Home / Technology / The debate continues about Zopa

The debate continues about Zopa

James Gardner has responded to my post of yesterday, with a well-reasoned argument.

However, he's made some error of numbers by stating that "consumer credit excluding credit cards from May 2008 – May 2009 was
about £2.5 Billion. Let's take the easiest case for critical mass
first, where Zopa achieves just 2.5% of that, or in other words, writes
£625 million pounds of loans in the last year."

James has now corrected his numbers to say that 2.5%
of £2.5 billion is £62.5 million.

Zopa wrote £20 million of lending in
the last year, according to their figures, so they have 1% of lending, according to James.

This means it is not unreasonable to assume critical mass by 2011 based upon James' view that "critical mass usually occurs when somewhere between 2.5% and 16% of a particular target market have adopted an innovation."

However, even then James' figure is incorrect. 

Net new consumer credit lending grew
by only £100 million in June 2009.

If this is true, then net new bank consumer credit lending is running at a rate of £1.2 billion this year.

The entry into critical mass figures that James uses of 2.5% means that Zopa would need to write £30 million of the net new consumer credit lending market place to gain entry into the critical mass stakes in the next year.

Zopa's net new lending grew by £20 million in the last year so, in today's contracted market, they are taking 2% of net new lending. 

If critical mass starts at 2.5% or more, and Zopa already has 1% according to James and 2% according to my figures, then yes, they are starting to become a serious player in the lending market and it would not be unreasonable to expect them to be a key player by 2011 as I stated yesterday.

Equally, I widened the debate yesterday to all social finance and recognise,
now that James has articulated his arguments more fully, that he is purely throwing rocks
at Zopa's strategy, not at other social finance provider's strategies.

So, James and I probably agree that social finance is still a space to watch but, in Zopa's case, he believes they are off-beam.

Zopa's biggest challenge is to get funders for loans to join the
site. Thanks to the credit crisis and lack of savings interest rates,
they are getting this. 

Finally, my comments yesterday about James being a teeth puller and multigeneration criminal are more than appropriate, when you bear in mind that there is a cricket
match taking place at present between England and Australia.

It's called the Ashes, for those uninitiated, and let's just trust that Freddie Flintoff pulls it off (fifth and final game starts tomorrow – the decider)!

UPDATE 13:30 19th August

If you read James's blog post, he tries to put words in my mouth by making it look like I'm saying Zopa's growth rate is "quite remarkable".  I didn't say that Zopa's pace of growth is "quite remarkable" but was quoting from Zopa's blog, as is quite clearly shown in yesterday's post. 

He also makes it look as though all of my comments are solely attributable to Zopa, whereas I wrote a much wider piece about new online social financial services providers of which Zopa is one.  Therefore, comments about how they are "taking off" was part of a long section in my blog post.

The comment was particularly towards SmartyPig, who have surprised me in attracting $150 million of deposits in just 15 months with an estimate of $500 million by the end of this year.  I also reference new hybrid business models such as bank-led social lending from Caja Navarro in Spain.

James use of these comments out of context, which make it appear as though they solely refer to Zopa, is an inaccurate representation of my views therefore.

Finally, for those who are not aware, the late founder of Zopa, Richard Duvall, presented at the Financial Services Club in February 2005, a week before they launched.

Here's his presentation:

and the then CEO, James Alexander, presented at the Club in February 2008 with an update.  Here's his:

UPDATE 23:30 19th AUGUST

I knew that James was wrong when he talked about Zopa's cost base and fee rates, but wanted to check in with the charging model with Zopa before posting more fudge in this debate.

My understanding is that they purely make a revenue out of the fee for an funder against the fee of a borrower, e.g. the razor thin margins I referred to are based upon the 0.5 percent difference between the 8% return on a lender giving money (liquidity if you like) into Zopa versus the 8.5% paid by a borrower. 

Luckily Martin, the original blogger at Zopa's website who started this debate, posted this comment on James's blog which clarifies all:

Hi James, Martin here.

Given the blue touch paper that you have clearly lit here, I find I
can barely keep up with all the different shots that are being fired
back and forward – fun reading though!

As the chap who started this game off with my original post on the
Zopa blog, can I just interject to address a key mistake being made in
some of the assertions…

I disagree with you (and possibly others) that one or more banks
“could kill off Zopa with a price war because Zopa’s pockets aren’t
deep enough”. WRONG! The depth of Zopa’s pockets are virtually
irrelevant because Zopa is not a lender, it is a MARKETPLACE.

Zopa does NOT set the rates. Lenders choose their own rates, and if
borrowers think they are good enough they will take them up. If they
don’t, they won’t. Prices are NOT a function of the depth of Zopa’s
pockets.

If banks wanted to destroy Zopa through a price war, they would have
to undercut all the people lending on Zopa by offering rates MUCH lower
than they are now. Or they would need to offer would-be lenders on Zopa
hugely better rates on cash savings to remove the attraction of lending
on Zopa.

Ironically, it’s the banks that cannot afford this price war:

Firstly, the price advantage for both borrowers and lenders at Zopa
is very large, especially at the moment while banks are charging such
huge spreads across loan and savings products to try to rebuild their
shattered balance sheets.

Secondly, bank overheads are enormous and hard to shrink. In stark
contrast, Zopa’s operating costs are wafer thin, and because of the way
the model works, will only get proportionately smaller as the business
continues to grow in size.

Thirdly, and perhaps the real ‘show-stopper’ for any bank trying to
kill off Zopa with a price war is the bank’s inability to target the
loss-making offers. There is no way to target Zopa members directly or
even indirectly, so these undercutting price offers would have to be
made to the entire country. That in itself would destroy the bank
concerned long before it would shut down Zopa.

Finally, I think you need to think about what you are proposing
banks could or even should kill off. It is real people trying to get a
better deal by bypassing the banks and dealing with other real people
instead. Given banks’ current popularity, most people would view
cynical strategies like you suggest as a disgrace (and potentially
illegal), especially if the banks concerned were majority-owned by the
taxpayer.

Over to you guys…

MC

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...

Check Also

100 years from now, will we look back and think how ignorant we were?

I was talking about space exploration with a colleague the other day. They looked at …

  • I corrected my erroneous maths (resulting from failing to count zeros correctly at 5AM this morning) immediately on the post.
    Thanks for jumping right on the error for me.
    I dispute your data though and used BofE data on personal lending excluding credit cards.

  • Chris Skinner

    You cannot dispute the data James as you have now made a correction that makes my argument even more compelling.
    “Using Bank of England data, I compute that consumer credit excluding credit cards from May 2008 – May 2009 was about £2.5 Billion. Let’s take the easiest case for critical mass first, where Zopa achieves just 2.5% of that, or in other words, writes £62.5 million pounds of loans in the last year. Their actual achievement is 80% of that in their whole lifetime.”
    Now you’ve updated your figures, and bearing in mind that Zopa traded £20 million in the past year, you’re now saying that they’re running at just under 1% of lending. So 2.5% by 2011 is quite reasonable under current climate.

  • Chris Skinner

    You cannot dispute the data James as you have now made a correction that makes my argument even more compelling.
    “Using Bank of England data, I compute that consumer credit excluding credit cards from May 2008 – May 2009 was about £2.5 Billion. Let’s take the easiest case for critical mass first, where Zopa achieves just 2.5% of that, or in other words, writes £62.5 million pounds of loans in the last year. Their actual achievement is 80% of that in their whole lifetime.”
    Now you’ve updated your figures, and bearing in mind that Zopa traded £20 million in the past year, you’re now saying that they’re running at just under 1% of lending. So 2.5% by 2011 is quite reasonable under current climate.

  • I’ve picked up this dialogue from Twitter. It looked interesting at the start, but now, your argument seems to be wandering all over the place.
    Yesterday’s piece began “it’s worth looking at the business models of the new entrants who are trying to disrupt this space and pose the question: are they sustainable?”. I agree. I’m very interested in that.
    James Gardner made the point that Zopa’s business model isn’t disruptive, and it would find it difficult to compete with banks on price. That doesn’t seem to be ‘throwing rocks’ at Zopa, it seems to be a cogent response to the points you made.
    But your come back today appears to be about whether all social lenders combined can get a 2.5% market share, this year or next. Just supposing they do, what does that demonstrate about the direction that banking’s going in?

  • I’ve picked up this dialogue from Twitter. It looked interesting at the start, but now, your argument seems to be wandering all over the place.
    Yesterday’s piece began “it’s worth looking at the business models of the new entrants who are trying to disrupt this space and pose the question: are they sustainable?”. I agree. I’m very interested in that.
    James Gardner made the point that Zopa’s business model isn’t disruptive, and it would find it difficult to compete with banks on price. That doesn’t seem to be ‘throwing rocks’ at Zopa, it seems to be a cogent response to the points you made.
    But your come back today appears to be about whether all social lenders combined can get a 2.5% market share, this year or next. Just supposing they do, what does that demonstrate about the direction that banking’s going in?

  • Chris Skinner

    My argument is not wandering anywhere. I am purely responding to a point that James makes about 2.5% being the point of ‘critical mass’ when a new competitor becomes a serious threat to the old system, which is where all this started, e.g. could Zopa ever be a threat to the banking system long-term? Yes, if they reach crticial mass.
    James is ‘throwing rocks’ at their business strategy, and I’m trying to rise above the debate now, as I am not Zopa’s spokesperson.
    Where I come from is the ‘disruptive’ model of new social finance businesses – SmartyPig, Zopa, Mint, Wonga (which is where I began yesterday) – and what they mean to banking’s long-term future.
    Chris

  • Chris Skinner

    My argument is not wandering anywhere. I am purely responding to a point that James makes about 2.5% being the point of ‘critical mass’ when a new competitor becomes a serious threat to the old system, which is where all this started, e.g. could Zopa ever be a threat to the banking system long-term? Yes, if they reach crticial mass.
    James is ‘throwing rocks’ at their business strategy, and I’m trying to rise above the debate now, as I am not Zopa’s spokesperson.
    Where I come from is the ‘disruptive’ model of new social finance businesses – SmartyPig, Zopa, Mint, Wonga (which is where I began yesterday) – and what they mean to banking’s long-term future.
    Chris

  • Steve Chittenden

    PRICING
    I thought I’d do a bit of practical research to ascertain the suggested battle ground of price; let’s look at this from a customer perspective:
    BUYER
    My ‘High Street Bank’ wants 11.4% for £10k to help me purchase; A ‘P2P’ marketplace suggests 11.4% too – both on the basis that I’m credit worthy. However a comparison website then exposes the additional fees & demonstrates that a traditional lender wants £12,059 back, and the P2P £12,823…[perhaps ‘interesting’ application of APR% calculation rules creates the difference?]
    – so not much price difference there
    SELLER
    Given that your investment capital funds can’t be readily returned, we need to look at longer term money, as opposed to instant access accounts:
    Traditional banks are still paying significantly over base rate (0.5%) [as the term market is more in line with Gvt Bond rates] and a ‘High Street’ offering can easily be obtained at 5.25% for such fixed term funds.
    P2P’s headline rates are significantly higher at 8.2%, but these come with various cost reductions such as P2P fee & bad debt provision. This reduces returns (pre-tax) by some 2% equating to some 6.2% gross.
    BENEFIT
    So my P2P deposit pays 0.95% more! Great, let’s do it…
    Oh, wait a miniute, what’s the fundamental thing that Banks do, oh yes, insulate the depositor from the bad debts of the borrower [albeit with the help of the Gvt at the moment – not that we could consider that the Gvt would step in to support a P2P enterprise/individual model] meaning that your hard-earned cash is guaranteed, whereas that of P2P leaves an element of exposure for you.
    Is that risk management worth 0.95%?
    Not exactly my idea of ‘razor sharp’ margins that have been suggested [I’d like 10% return if it’s being lent out at 11.4%…that’s what I’d call razor shap margins]
    MISSING THE POINT
    So all of the above demonstrates that the ‘battle’ is not on price.
    The issue appears to be that of social connectivity fuelled by lack of trust (as opposed to trust for traditional banks) and the beginning of social change in finance like we’ve already seen across other traditional industries.
    Will this become a case of the Banks ignoring the ‘hole in the dam’?

  • Chris Skinner

    Totally, 100% agree with you Steve, and now we’re getting to the point. The battle is not interest rates and price, but margins and business models.
    Zopa use the same risk management system as a bank, so the 0.95% reduction in margin that Zopa offers is bulletproof.
    Great entry and backed up by today’s add-on.
    http://thefinanser.co.uk/fsclub/2009/08/why-zopa-and-their-siblings-are-disruptive.html