With my peers

[Dave Birch] I went over to the FS Club to hear Forum friend Giles Andrews of Zopa give an update on their progress. He explained that one way of thinking about Zopa is as a bond market for consumers, but one that allows people to get a social return as well as a financial one. What an interesting description. And it was an interesting meeting. I won't quote anyone, because the meeting was held under the Chatham House rule, but rather I will give some general impressions of the discussion...

We all know Zopa as P2P lending, a marketplace for money. It's not that hard to set up a web site, though, so there must be more to it. What makes it work, seeing as their numbers have steadily climbed? Giles gave a few insights: he said, for example, that the core of Zopa's business is their sophisticated credit rating model. I deduce it must be working tolerably well, since their bad debts over the last five years have averaged 70bp.

What I found particularly interesting was the relationship between Zopa and retail banks. In an odd way, the credit crunch came along at the right time for Zopa. Their lending went from £15 million in 2008 to £35 million in 2009 to £75 million this year. It seems to me that as public trust in banks collapsed (along with the interest rates) so more and more people turned to Zopa.

Recently Zopa have been lobbying for regulation of P2P Lending in UK.

[From New Datamonitor report on P2P Lending in the UK has some interesting analysis points « The Bankwatch]

This is true. In fact Giles has said that Zopa think they should be highly regulated and properly supervised. This would be good for them for two reasons: first of all it would create a structure for more competition, and more competition is good for innovation and excellence, and secondly it would further legitimise the P2P sector, thus bringing in more borrowers and lenders. It would also, presumably, bring in more competitors, which would be good for competition.

As someone once said, the economy needs banking but it doesn't need banks. We shouldn't mistake current arrangements for laws of nature.

For the foreseeable future, retail banks will face a weakening of consumer demand. Personal savings rates will remain higher, banks’ balance sheets will shrink, commercial real estate will falter, and tighter regulations of products such as credit cards and overdraft protection will restrict profits. With all this, retail banks can anticipate a lower return on equity than in years past... By 2014, Gen Y will make up the largest segment of the U.S. workforce, and by 2025 it will account for 60 to 70 percent of the employed population... More than any previous generation, this one is shaped by the Internet and ubiquitous connectivity.

[From Six Industries in Search of Survival]

Well, yes. And I might add that the mobile channel will be the most important. But surely there are a couple of success factors around Zopa that will be much harder to copy than some channel integration and social media buzz marketing. First of all, there's a transparency to way that Zopa work: they use twitter as an open customer communication channel and have discussion forums where they actively want customers to highlight problems so that they can get on an fix them. Banks would undoubtedly find the idea of airing dirty laundry in public disconcerting, but if you start off with a transparent model then you never get the dirty laundry people customer help you with the washing (horrible metaphors, must think of something better!) in the first place. But there's also a less tangible aspect to their business: the lenders like to log in and see how their money is doing, so the money becomes (as Marshall McLuhan said) a bridge.

So where could this go. I've been fascinated by Zopa from the start, because it's an example of a new business built in the digital space, a business that simply couldn't exist otherwise, not an electronic version of an existing business and existing business model. I've pondered before about where they might go...

I don't agree... about Facebook becoming a bank -- that is, a heavily regulated credit institution -- but I do agree that it can become a payment institution and... a facilitator of peer-to-peer finance. You can see, for example, that it might make sense for Facebook to buy Zopa. But getting a banking licence? What's the point. Apart from anything else buying a bank is cheaper than employing lawyers to get you a banking licence.

[From Digital Money: Payments & Banking]

However this evolves, Zopa is an instance of one of the building blocks of a reputation economy and I'll continue to regard their trajectory as totemic.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]

Comments

[Colin Henderson]

Wish I had been there Dave. I believe the most poignant comment from Giles was the 'bond market for consumer' comment.

P2P lending has evolved significantly since 2005. P2P is opening up a new asset class for lenders (investors) that was previously only available to banks and credit card companies. This is good for investors.

P2P is also a throw back to traditional lending principles where loans are amortised. If one does the math on credit cards or lines of credit at the minimum payment, the amortisation is somewhere between 20 years and 70+ years. Guess who makes money in that model, and who loses. Not much social equity there.

So at its essence P2P eliminates an expensive and inefficient middle man (bank) and through a trusted and importantly, an efficient platform, offers benefits to both sides of the transaction. These benefits are the more relevant in these next few years we can expect continued consumer de-leveraging.

Zopa are doing a fabulous job in Britain, and I do understand the desire for some regulation with others showing up out of the blue and with hardly the pedigree of Zopa.

[Disclaimer: I am with CommunityLend; a P2P lending platform in Canada.]