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Social lending: from baby to child

Zopa announced results this week that showed lending had risen 140 percent year on year.

In short, Zopa offers a lean and mean, razor thin margin system for loans.  As an lender, I enter Zopa and place an amount – let’s say
$10,000 – in the system. Zopa then spreads that loan
across a range of borrowers who I select as being appropriate for my money.

The beauty of the system is two-fold.

First, it offers great investment returns and borrowing rates, because it works on razor thin margins. The Zopa rates today offer up to 12% on investments per annum if you are willing to take on board higher risk borrowers.

Equally, it offers loans as low as 8% for lower risk borrowers. Compare that to the less than 4% on savings and typical start rates of 12% on laons and you can see why Zopa becomes attractive.

As mentioned, it also manages the risk of lending on your behalf.

This means that it spreads the risks of your loan across many borrowers, and uses credit rating agencies like Experian and Equifax to work out who is a higher risk or lower risk borrower.

The second part is the beauty of the system though. If I am a borrower, I can see who I’m borrowing from. Similarly, if I am a lender, I can see who I’m lending to. That’s why it’s called social lending.

The fact that I’m in hock to someone I now know and can see makes the system a dependable ecosystem, with less than 2% of loans in default, which is far better than traditional systems.

So, you have something that works, which is why Zopa has been copied worldwide with Smava, Boober and others in Europe; Prosper, Kiva and the Lending Club in the USA; ppdai in China; and many more.

Are they making money?

Not really.

Most of these fledglings are just learning to fly, but Zopa did announce yesterday that business was up 140% year-on-year. In practice, that still means only £35 million of lending however which, for a business that’s as many months old working hand-to-mouth is not a lot.

In fact it barely covers expenses.

But hand to mouth can soon change into a feast.

A decade ago we all thought that PayPal was irrelevant, and yet today PayPal has over 70 million active users in over 200 countries processing billions of dollars of transactions.

Is that irrelevant?

No.

Equally, Facebook went from no users to 150 million in the same time as Zopa has been around.

Twitter has gone from no users to 10 million in as many months.

This again illustrates the new economics of the world and of finance.

A few bright minds with a server can launch a brilliant business overnight for virtually no cost.

So don’t dismiss Zopa too easily as today’s minnow may be tomorrow’s gorilla.

This is particularly true when the banking system is broken, turning away prime and subprime and offering pensioners and savers zero returns on their investments.

In fact, if you consider Zopa's growth of 140 percent in the last year, is this because their model finally works or something else?

I think it's the something else.

It’s that their model has finally been awoken thanks to the banking system being broken and loans being harder to get than Viagra in a monastery.

In other words, the fact that banks are not lending loosely, as they were, or offering decent savings rates, as they did, is pushing customers straight into the hands of the social lending platforms.

As a result, watch out for social lending … and also watch out for social saving, social insurance, social mortgages and more too.

After all, social lending is just the start.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Chris
    Nice post. However, as a co-founder and Zopa’s former General Counsel, I feel obliged to point out that Zopa lenders aren’t “investors”, nor does Zopa manage lenders’ money on their behalf. Lenders set the amount they’re prepared to lend, the rate at which they’re prepared to lend at, having made their own assessment of potential bad debt and specify the type and number of borrowers they want to lend to. They – along with borrowers – agree the basis on which the system works, including how money is paid by borrowers and distributed to lenders via a segregated bank account. Lenders remain in day to day control of the management of their money, right through to how effective the collections process is – unlike their money in the bank or in an investment fund.
    User control, openness, fairness and transparency – along with appropriately lean yet adequate and sustainable margins on Zopa’s role that leave most of the “spread” with lenders and borrowers – distinguish Zopa from traditional financial services.
    Best
    SDJ

  • Chris Skinner

    Apologies Simon if my use of the term ‘investor’ rather than ‘lender’ is out-of-kilter.
    I must admit that having been involved with Zopa since inception (see http://www.fsclub.co.uk/events-past-2005.cfm February 2005 Richard Duvall presentation), the service was presented to me as an investment opportunity with this ‘managed by Zopa’ bit being the positioning of you guys managing the credit rating etc.
    I agree that, in clarification, the ‘community’ of Zopa does a lot more proactive management.
    This clip is one I use a lot which I think explains the model well:



    Chris

  • Great post Chris.
    I agree that more social finance models will quickly emerge – there are several en route to market.
    Exciting times
    James