Case Study on ZOPA.COM
2013
Zopa is a company bringing borrowers and lenders in touch with each other, without the intermediary of a bank. It is a form of Social Lending.
Direct lending between friends, family and neighbors has existed since before formal banks, legal agreements and even currencies. These loans were often small, and much like today‟s “microfinance” loans relied on relationships of trust between individuals. Today, formal banks play a large role in financial intermediation, which has allowed for scale, transparency and efficiency, but has failed to meet the financial needs of the poor. The concept of microfinance stems from this need to extend access to financial services to the poor and other unbanked communities. With the birth of the internet, and the success of online social networking, a new form of non-bank lending has arisen, borrowing from traditional reliance on trust within communities but extending the concept of community beyond geographic boundaries. Beginning with Zopa (www.uk.zopa.com) in the United Kingdom in March 2005, person-to-person (P2P) internet sites are serving as marketplaces for borrowers and lenders in various developed economies and by January 2007 it had 40 employees and 105,000 registered member users (lenders and borrowers). ZOPA arranges for more than $100,000 loans every day.
Zopa is a peer-to-peer banking service, and a powerful example of a business model that works for all three parties. In essence, it turns each lender into a banker. Lenders' money is ascribed to specific borrowers, and is at risk if those borrowers default on loans. While it's not possible to rely purely on goodwill to avoid this happening, Zopa has found a system that minimizes the risk, as its co-founder and CEO Giles Andrews explains:
"We'd observed that big companies tended to get a much better deal out of financial services than individuals did, because of the bond market [which connects big investors and borrowers directly]. One of the requirements for such a marketplace to function is trusted third-party data. Rating agencies provided really good quality information on companies. They haven't done quite so well in rating mortgage securities but they've always done quite well on companies. "So we asked ourselves, could you imagine a scenario where there was a similar marketplace where consumers went to get a loan, and is there any data that's useful? And the answer was yes. It's
Case Study on ZOPA.COM
2013
quite different data – the credit bureau data on individuals isn't as predictive on an individual basis as Moody's rating of General Electric, but on a portfolio basis it works extremely well. As long as you're lending to lots of different people, the data works just fine – it's highly predictive."
Securing the Loans. Zopa tries to check the background of the borrowers in the following ways: • Conducting a credit rating investigation at Experion, Equifax, or a similar company. • Checking people‟s eBay rating (if available). • Checking the borrower‟s profile (if available online). • Permitting only one account for each borrower. • Checking the possibility of identity theft by a borrower by asking questions about past borrowing, demographics, etc.
In addition, Zopa advises lenders to spread out the risk by lending from one individual to several borrowers. Furthermore, if you like to sleep better, you can get insurance (for a fee) on the amount you lend. The risk, however, is fairly large; the actual bad debt rate, at Prosper, according to Wikipedia (2011b), is over 40 percent.
The Revenue Model ZOPA takes 0.5 percent of the loan amount from both the lender and the borrower. There are no hidden fees, and the only other (optional) cost to the lender is the insurance (plus the fees that ZOPA takes for arranging the insurance). At the moment, the site does not have sponsored ads. But it is likely that in the future vendors will try to sell related products or services to either the lenders or the buyers.
The Lending Process The following are the steps in ZOPA‟s lending process: 1. Let‟s say that a lender has $20,000. She transferred it to her ZOPA account stating her willingness to get a 7.5 percent interest rate from borrowers of top credit rating, for 2 years. 2. ZOPA organizes a pool of, for example, 40 borrowers witha similar creditworthiness of top rating, one that meets the lender‟s requirement. Each will get $20,000 divided by 40, which is $500.
3. The lender can read the profile of the prospective borrowers and the intended use of the money. The borrowers can read the lender‟s profile as well. This fosters a personal relationship between borrowers and lenders and helps in reducing default.
4. ZOPA arranges the contracts.
5. ZOPA collects interest payments and mails the lender a monthly check.
Case Study on ZOPA.COM
2013
6. ZOPA arranges repayment of the loan after two years. The Zopa model is to a large extent based on ethicality. Zopa aims to attract lenders who have a desire to lend money directly to people for altruistic purposes. Furthermore, the Zopa model is premised on the idea that by removing the need for intermediaries it offers a fairer financial deal for borrowers and a better rate of return for lenders. In this sense, it actually makes it financially advantageous since financial gain is dependant on Zopa‟s ethical principles. This model is advantageous because it increases the belief in Zopa‟s ethicality through members’ greater involvement and participation in altruistic lending. The ability to discern exactly who and what members are supporting is very compelling. It means that Zopa appears to offer a more authentic and transparent form of lending, where members feel more personally responsible because they believe that it is „my money‟ that is helping particular known individuals in specified ways." Summary of Key Points : Zopa exploits the widespread perception that there is a lack of transparency regarding the operations of mainstream financial services. 51% of respondents to our survey of general bankers were very concerned that their principal bank was involved in unethical finance and 73% thought banks should be more transparent about which organisations they are investing in. There is a general lack of knowledge about mainstream financial services‟ ethical policies and projects. 64% were unaware that their principal bank had community development projects and only 11% were aware that their bank had philanthropic projects in 3rd world countries. Members of Zopa were particularly cynical about mainstream banks. 56% thought mainstream banks were most closely associated with being impersonal, only 2% associated banks with environmental concerns and only 7% equated mainstream banks with ethical banking. Overall, ethicality is perceived to be intrinsic to Zopa and Zopa is understood to operate a much fairer financial deal in comparison with mainstream financial services, largely because Zopa members have a much more direct role of personal responsibility in Zopa‟s ethical standing; enabling them to feel that Zopa is more authentic and transparent than mainstream financial services.
Case Study on ZOPA.COM
2013
Competition P2P lending competes both with traditional banks and with online banking. Online banking is especially attractive to small investors, with some banks offering online savings accounts of 5 to 6 percent in 2006 through 2007; by 2009 interest rates had dropped to 1 to 2.25 percent. As of 2009, other competitors include Lending Club (lendingclub.com) and Fynanz ( fynanz.com).
Business Model Peer-to-peer lending is a smarter, fairer and more human way of doing money. It's like borrowing and lending with your friends and family - except there are thousands of people you can lend and borrow with. Both lenders and borrowers get better rates, because peer-to-peer lending is more efficient than the traditional banking model. Banks have massive overheads, with thousands of employees to pay and hundreds of branches to maintain. So they have to take large margins on the money that passes through them. There's no smoke and mirrors here. Banks use your money to make even more money for themselves. They lend some of it out, gamble some of it on the price of tin or the Yen depreciating, and invest the rest in any other money-making schemes they can think of. Whereas at Zopa, people who have spare money lend it directly to people who want to borrow. There are no banks in the middle, no huge overheads and no unethical investments. Zopa.com is a new e-business model based which is based on C2C (Consumer-To-Consumer) business model where borrowers borrow money from lenders at interest rate decided by the lenders who receive the interest. It allows people who want to lend their money to be matched with those who want to borrow. Zopa charges a nominal fee out of the borrower‟s loan amount and lenders amount. It acts as a middle-man between the two parties. It targets customers who are sick of banks. Zopa uses the credit reference agencies Call credit and Equifax to check borrower‟s credentials, to prevent people with bad credit history and to avoid problems between lenders and bad debtors.
The Zopa operating model:
People join Zopa online either as borrower or lender. They have to register with the Zopa, onceregistered; lenders could lend money to a pool of the lenders grouped together because of similarcredits and desired term for loan. Zopa assesses the credibility of the borrowers through creditreference agencies based ratings. The method of assessing is similar to those of U.K. retail banksand other lenders. Services is offered to only those who has attained a credit rating of A*-, A-, B-or C-. The
Case Study on ZOPA.COM
2013
company also checks and verifies for identities of all lenders and borrowers by thehelp of the identity checking agency. Again, the ability of each borrower to repay is checked individually by the company‟s own team of underwriters access to the Zopa‟s own market which includes four lending categories A*, A, B, and C by loan term.
What do you get for your money?
Making loans happen
The website is safe, secure and easy to use, and is open to lenders and borrowers 24 hours a day
We match offers made by lenders to loan applications made by borrowers
We take care of the contractual side of things between lenders and borrowers, so you don't have to deal with endless paperwork and legal documents
We distribute the money between parties
Making things safe
We use a company called Equifax to do an identity check on all potential lenders and borrowers
Everyone looking to borrow is credit-checked and risk-assessed. Anyone who we feel is not creditworthy will be prevented from borrowing at Zopa
People we're happy to let borrow at Zopa are put into either the A*, A, or B market. This allows borrowers to get a rate that's right for them, and means lenders can manage their risk level.
We diversify risk by spreading lenders' money across a range of borrowers. The amount lent to any one borrower is automatically set to £10, meaning a loanbook of £2000 will be split across 200 borrowers.
Our underwriters individually assess each borrower's ability to repay before any loans are approved
A collections agency chases any missed payments on each lender's behalf. This is exactly the same process that banks and other financial institutions use
As thorough as we are, we always respect our members' privacy.
Making it worthwhile for lenders
Lenders get a whole new asset class. It isn't a savings account, it isn't an investment and it's independent from anything else in your portfolio
Lenders can choose their rates and loan length, and whether they want to lend in the A*, A or B markets.
We provide information – including market data and expected levels of bad debt – to help lenders choose their terms.
Case Study on ZOPA.COM
2013
Making Zopa work
Behind Zopa is a dedicated, passionate team of people who have done this sort of thing before
Our customer service team is only an email away
Our underwriting team comprises real live people (rather than just a bank of computers) who look at every borrowing application on an individual basis. They're highly trained and very, very good at what they do
Our technology team are constantly looking for ways to improve the site. It's good already, but we're going to keep improving it and innovating
Our marketing team works hard to spread the word about Zopa and actively seeks out lenders and quality borrowers. Because the more people there are at Zopa, the more people there are to lend to and borrow from – and the better it is for everyone.
2013
Case Study on ZOPA.COM Business Model
So that the Zopa marketplace works smoothly, we've put a series of checks and balances in place. This is how it works:
We look at the credit scores of people looking to borrow and work out whether they fit into the A*, A or B market. If they're none of these, then Zopa's not for them.
Lenders make lending offers - 'I'd like to lend this much to A-rated borrowers for this long and at this rate.'
Borrowers size up the rates offered to them, and snap up the ones they like the look of. If they don't like the rates today, they can come back tomorrow to see if things have changed.
To reduce any risk, Zopa lenders only lend small chunks to individual borrowers. The amount lent to any one borrower is automatically set to £10, meaning a loanbook of £2000 will be split across 200 borrowers.
Borrowers enter into legally binding contracts with their lenders.
Borrowers repay monthly by direct debit. If any repayments are missed, a collections agency uses the same recovery process that the high street banks use.
Zopa earns money by charging borrowers a borrowing fee upon approval and lenders a 1% annual lender fee.
And everyone's happy - lenders get great returns, borrowers get great rates, and there's not a bank or a bank manager in sight.
Case Study on ZOPA.COM
Website Snapshots:
2013
