Can this startup profit from interest-free loans?

Hello there,

Here at PreSeed Now, we write about startups at an earlier stage than most of the media, but there is still such as thing as too early stage.

An idea in a deck with nothing else to underpin it would be too early, for example. And I’ve knocked back startups who have told me they don’t yet have a CTO, as it simply wasn’t clear they’d be able to move forward without one.

Beyond that, I want the selection of startups to inform you and inspire you about the diversity of what’s happening across the UK. And I want us to do that by covering startups at all stages of ‘early’. I hope we’re delivering on that.

You can always drop me a line if you have any thoughts.

The cost of living crisis has led some entrepreneurs to apply fresh thinking to help those in need with promising-looking businesses.

Last week we covered Tickets for Good, and today let’s take a look at ZeroPA and its big idea of offering interest-free loans AND making a profit.

– Martin

ZeroPA wants to make a profit from lending money interest free

Out on the Isle of Man, a UK startup is testing a hypothesis: that you can offer zero-interest loans to help people on low incomes pay for essential goods and services, and build a successful, scalable business around it.

ZeroPA offers loans of between £50 and £1,000 for up to a year on an interest-free basis. These loans are offered as vouchers rather than cash, and can be spent on things like food, utilities, clothing, white goods, furniture, household repairs, and basic tech.

Funds for the loans are sourced from altruistic lenders via a peer-to-peer model that–despite the lack of interest payments–is designed to return a profit to lenders, the startup, and its investors.

Founder and CEO Saqhib Ali, says that ZeroPA (a reference to ‘zero per annum’ but pronounced a bit like the U2 album ‘Zooropa’) aims to have relationships with a range of retailers, and get a cut of the purchase price for generating the purchase.

Bedford-based Ali says borrowers need to be referred from an organisation like a credit union, foodbank, or Citizens Advice, to ensure they’re really in need of this kind of loan. The application process happens through the ZeroPA website, with successful applicants then having to wait up to five days for the retailer to be paid, and the goods to be available.

Meanwhile, risk to lenders is mitigated by the startup spreading funds from individual lenders across multiple loans.

Ali says the aim is to automate the whole process over time, but there is some human intervention at present, behind the scenes of a self-service process.

But is it a business?

Lending to those on low incomes can be a lucrative, if often morally dubious, pursuit. By taking interest out of the equation, ZeroPA’s offering is likely to be compelling for those who find themselves having to take out a loan for essentials, but is there a business here? 

Ali’s projections for the next few years certainly see it as a profitable operation. He plans for profits to be split equally between a risk pool set aside to protect against bad debts, paying for infrastructure, returning funds to investors, and providing a profit share with lenders.

It’s an interesting idea, but how can Ali be sure there are enough lenders out there who want to lend in this way?

“A lot of corporates and individuals want to invest in CSR [corporate social responsibility] or ESG [environmental, social, and governance] type investing, they don't want to just invest in the Apples or BPs and Shells of this world… I think they want to do good with their money and this gives them an opportunity.”

The story so far…

Ali, who has a background in the financial world, says he came up with the concept behind ZeroPA in the mid-2010s when he was working at Lloyds Banking Group. 

“I watched ‘I, Daniel Blake’, which really made me wonder; was there a way of helping the millions that are in this perpetual debt? 

“There was a call that I listened to with the financial distress unit of Lloyds, where there was a grandma that had borrowed max on her loan, her credit card, her overdraft, and was in tears. And as if we were a fairy godmother, we said ‘oh, it's okay, we'll suspend all your payments, we’ll wipe off the interest, and we'll set up a payment plan’. 

“And I thought, ‘well hang on if we can do that for this person. What if we could do that for the millions of others?’” 

Ali developed the concept for ZeroPA as a self-perpetuating business, rather than a charity, that didn’t charge interest. A muslim, he drew some inspiration from Islamic finance principles in coming up with the idea of a workable system that charges no interest.

The result is something that is a little closer to a co-operative than a typical finance startup, but it’s undoubtedly an interesting concept that could prove highly impactful.

Putting the idea to the test

To put the idea to the test, ZeroPA launched a pilot programme on the Isle of Man late last year. They picked the island due to its similarity to the UK in terms of regulation around lending. 

They use the Argid.im branding on the Isle of Man (argid meaning ‘money’ in Manx), and you can watch an explainer video for the service here.

Ali says the result so far of the pilot has been clear:

“In one month, we had the value of applications that we thought we would get in three months. We were bowled over by that…. If you scale up what we've done on the Isle of Man to the UK, when we get the FCA licence here, I think it shows demand is definitely there.

“On the Isle of Man… we've had applications for utility bills, towards food, clothing, furniture, and our very first loan was actually towards basic household goods like a kettle, toaster, washing machine, and Hoover.”

But while Ali says he’s put together an experienced executive and non-executive team, a couple of key roles still need to be filled: a CTO to drive the technical underpinnings of the business, and someone to help nurture relationships with the retailers and providers who will provide the goods and services to borrowers, and the profit to ZeroPA.

Once that’s all in place, Ali says the aim is to apply to the Financial Conduct Authority as soon as the startup gets its next tranche of funding, with the aim of being registered before year end.

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