Metro Bank, one of the UK challenger banks, has just announced a deal to lend customer deposits through Zopa, one of the UK’s biggest peer-to-peer platforms.
This is a significant in a number of reasonss. It is both the first British bank to lend through a peer-to-peer platform, and a major collaboration of challenger bank with the fintech sector.
But the most remarkable thing about the collaboration is that it is the biggest example to date of what is known as component banking. If you are building a bank you no longer have to be a full service bank to offer your customers a full range of banking services. Through collaboration you can develop services far more quickly with component parts and more efficiently than building the capability in-house. Like Lego bricks.
The comparison with Lego bricks is entirely appropriate. As any parent who has walked barefoot across their child’s bedroom can tell you a Lego brick is the toughest material known to mankind. You could build a tower of Lego bricks 3.5km high before it failed.
For Metro Bank the commercial benefits are simple. It has about £3bn in deposits but only lends about half that amount. It is quite simply a better distribution channel for deposits through Zopa that building its own loan administration business. Zopa benefits from more access to wholesale funding, and it allocates loans randomly to institutional and individual funders to prevent cherry picking.
There are an increasing number of examples of component banking:
- Santander UK and Funding Circle announced a partnership last June where Santander refer small business customers looking for a loan to Funding Circle. Royal Bank of Scotland have announced a similar deal.
- In the US, Lending Club has teamed up with banks, so they can both buy loans originated through the platform and refer customers to it as an alternative source.
- Currency Cloud is working with several banks to provide their retail customers with FX payments
- Why should a bank pay for expensive networks of correspondent banks to provide money transfer services when they could refer business to a peer-to-peer service like TransferWise
This is a big threat to the traditional banking institutions. A increasing number of personal and business customers don’t want the limited and expensive product offerings of the high street banks. For instance most customers don’t make international payments, but those that do need to make remittances – expats etc – could simply use a cloud provider.
Why pay for a marble banking hall when you could build your own out of Lego?