The British firm Zopa.com is coming; however, it's not by land or sea, it's by the internet.
We'll cover their U.S. invasion toward the end of the article, but first let's discuss what Zopa.com is.
Zopa.com bills itself as the worlds first lending and borrowing marketplace. It works by matching up lenders to borrowers. Their pitch is that by cutting out the middleman (banks) lenders can get a better return on their investment and borrowers can get a cheaper loan rate than they would have through traditional banks. I suppose that Zopa.com does not consider themselves to be middlemen.
According to their website, Zopa is a term taken from business theory. It stands for Zone of Possible Agreement and is the overlap between one person's bottom line (the lowest they're prepared to get for something) and another person's top line (the most they're prepared to give for something). It's the way people negotiate. From buying a car or getting a mortgage to a teenager negotiating with parents about staying out late, if there's no Zopa, there's no deal.
The firm has attracted over 90,000 participants to date, and since their founding in March of 2005 has facilitated millions of pounds in lending transactions. (As of the writing of this article $1 US = £1.90 GBP).
The website works by ranking accepted borrowers into one of three credit risk categories: type A, B, and C (they plan to participate in the sub-prime market with categories D, E, & F in the future). Lenders can offer their money to any or all categories at any rate of interest for a set period of between six months and five years. Every loan offer goes into one marketplace that reflects the different loan maturities for the specific borrower type. Participants can borrow up to £15,000 and are matched automatically with offers in their marketplace that meet their criteria. If a lender's loan rate is too high, there will be no takers and the money will simply sit there earning the 3.5% paid by Zopa.
Individual lenders can offer up to £25,000 without regulatory licensure by British authorities. Amounts over £25,000 require the lender to obtain a consumer credit license - which Zopa helps the lender obtain. Lenders' investments in excess of £500 are distributed among at least 50 different borrowers to provide diversification and mitigate credit risk. Deposits of less than £500 are distributed in £10 blocks. And, lenders can fund the transaction within an hour using a debit card from their existing bank.
Lenders and borrowers enter a legally binding contract with each other and Zopa manages the collection of monthly repayments. Zopa performs the same credit checks as banks, using Experian and Equifax, and also checks things such as the borrowers' e-bay profile, if they have one, to determine if the borrower is a good credit risk.
Zopa also uses the same recovery processes that banks use. Zopa covers its lenders for any fraud or identity theft risk, but beyond that the credit risk is on the lender. Since its inception, the default rate on loans has been only 0.05%, although Zopa advises its lenders to anticipate a default rate of between 1.3% and 3%, depending on the category of borrower they are lending to.
Zopa makes its money by charging a fee on both sides of the transaction - 0.5% to the lender and 0.5% to the borrower.
Now they are coming to the U.S.
Zopa has raised $15 million for their U.S. expansion through venture capital investors (Benchmark, which initially funded e-bay, provided initial funding for Zopa). With offices in San Francisco, they are preparing to roll out their service here within the next 12 months. Zopa has also hired the head of consumer credit from a large west coast bank to head up their credit department.
A U.S. based firm, Prosper.com, offers to match borrowers and lenders currently. Zopa takes the person-to-person lending model one step further by taking on an enhanced underwriting role and diversifying all loans across multiple borrowers - both of which are features that simplify the process and reduce the risk for the lender.
Zopa's marketing has a decidedly anti-bank twist with phrases like “Because we live in an age when 9-5 isn't the be-all-and-end-all, but banks still think it is” scattered throughout their web site. (They obviously have not seen the schedules of the bankers I know).
Zopa and its brethren are but one example of how technology allows for competition that was unimaginable only a few years ago. This same technology allows for banks to create entire new markets for themselves.
What innovative ideas does your bank have? Do you know how you will compete?
Robert Mendez is a former banker and is president of BancPartner Group. He can be reached at rmendez@bancpartner.com or at 405-702-1425.