Zopa borrowing/lending exhange?

If there is a margin in it for lenders then why don't Zopa just lend the money themselves and cut out the lender?

I'd also add that Zopa are charging a 1% commission which thinking about it makes the borrowing rate for borrowers less competitive and the default chances even higher.

The whole thing makes no sense to me. The article in today's Financial Mail says that borrowers have to earn at least £25K per year. Surely this then excludes the most lucrative end of the credit market which is lending to low income people at high rates.

The "spin" in the Financial Mail has borrowers saying that they borrowed through Zopa for essentialy emotive reasons such as customer service in banks is poor but the people at Zopa are nice and helpful. This really is flimsy wishy washy stuff.

It also quotes Zopa as saying that borrowers are less likely to default on loans from other individuals but provides no evidence of this.

The maths just don't add up to this thing working. I think the whole business model is floored as there simply isn't enough margin in it.

"Zopa is aiming to offer banking products on a human scale, offering an alternative to a world characterised by automated systems and mega profits."
The Independent 1.10.05

This quote from Zopa's own web site does kind of say that the product is aimed more at borrowers than lenders.

Here is a profile from their web site of some typical lenders and borrowers:
It looks very much like a selection of posh/middle class people who drink Pimms and go to Tuscany on their hols. There was also a borrower called Rupert in the Mail article. Hardly a cross section of today's debt laden chav Britain.


Simon - Lender

Simon lives near Henley-on-Thames in Berkshire and is the Director of Consulting in a London based management consultancy. He says he plays golf very badly, but watches rugby very well. He got married last autumn.

"We work very hard, but then we really enjoy spending it. We work so that we can live the way we want to. Is that a cop out?"

"Zopa was something different - and its ethics appeared to fit with mine. At this stage it is a toe in the water. My income varies as a lot of it is based on the performance of the company. I put some of last quarters bonus onto the market to see what happens. If I like the experience then I might put all of next quarters onto it.

"The Zopa difference was the clarity of allowing me two markets. I could get a lower rate but with less risk and vice-versa. I guess this is possible with different 'at risk' funds from banks, but they appear to be locked in for longer and quite a bit more complicated. It's early days, but I also enjoy going onto the market to see if my money has been taken."

"I also think that the banks don't really understand a really key group of people. I work around a lot of 'mobile professional workers' who have variable incomes, often are directors of small independent companies and they don't really tick the boxes required. Try asking the guy sat behind me what his annual salary is going to be - he has no idea and most of it will be in dividend payments anyway. Banks don't get that. How many bank managers have worked like that?





David - Lender

David is 64 years old and lives in the West Midlands. He has two grown up children. A retired civil servant, David loves keeping active and fit - gardening, golf and walking. He has always sought security and greatly values stability - for example he was a career civil servant. He likes to keep on top of his finances. He received a lump sum from an early retirement package and has income sources from a number of pension plans - he feels financially secure.

"Banks have become a lot more competitive over the last 10 year - resulting in them becoming a lots less customer-friendly. They have sought to become more efficient - but actually their service levels have declined as they have cut out direct customer contact. It irritates me that even though they hold onto a substantial amount of money I can't get to speak to someone easily who knows what they are talking about."

"I heard about Zopa through a friend. It's a great idea. It makes sense - after all there is a huge gap between what people borrow at and what I can get from a savings account. I can get a better return on my spare cash by cutting out the banks profits - and so can the person borrowing. I thought I would have a dabble, explore it and see if it really works."

"The website is friendly and the contact that I have had with Zopa has impressed me. Zopa is friendly and genuinely concerned about their Members. It's honest. They keep people informed - and the communications are sensible and mature. With some financial organisations I feel that I am being dealt with as if I were an uninformed adolescent"

"Lending at Zopa also felt different. It's really easy to use - and I found myself a little more involved - looking regularly to see who I had lent too."

"I've also been really pleased to see how stringently Zopa vets borrowers. They don't allow my money to be lent to just anyone. I understand they have not had one missed payment from borrowers, and this gives me great confidence."




Nick - Lender

Nick is 36 and single. He rents his home in Wokingham from where he runs his own computer consultancy. He's arguably a strategist - loving poker, chess and fishing.

"Banks are a necessary service - but are a little complacent because they know people won't go through the hassle of switching. They also charge too much - particularly on the business side."

"I heard about Zopa from the 'Money Saving Expert', Martin Lewis. Zopa is a fabulous and really rather obvious idea. It exploits the rather large gap between the rate at which people borrow and the rate at which they can save. I've got a lump sum in the bank and I am not happy with the returns. At Zopa I can get a better return on my spare cash."

"Potentially in the future, I might use my good credit rating to borrow and then lend back to people with a worse credit rating. I already use Betfair, and Zopa is a similar idea. It's appealing."

"I also like the fact I got to see my credit rating - even though I was interested in being a lender. At the moment I am just trying Zopa - to see if it really works. If it does, as seems to be, then I will put more money in."





Rebecca - Borrower

Rebecca is 36 and lives in Ladbroke Grove with her partner, Simon. She's in the process of fulfilling a lifelong aspiration and setting up her own catering business, 'Duckie's', having trained as a chef at Leith's 6 years ago. Previously she worked as a brand planner in an advertising agency. Since deciding to leave the corporate world, she's been doing freelance strategy work for agencies and brand consultancies to maintain an income level whilst getting her new business off the ground.

"There's a big movement of 30-somethings moving out of corporate life. I've got a much richer life now, even though I've got less income"

"I think Zopa's brilliant. The borrowing process was so easy. I loathe banks. It makes me very angry how much gets creamed off any product and it rocks me to my soul how much I spend on interest….it feels so greedy"

"I felt there was a bit of a stigma about self-employment and its 'lumpy income' levels. I was really scared about my mortgage and not being able to renew my fixed rate, even though I had money in the bank. I was worried about getting all the proof of projected income that people told me I'd need. I was worried that people wouldn't think I was as 'worthy' as someone who was on PAYE. And yet, I handle my money better than ever now."

Rebecca says that more and more young graduates already seem to be doing what she's doing and leaving corporate life much earlier. Two colleagues of hers started off in blue chip careers, reached their mid-twenties and decided that the corporate life wasn't for them. One has set up her own business making high fashion maternity bras. The other has a business importing jeans.

"People want to be more creative. We are at the end of a traditional phase. The paradigm has changed"

BACK TO TOP



James - Borrower

James is 34 and single - he's moved homes 5 times in the last 3 years and is about to move again. 4 years ago, he left a very well paid job with a big-4 consulting firm because he didn't like big companies; since then he's been a freelance consultant either working for himself or working as part of the management team of a start-up company; sometimes he is very well paid, sometimes he's not paid at all; he had a business go bad 4 years ago and that created something of a credit history.

"I find my bank very helpful when I'm loaded and very unhelpful when I need help. I'm not rich but I get very well paid when I do get paid and I don't get paid all the time. When I need a loan, they can't give it to me - I'd like a line of credit that I can use at any time, but they won't give it to me. I've known the bank manager personally since I came to the UK - I know his kids - and despite the fact that he's a senior and highly experienced member of the bank and very intuitive about me, he doesn't seem to be able to make decisions; I think that's a bit sad."

"I think Zopa is a brilliant idea. I like the idea that a private individual is helping me out with a loan and I'm helping them out by paying them interest (rather than my interest becoming part of another record payout to shareholders). I find banks very dehumanising and Zopa very humanising."

"I've borrowed £5,000 to help me move house and to pay off some minor loans I made against my business. Zopa have offered me a credit facility so that I can borrow money when I need it and pay it off when I've got a big consulting contract'.





Michael - Borrower

Michael set up the global brand and marketing agency Wolff Olins with Wally Olins in 1965. Now he's a freelance consultant advising leading companies on their brand strategies. Michael is 72, married, with 7 kids and 2 cats.

Michael's income is lumpy as it depends on what consulting work he's got on the go. He had an unexpected sudden expense and borrowed some money through Zopa to pay for it.

"I've borrowed £5,000 to help me pay for some work to deal with subsidence in my garden. I got what seems to me to be a very good rate, and I can pay if off whenever I want. And I love it that the money comes from real people; it feels like they are investing in my garden"

"Zopa is a simple and practical idea. It makes sense. It has a very different feel from a bank. There’s an idea behind it – a modern idea – which there isn’t with a bank. Zopa feels even-handed. You don’t feel that with a bank – the bank’s set up to always win."

Thanks Grumbler. Read through these and the summary is basically that its not too bad for a borrower but silly to consider as a lender.

I also posted a note to Martin Lewis telling him that Zopa are using him to promote their web site when he is actually saying that he doesn't like the concept!

I can see Zopa ultimately just lending the money themselves as default rates start to kick in and lenders gradually realise that they are no better off and have to fill in a tax return.

I can't believe just how badly thought out this idea is. I guess the hope for the founders is that once they build up a big database of users they will then probably cross sell other stuff to them.

Yeah, he'll pay back his own debt 100% at say 5% and get a 2% default on the money he has lent at 7% making a net profit of zero.

Just also found this on their website under the heading of "Zopa for worriers", a piece by them trying to reassure worried potential lenders. It says:

"Worriers
Person-to-person lending and borrowing. Uh-oh. Alarm bells.

How do you know you're not lending to a fraud? What happens if your borrower goes broke? What happens if Zopa goes into receivership tomorrow taking you and your money with it?

OK. Let's take it point by point.

First of all, frauds are eliminated by Zopa's credit check. All Zopa members need to get through a quick but unforgiving questionnaire that will show up a track-record of fraud or anything that even hints at it.

Secondly, if your borrower goes broke, it's clearly not an ideal situation. That's why at Zopa you lend to a minimum of fifty borrowers to spread the risk. And if any of those borrowers default, then Zopa will chase the payment for you with the same debt-chasing parties that banks use.

And thirdly, Zopa's not going down. It's got more than 10,000 members and has backing from Benchmark, the venture capitalists behind eBay. And they're not worried, not in the slightest. "

The last paragraph is really reassuring! Perhaps it should have the word yet added to it. If Zopa did "go down", would borrowers have anyone to pay the money back via and if not would they (the borrowers) simply just rub their hands together with glee?

I will watch this whole Zopa venture with interest (if you excuse the pun!) over the next few months as I feel there are many potential banana skins.

In my opinion it could be a huge risk as a lender on Zopa purely because Zopa are effectively acting as brokers and when your funds are gone they are gone. Your funds can't be ringfenced as they are in the ownership of a third party.