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.
Zopa (Zone of Possible Agreement): the new company is an amalgam of a number of business philosophies. It is where eBay meets credit unions by way of easyJet, the peer-to-peer movement and Betfair. You can lend up to £25,000 through Zopa and your money is divided among 50 borrowers (who have already been screened to ensure they have good credit ratings) to minimise risks of default. (http://www.guardian.co.uk/economicdispatch/story/0,12498,1435623,00.html}
"Here's the way the world works (and it must be right because it's been like this for hundreds of years...) People who have spare money give it to a bank. Banks then do whatever they like with it. Some of it they lend to people who need to borrow. Some of it they give to their shareholders. Some of it they gamble on the price of tin, or the dollar going down, or whether there'll be floods in Asia. Banks make lots of money from all this, a fraction of which they give back to their customers. Zopa though lets people who have spare money to lend it directly to people, like them, who want to borrow it. No bank in the middle, no huge overheads, no unethical investments. To minimise any risk, the money each lender puts in is spread amongst at least 50 borrowers (and likewise each borrower gets their money from a number of different lenders). Zopa is, therefore, for people who want to be a part of something new. Who want to join a community of like-minded individuals and lend to them and borrow from them in a trusting but secure way.
Zopa is for people who are looking for a better rate of return. Zopa's interest rates aren't squeezed by middlemen (the banks) because there are no middlemen - that's the Zopa idea.
Zopa is for creditworthy people who earn money in new ways, in ways that banks don't always recognise. People who are self employed, people who have peaks and troughs to their income, people who would be invisible to a bank's credit rating system but are seen and validated by Zopa's." (http://www.zopa.com/ZopaWeb/)
By Open Business at http://www.openbusiness.cc/2007/05/20/the-emergent-field-of-p2p-finance/
"Who: Zopa was set up by many of the team who launched Egg, and is backed by Benchmark Capital, (who backed eBay), Wellington Partners, Bessemer Venture Partners (the VC firm which backed Skype), Tim Draper and The Rowland Family.
Borrowers: People can borrow from £1000 to £15000 under contracts of £10 each, in multiples of £100. Borrowers must submit to being credit-checked by Equifax, and to having the results made publicly available on their profile. On the basis of this and other information collected during registration, they are assigned to one of four different markets (A*, A, B and C). In the less ‘credit-worthy’ markets, borrowers will pay significantly higher interest rates, to account for the statistically greater ‘bad debt’ rate. The ‘market rate’ for each of the four classes of borrower is determined globally and not on an individual basis. The funds are then reserved and after more checks with credit reference agencies the loan is approved by Zopa. The money is then paid directly into the borrower’s bank account, often within a few days. Any defaults or late payments will affect a borrower’s credit rating, as with a standard bank loan.
Lenders: Zopa lenders first transfer the amount they wish to lend into their Zopa holding account. This is a segregated account which is operated by Zopa and specified as containing money owned by Zopa members.
Zopa lenders can lend any amount from £10 to upwards of £25,000. Offers are made in amounts of £10 to each borrower, although the highest number of contracts any one borrower can have with a single lender as a result of his or her successful bids is 20. To lend more than £25,000 lenders need to first hold a Consumer Credit Licence. Lenders can choose their rates and loan lengths, and whether they want to lend in the A*, A, B or C markets. Zopa provide information - including market data and expected levels of bad debt - to help lenders choose their terms. Lenders will also earn 4.75% interest while they’re waiting for their money to be lent out. Zopa estimate that lenders should make a 6-7% return per year if all the money repaid is lent out again (an average bad debt of 4% is already taken into account). This is 1% to 2% higher than the current best savings account. Returns are approaching the level of long term stock market returns (which are around 8%) but are more predictable.
Community: Members who have not lent or borrowed with each other are only identified on the site by their nicknames. If you have lent money, you will find out the real names (but not any of their contact details) of your borrowers on the quarterly statement. If you have borrowed money, you will see the real names (but not any of the contact details) of your lenders on your loan contract note. There is not a great deal of engagement within Zopa on a community or social level, as the primary aim is to save lenders and borrowers money by ‘cutting out the middleman’, not to create a community of lenders and borrowers.
Typical transaction: Zopa is the most classical ‘financial instrument’ of the emergent P2P finance services, and the typical transactions reflect that: relatively anonymous, diversified holdings in widely ranging amounts.
Business model: Zopa makes money by charging lenders and borrowers a fee. It charges borrowers 0.5% of their loan amount and lenders a 0.5% annual service fee. It also earns money through selling payment protection insurance to borrowers who want it (they have a commission based deal with Pinnacle Insurance), and through introducing people who can’t pass Zopa’s credit checking regime to other loan providers (again on commission through ‘preferred’ suppliers). Zopa has received credit licenses from the Office of Fair Trading. It is authorised and regulated by the Financial Services Authority only in respect of its insurance mediation activities, although it must also comply with the “Higher Level Standards” that apply to all firms authorised and regulated by the FSA.
Establishing trust: Everyone looking to borrow is credit-checked and risk-assessed by Equifax, and people judged not credit-worthy will be prevented from borrowing at Zopa. The rest are put into either the A*, A, B or C market. This allows borrowers to “get a rate that’s right for them”, and means lenders can manage their risk level. Lenders are encouraged to diversify risk by spreading money across a range of borrowers. When a person lends £500 or more, her money is spread across at least 50 borrowers. A collections agency chases missed payments on each lender’s behalf. Zopa’s model is close to that used by banks and other financial institutions. In the event of a total business failure, the loan agreements still stand because Zopa is not a party to any loan contracts; it only provides the mechanism for agreeing them. The repayments will continue to be collected by a collections agency that is appointed by Zopa lenders to collect missed payments. The costs of collections activity will not vary if Zopa has failed. Zopa also have a number of online and offline procedures to catch unusual or suspicious behaviour on the site and can immediately suspend the membership of anyone whose intentions do not look completely honourable. These procedures are not elaborated.
Performance: Zopa has been relatively successful, and has recently secured an additional $12.9m of investment to expand its business in the UK and to launch in the US.
Problems or limitations: The forced diversification and lack of meaningful contact between lender and borrower may mean that users could feel somewhat estranged from one another. Lenders know the ‘class’ of borrower (e.g. A*, B) but they cannot lend more than £200 to any one borrower. The bond is ultimately legal and not social — the devices for reclaiming money are drawn from the banking industry, such as risk evaluation and collection agencies. The potential social aspects of the service are not exploited to the same extent as they are in competing services (such as Prosper) since personal interaction is not of great importance to the model." (http://www.openbusiness.cc/2007/05/20/the-emergent-field-of-p2p-finance/)
Michael Hulme and Collete Wright:
"Zopa offers a smarter, fairer way to do money – and just the kind of refreshing alternative that the UK public deserves after years of ill-treatment by the banks. The ironic thing is that although Zopa is the first online lending and borrowing community, it is in fact no different to what’s been happening in families and communities for centuries all around the world. Zopa has simply successfully harnessed the power of those types of relationships’ (James Alexander, COO at Zopa, as cited in Press Release, 7 July 2006).
Zopa was launched in March 2005 by several people with previous experience in financial services. It is the first person to person lending and borrowing community in the UK (Press Release, 7 July 2006). Zopa has over 85,000 members (Zopa, 2006), and since its launch in March 2005, Zopa has secured for its lenders a gross return of 6.8%, with bad debt at 0.05% (Press Release, 5 July 2006). Zopa is currently headed by a series of people with vast experience working in the financial services sector; including Richard Duvall, Zopa Chief Executive Officer who led the team who created Egg; James Alexander, Zopa Chief Financial Officer who was the Strategy Director of Egg; Tim Parlett, Zopa Chief Technology Officer who previously developed JP Morgan’s e-commerce strategy and Karen Why, Zopa Risk Director, previously Risk Director of Consumer Risk at Abbey National.
Furthermore, Zopa is backed by Benchmark Capital, the venture capital firm that supported eBay (Zopa, 2006). Zopa is also based on a similar peer-to-peer model of eBay. Writing about peer to peer lending Goundon claims that Social Lending establishes a model of exchange which is not based on financial gain at the expense of others.
He claims that;
- ‘The traditional models of “I win if you lose” and vice versa no longer apply to every business’ (Goundon, 2005).
Zopa stands for ‘Zone of Possible Agreement’, which means that lenders and borrowers are matched up when the lenders’ desired rate of return meets borrowers’ desired interest rate. Thus, Zopa markets itself on two axes; financial competitiveness and its social and ethical orientation. It claims both to provide consumers with a socially rewarding investment or loan (Ensor, 2006) and to offer a better financial return in comparison with mainstream banks. Johan Brenner of Benchmark Capital claims that Zopa gives a better financial return by about 30% (Brenner, as cited in Press Release, 25 March 2006).
Zopa would claim that by combining a better interest rate to borrowers and a better return for lenders and a more community based approach, Zopa is essentially reinventing a model of friendly societies claiming to provide a more social and ethical financial service closely allied with mutual gain." (http://www.socialfuturesobservatory.co.uk/pdf_download/internetbasedsociallending.pdf)
Zopa and Ethical Finance
Michael Hume and Collette Wright:
"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.
Despite the considerable number of ethical projects and policies in mainstream financial services, people were more likely to relate ethical banking to Zopa rather than mainstream banks. 31% most associated ethical banking with Zopa whilst only 24% most associated ethical banking with mainstream financial services.
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.
Zopa is perceived to offer a fairer financial deal in comparison with mainstream financial services. On average, 65% of Zopa lenders believe that Zopa offer a better rate of return on their investment than mainstream banks. Whilst only 15% of respondents to the survey of general bankers felt that the interest they paid through high street banks accurately reflected their perception of their creditworthiness, 77% of Zopa borrowers felt that the interest they paid through Zopa was fair in terms of their creditworthiness.
Although the financial gain/saving is one of the most important features of Zopa, people are also attracted to using Zopa for more social and altruistic reasons. In describing their most significant motivation for using Zopa, 62% felt that financial gain was the most significant, 56% thought the general interest and innovativeness of Zopa, 33% wanted to use Zopa to diversify their investments and 27% wanted to invest in people rather than institutions.
Overall, people are motivated to use Zopa because the financial return or saving is based on a greater perceived equitability and fairer assessment of individuals’ creditworthiness. This reflects how Social Lending schemes are perceived to be based on principles of ‘good faith’, which value the individual and give the person personal social responsibility. Mainstream financial services tend to be equated with ‘bad faith’ which relies on assuming the worst in the customer and making provisions for it." (http://www.socialfuturesobservatory.co.uk/pdf_download/internetbasedsociallending.pdf)
Risk-Mitigating Strategies at Zopa
"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 minimises 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 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."
So while lending £10,000 to an individual might be a gamble, lending £10 to 1,000 individuals makes the risk much more quantifiable. Because Zopa connects its borrowers and lenders directly, it can offer both parties some excellent interest rates, typically at around 8% APR for a £5,000 loan or investment over three years. Borrowers pay a one-off £100 fee to Zopa, while lenders pay a 1% annual service fee. Some people will always struggle to repay loans, but because each lender typically only lends £10 to each individual borrower, the risk is spread across multiple lenders.
Zopa also minimises defaults by only offering loans to people with excellent credit ratings. "We've had bad debts of less than 0.9% in the six years since we launched, which is way less than any other lender," says Andrews. "Part of it is because I think we built a better system, but another part of it is that people know they're borrowing money from real people and don't want to let them down."
Of course, that could change in future, and it's also possible that Zopa could cease trading – don't expect any bank bail-outs here. However, loan repayments would still be payable as the contracts are with lenders and borrowers directly. An FAQ page (http://tinyurl.com/zopafail) explains how this would be carried out in practice.
Andrews told us how an early inspiration for Zopa was the phenomenal rise of eBay. "There was something slightly anti-establishment about it, bypassing big institutions or big retailers. Something about people power, and something about the power of trust. However, we couldn't replicate an eBay behaviour model because, actually, it's not a great idea to lend money to borrowers on a regular basis; it tends to suggest that they can't afford it.
"We did run [a system where lenders picked individual borrowers] for a little while – a sort of eBay-type listing model where people put up their picture and said what they wanted to borrow the money for. It provided a bit of colour for the website, but we found that adding the emotional cues tended to reduce the efficiency of the transaction. While they might quite like the process, they ended up making worse decisions than if they didn't know that stuff. That was particularly the case [for other peer-to-peer lending services] in the United States where you have lots of pictures of attractive young women looking for loans for really worthy family purposes, unfortunately a disproportionate number of whom went on to default." (http://www.expertreviews.co.uk/general/1290001/peer-to-peer-living-save-money-by-cutting-out-the-middle-man/)
A successful German lending and borrowing experiment, dieborger.de, at http://theage.com.au/articles/2005/03/17/1110913726676.html?oneclick=true
Other Peer to Peer Exchanges and Social Lending, are described here at http://www.wired.com/news/culture/0,1284,66800,00.html
See also P2P Lending