate in the sub-prime or pay-day loan space, perhaps because, as its CEO said in an interview with McKinsey last year: “Being a bank born after COVID hit, we never had the luxury of not being cautious.”

Ferrero says the bank’s customers tend to be resilient but, faced with the current cost-of-living squeeze, she splits them into two groups.

“We have customers who came out of the pandemic with higher savings and a good credit score but are feeling the pinch with inflation and less disposable income. They will likely try to protect their savings and limit their credit exposure, leading to less volume in discretionary spending.

“The other group are customers who either lost income or are now in low-pay jobs and did not manage to save through the pandemic, who have been left without a financial buffer.

“They will likely be the ones most immediately impacted by double-digit inflation and may rely on their credit cards to cover day-to-day payments and balance their books. Against this backdrop, it is important for consumers to be able to access sustainable and affordable credit.”

CUSTOMER DATA IS KING

“BNPL 2.0 is an evolution of today’s model. It gives consumers access to affordable credit but with clear protections in place”

Zopa Bank has used models based on machine learning since 2015. Credit decision-making is fast, which ensures a slick experience for customers borrowing directly or via a merchant’s point-of-sale terminal or website. While it doesn’t offer current accounts, it uses current account turnover data from other banks to verify income, as well as harnessing intelligence gleaned from data acquired via open banking.

A recent innovation created to account for increased risk due to the cost-of-living crisis has been harnessing data taken via an API that allows the bank to assess the size of a credit applicant’s home and, therefore, the impact of soaring energy bills. Also, in February, Zopa announced it had partnered with Experian so the credit rating agency’s Boost data could be used in the bank’s credit card decisioning process.

Experian Boost allows consumers to improve their credit score by considering transactional data – such as current account credits and debits, regular payments to digital service providers, plus savings accounts and utility bill payment data.The Boost data is considered, regardless of whether customers apply for a Zopa Bank credit card directly, or via Experian or a third party, and it can result in lower APRs being offered.

Ferrero says: “We continuously adjust our credit risk, based on the macroeconomic conditions, pulling back on loan origination and credit risk when needed.”

Notwithstanding the current pressures on consumers, taking a cautious approach has paid off: a low level of loan defaults compared to rivals during 2020 and 2021 accelerated the company’s journey toward profitability. It nudged in and out of positive monthly accounts last year.Another key move was the decision not to offer a current account after witnessing rivals attract large numbers of customers who then only maintained balances averaging around £500.

Even with the potential to cross-sell other products to current account holders, Zopa deemed the economics did not stack up. Its decision was validated when its CEO reported the bank enjoyed strong repeat behaviour with half of customers keeping savings with the bank when a fixed-term product came to an end.

He told McKinsey: “If I look at my loans, about half of our customers will take a loan again with us within five or six years of the first one. And when they do that, they come directly back to us – we are not spending marketing money on that.”

BEST IN CLASS

A unicorn within 18 months of transitioning to a bank, to date the neo has attracted £3billion in deposits and issued around 400,000 cards. Its savings app is rated one of the best on the market and the bank is currently offering one of, if not the best easy-access savings rate in the country.

Like many others, it’s talked about an early IPO, but following a top-up £75million fundraise in February, Ferrero says ‘we will not be rushed to make hasty decisions and will carefully evaluate the investment climate when markets reopen’. Meanwhile, the bank is doubling down on efforts to create more of those financially responsible customers it cherishes.

It launched the 2025 Fintech Pledge alongside credit rating agency ClearScore in September, which aims to drive 10 million actions by 2025 that build the financial resilience of consumers. Thirty-four financial institutions have since joined to help people take action to boost their savings, improve credit scores, consolidate debt and lower their bills.It also recently announced a partnership with The Money Charity to create an online course and a series of financial education workshops to reach consumers who may need it most, and these will launch in the coming months.”

Running until December 2025, Zopa Bank and ClearScore will fund the first year of The Money Charity’s work, which will include a free online course, plus more targeted personal finance help for community groups and individuals.By then, the UK’s Consumer Duty law, which demands financial services providers ‘act to deliver good outcomes for retail customers’ as well as, potentially, a legislative framework for BNPL, will be in place. Ferrero welcomes both of those.

“Regulation will undoubtedly help the BNPL space,” she says, “by providing necessary safeguards for customers and creating a level playing field for responsible companies to grow.

This article was published in The Fintech Magazine Issue 28, Page 20-21