The Bankwatch

Tracking the consumer evolution of financial services

Zopa is not a Social Lender, and why that matters

Back in June, Zopa was voted “Best Internet Project” by The Banker Technology Awards, 2007 and I posted about it here.  I was a little sceptical at the time, of the award being judged by people such as the CEO of Lloyds, HSBC, and CitiBank, and this quote:

The judges particularly liked the fact that with just 25 staff it was
able to provide a seamless customer experience. Using a discussion
board and a blog
it is able to listen and learn from its members,
providing an innovative and more efficient marketing model. [emphasis mine]

So, for other reasons, i was doing a bit of analysis that included a fresh and closer look at Zopa.  I have two conclusions.  Zopa is not social lending, nor is it a social network, and here is why.

Social Network:  Lets begin with the above quote about the discussion board, and blog.  The discussion board is an off the shelf product by Invision.  it is not integrated with Zopa, and has little activity as far as I can tell.  There are about 7,000 posts there, which can be compared to Prosper with ~250,000 posts over a similar timeframe.  But what amazed me, is the lack of integration.  Even though I am registered with Zopa, I had to register again to gain access to the board, and the board did not recognise me as a registered member.  Without the direct connection between borrower and lender acitivity within Zopa, and their comments, the learning referred to in the above quote is minimal at best.  More importantly, Zopa is not developing basics for meaningful connections between members, that provide something of the viral effects one sees in social networks.

Social Lending:  This may be the more controversial point.  When discussing the socal finance space, names such as Prosper, Zopa, and CircleLending are often mentioned in the same sentence.  But while each has their own distinctiveness, there is a dramatic difference between Zopa and the others, that I believe places them in a different category.  Incidentally I am not questioning Zopa’s novel business model.  Its just not a valid comparable when assessing the merits of social lending. 

In Zopa Borrowers are categorised into what Zopa call credit markets.  Lenders choose one or more credit markets, and that is the extent of their involvement.  Zopa match lender money with borrower loans, and Zopa applies the diversification criteria based on Zopa’s interpretation of credit risk.  The borrowing and investing process is mechanical, and quite impersonal.

Social lending would by defintion require social interaction between borrowers and lenders at the time of the transaction.  Anything less is an online service from which people can borrow money, or people can invest money.

Relevance to Bankwatch:
I see two key differentiators between social finance, and traditional lending and borrowing.  These are critical elements, that define the new model.  Anything less would by definition, be more of a tweak to traditional banking.

1) market driven rates:

The interest rate environment in a true social lender is determined by market forces, between lenders and borrowers, and auction is one way to achieve that environment.  Zopa rates are defined by Zopa.

2) borrower and lender democracy:

Traditional borrowing has a fairly paternalistic feel to it, with the Borrower approaching the lender and “applying” for a loan.  They may be accepted or turned down.  Zopa is no different in that respect.

Social lending provides a more with much greater lender and borrower interaction, and is more democratic.  This interaction with a many (lenders) to one (borrower) and the discussion of the loan provides a more balanced relationship between them.  In fact that discussion broadens the discussion into a variety of subjective and qualitative factors which are closer to the nature of discussion which a Banker would consider during a one on one interview.  Those discussion elements form a view of the borrower that is deeper than only the credit rating, and form part of a Bankers judgment. 

Social Finance takes that bankers judgement and in essence allows the market to apply that judgment through an online exchange.  The extent that the exchange provides support for that judgement will evolve and become competitive differentiators between social lenders.

However in order to be considered a social lender in the first place, you must have that interaction at the point of lending and borrowing, and Zopa does not.  That interaction is essential to provide scale, and market efficiency, through better, more (financially) educated, and informed lenders and borrowers.  Anything less looks more like traditional online banking.

So as stated earlier, nothing at all wrong with the Zopa model, its just different than we might think.

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Written by Colin Henderson

July 16, 2007 at 12:12

7 Responses

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  1. I may be speaking from ignorance here not knowing much about Zopa but lending judgement is a key factor with experience in lending crucial. I wonder where that is in the model and the only way to know this is to see the write-off and delinquency rates. Is that posted on Zopa? There is a statement that a collections agency pursues the delinquent but no notice as to cost which is typically 40% of the face value of the loan. What you say about interaction is key. They say human communicate up to 60% by facial expressions and voice. On-line banking tends to limit those key areas.


    July 16, 2007 at 14:10

  2. Zopa are moving towards greater transparency on bad debts. This discussion board topic is the latest, with a link to real stats:


    July 16, 2007 at 16:03

  3. Interesting analysis, but 3 points to consider further.

    First, the point about social lending is that consumers are in control, rather than financial institutions. It’s another example of Web 2.0 at work, the user-generated content being specific rates, amounts, loan terms and so on, which users input, as well as requests for functionality they want to see and numerous other issues that do get debated, although the proof is in the operation of the market itself. There wasn’t anymore “discussion” than that in the straightforward open outcry markets for anything from fish to commodities.

    Second, Zopa does not set rates. Zopa lenders specify the rates they’re prepared to accept (along with the amount, term and borrowers they want to lend to) at the time they make their loan offers. The money offered at those rates creates a “supply curve” in each market. When a borrower bids, the matching process collects money from the supply curve, taking the lowest offers first. It works like this to enable lenders to predictably control the number of borrowers they lend to (diversification) – which is key to their ability to control the risk of losing their principal loan amount. Lenders can choose (and change) the number of borrowers to whom they lend their money. Other sites make this critical diversification process manual, and of course some people might like this, even though it’s harder work for them to lend each amount of money to enough people to minimise the risk of losing the principal, as well as get a great return.

    Third, lending and borrowing at Zopa results in a direct, one-to-one loan contract between borrower and lender, to which Zopa itself is not a party. Unlike at, say, Prosper which lends to each borrower, then sells its own loan note to participating investors (hardly what you’d call “lending” at all, but it’s one way of getting money from one person to another, I guess).

    I hope this is helpful. We’d love to hear more of your thoughts when you have the time!

    Simon Deane-Johns

    July 17, 2007 at 05:39

  4. @Simon … thanks for stopping by, and taking the time to comment. I appreciate the clarification on the mechanics of the setting of interest rates.

    As I tried to say in the post, I do not question the validity of the Zopa model, but rather wanted to further develop the definition of social lending.

    For me the key in the evolution of social lending, lies in the lender borrower personal interaction before, during and after the transaction. That interaction could occur at any or all of those three times, and that is the evolution of social finance/ computing, that I see.

    I would add that interaction must be behind a certain amount of anonymity due to the sensitivity of personal financial information, and all these factors contribute to the magic that we are all striving to achieve.

    Again, thanks for the commentary, and deepening the conversation.


    July 17, 2007 at 10:03

  5. […] Which banks understand the web lifestyle? ← Zopa is not a Social Lender, and why that matters […]

  6. Hi Colin,

    Interesting entry interesting; looking at the differences rather than assuming similarities is a worthwhile exercise in the fledgling stage of P2P lending. I am also rather satisfied with Simon’s response.

    What I do not find addressed is “why it matters”, which you put in your title. In addition, if borrowers -lenders find each other directly, although perhaps more social, it is not necessarily more democratic – and, where did that parameter come from in the discussion of social lending? Better to use the term P2P lending for now, which is perhaps a more neutral word?

    I wrote an entry on the ING blog about the zopa/prosper P2P dynamics and their equivalent in the insurance industry. It does not exist, but I described one example model which I called PoolSurance for now and, having said all the above, you made me wonder what matters to customers in the PoolSurance context. Formal peer relationships, or social interactions that could come from that, or the “democratic” aspects of peoples deciding by themselves (through pooling) what “rates” they have to pay? I would not be surprised if to each individual it would mean something else.

  7. @David … yes, I was not clear enough on the ‘why it matters’ and did a subsequent post. Probably still not there….. in simple terms, I see the social aspect as relating to direct interaction, whereas that does not exist in traditional financial services, nor in Zopa.

    Interesting how the concepts might apply within insurance though …


    July 20, 2007 at 10:55

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