Peer-to-peer pioneers like Zopa and LendingClub (LC.N) strove to cut out banks. They’ve now joined the industry they hoped to disrupt. Their move away from the business of directly linking retail savers and borrowers holds lessons for the current generation of financial technology upstarts. SoftBank Group-backed (9984.T) Zopa and $3 billion listed LendingClub were among the most prominent companies that enabled individuals to lend directly to small businesses or consumers. By dispensing with expensive bank branches, they hoped to offer investors higher rates while providing borrowers with quick, competitively priced credit. Individuals poured over $1 billion per year into LendingClub’s platform between 2015 and 2017. But after buying a bank last year, the U.S. group founded by Renaud Laplanche no longer takes retail peer-to-peer money. Britain’s Zopa is killing its equivalent division to focus on banking. Though the pandemic didn’t help, institutional investors had already started to crowd out retail money on some platforms. Attracting individuals requires pricey advertising, and customers may only invest a few thousand dollars at a time. Hedge funds and insurers, by contrast, routinely sign multimillion-dollar lending agreements. Regulators also played a role. After LendingClub bought a bank in 2020 American watchdogs said the company had to set aside capital against peer-to-peer loans even after passing the exposure to investors. That made the business uneconomical. Zopa’s British lenders had to prove they were sufficiently sophisticated, including taking a seven-question test. The proportion of people completing that process promptly dropped by 70% to 80%. The lesson for newer fintech upstarts, especially those dealing with cryptocurrencies, is that watchdogs can make life difficult for companies trying to create a new asset class. It’s also a reminder that beating banks is hard. Peer-to-peer pioneers theorised that, over time, they could match banks’ funding costs. That was always going to be tough. With banks financing most of their balance sheets with deposits, all-in funding costs are currently extremely low. By contrast, lenders on Zopa’s peer-to-peer platform were recently charging 4%. That gap is relevant for buy-now-pay-later upstarts like Affirm (AFRM.O) and Afterpay (APT.AX), which rely on wholesale financing. As interest rates rise, those costs tend to increase faster than deposit rates, giving incumbents like JPMorgan (JPM.N) and Barclays (BARC.L) a window to strike back with their own instalment-credit products. The peer-to-peer experience shows that it’s possible to build slicker websites than old-school lenders. Writing cheaper loans is another matter. Follow @liamwardproud on Twitter CONTEXT NEWS - British financial technology startup Zopa will stop processing loans funded by retail investors and buy back the outstanding debt at face value, a person familiar with the matter told Breakingviews. Customers will receive their money back by the end of January 2022, and the SoftBank Group-backed company will instead focus on attracting banking deposits. - U.S. peer LendingClub in October 2020 said it would close its retail peer-to-peer loans business after agreeing to buy lender Radius Bancorp earlier in the year. - Britain’s Metro Bank in August 2020 bought peer-to-peer lender RateSetter. London-listed Funding Circle stopped financing new loans with retail investors’ money in early 2020. Editing by Peter Thal Larsen and Oliver Taslic Our Standards: The Thomson Reuters Trust Principles.