2 STARTUPS THAT ARE TRYING TO DESTROY THE BANKS JUST JOINED FORCES

Chairman Vernon Hill with Metro Bank employees in
central London.

Bad news for banks: Two startups trying to reinvent finance and destroy traditional lending just teamed up.

The challenger bank Metro Bank has just struck a deal with Zopa, one of the UK's biggest peer-to-peer consumer lenders, to lend money over Zopa's platform. The amount lent wasn't disclosed, but a source told Business Insider it was around "millions a month."

The pair signalled their ambition in the release announcing the deal, writing: "Zopa and Metro Bank believe this partnership is a great example of how disruptive financial challengers can collaborate to provide additional value and revolutionise the UK banking sector."

'Signals our intent'

Both companies want not only to steal market share from the UK's traditional banks, but also to force them to reinvent their business by doing so.

Metro Bank, known for its strong focus on customer service, has previously labelled the UK's five dominant high-street banks "a cartel," and Zopa CEO Giles Andrews has chided banks for overlooking customers.

Clearly these are two companies that aren't just happy to work alongside traditional lenders.

Andrews said in a statement: "This partnership brings together two key challengers to the traditional financial services landscape and signals our intent to become a mainstream service."

Metro Bank CEO Craig Donaldson echoed Andrews' sentiment, saying: "At Metro Bank we're committed to revolutionising UK banking, and we're delighted to have partnered with Zopa, a fellow financial challenger."

Why banks should be worried

Peer-to-peer (P2P) lending poses a big threat to traditional high-street lenders. Traditional banks take deposits from customers and then loan that money out to those who want to borrow it.

Banks will lend at an interest rate that allows them to give depositors a decent return while also allowing the banks to make a profit, taking a cut as the middleman.

P2P lenders like Zopa cut these middlemen out. They allow online savers to lend money directly to those who want to borrow. Borrowers typically get a better rate, while interest rates for lenders can be as much as double what they would get simply depositing cash with banks.

Zopa and other P2P lenders make their money by charging a fee, but these are much more competitive than the cuts banks are taking.

Metro Bank, however, doesn't like to think of itself as a traditional lender and sees Zopa as an opportunity simply to reach more customers.

Formidable

Zopa and Metro Bank are already well established in the "alternative finance" world.

Zopa is part of a wave of financial technology, or FinTech, companies that have come to prominence since the 2008 financial crisis. The company has built a service that allows people to lend money to other individuals at competitive rates. Since its founding in 2005 Zopa has lent over £850 million to consumers and is tipped to IPO soon.

Metro Bank, meanwhile, is one of a number of so-called challenger banks — along with the likes of Aldermore and OneSavings Bank — aiming to introduce more competition to the UK banking sector. Since launch in 2010 it has signed up over half a million customers.

Business Insider