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
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
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
Over to you guys…