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FINANCE70
LO
A
NPeer-to-peer lending website Zopa
provides a platform to bring lendersand borrowers together,
bypassingthe banks. Five years after itsemergence, CEO and
co-founderGiles Andrews says the publicsdistrust of the greedy
banks has beena boon for his business.
By Julian Rogers
When I was a kid I loved the board
game Monopoly. Unortunately I
was always bere o that ruthless
property developer streak re-
quired to win. I would invariably
end up lumbered with a couple o
train stations, the deeds to the water works and a ew cheap
houses dotted around Old Kent Road and Bow Street. Aer
a couple o involuntary nights spent in swanky hotels on
Bond Street and Park Lane I was usually re-mortgaged up
to my neck and limping around the board praying or the
dice gods to prevent my battleship counter rom landing me
in yet more nancial misery. Even being sent to jail looked
inviting at this stage o proceedings; you cant get issuedwith
inexplicable income tax bills or mysterious parking
nes when youre banged up, right?
Suddenly, a devious grim would creep across my broth-
ers ace beore he threw me a nancial lieline: a UK2000
loan with an exorbitant interest rate o 50 percent some-
times higher to be repaid within the next two laps o the
board. Drowning in a sea o debt and ignoring the small
print, I would reluctantly accept his oer just to get my
des-
perate mitts on our red 500 notes. But this utile bid to
keep my head above water and stay in the game meant I was
always headed or one place: bankruptcy.
8/6/2019 Bmeu5 Zopa Giles Andrews Lowres
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Sidestepping
the banker and ob-
taining a loan rom a
ellow player is pretty much
how Zopa works, sans the crippling
interest rates. Zopa, an acronym o Zone o Possible Agree-ment,
is a so-called social lending site that acts as a middle-
man between individuals looking to lend money and those
seeking a loan, 24 hours a day. Te business was co-ounded
by Giles Andrews, who led our und raisings or US$35
million rom US and European investors beore Zopa burst
on to the world wide web in 2005. Te business model was
based loosely on online auction side eBay and internet
betting exchange Betair, the underlying actor being that
these sites also take a commission or bringing two people
together in a transaction over the net. Zopa, which went
live
in 2005, says social lending is a smarter, airer and more
human way o lending. An average o UK4 million in
loans is agreed every month. People really like working
together and have convinced themselves that together they
can get themselves a better deal than by dealing with more
traditional institutions, Andrews explains. Its a business
model that is outshining the banks, according to Andrews.
Our loan book has perormed better than any o the UK
banks consistently rom the day wed launched till now
weve got deault rates they would only dream about.
Borrowers typically borrow around UK5,000 (the
minimum permitted is UK1000 and the maximum
UK15,000), which is usually put towards a new car or
making home improvements, says Zopa. On the other side
o the ence, lenders achieve an average return o 8.2 percent.
Te average lent is UK2000 but this doesnt paint a true
picture according to Andrews. Its misleading because wehave
people lending as little as UK10 and we have people
lending many hundreds o thousands o pounds. Zopa
charges a one percent service ee to lenders while borrowers
pay UK124.50 on a loan. So whats to stop an unscrupulous
borrower rom running o with my cash, I hear you cry?
Well, i you lend UK500 or more then your money is spread
across at least 50 borrowers and the average deault rate is
0.7 percent. I probably wouldnt choose to lend 10 grand to
a complete stranger in the pub on the basis o his credit le,
says Andrews, but I might happily lend 10 quid to 1000
people who share the same credit prole.
Checks are made to vet potential borrowers and those
accepted are put into categories according to their ability
to pay A* (super clean borrowers) down to much riskierborrowers
in band C. Tere is also a Y group made up o
young borrowers. Lenders then make oers, such as wish-
ing to lend x amount o cash to an A-rated borrower or x
period and with x amount o interest. Te A-rated borrowers
then choose whether or not to accept the lenders money. I a
borrower does deault, they are chased or the debt through
proper legal channels. Te riskier groups pay higher interest
rates to the lenders but the deault rate will be higher. Its
a
case o balancing risk versus reward when loaning out your
hard-earned cash.
Crunch time
In the last two or three years, Zopas growth in popu-
larity has reected the groundswell o distrust o the banks
among the public. Te credit crisis was sparked by reckless
practices by the loosely regulated banks, which snowballed
into the worst recession since the Great Depression. Such is
the distrust o the banks nowadays that owning up to plyingyour
trade as wheeler-dealer hotshot in the City carries about
the same stigma as admitting to being a war criminal. Zopa
beneted rom the banks all rom grace, Andrews reveals.
We were three and a bit years old when the credit crisis hit
and had been working really hard at building up trust in the
business. Consumers didnt eel they were getting a good
deal out o banks there wasnt the same degree o banker
bashing as there is today, but there certainly was an
appetite
to look at alternatives. Andrews says Zopas loan book has
been properly managed. We could say we had managed
credit properly while all these banks were losing a ortune
making stupid lending decisions.
Unlike some o the banks, Zopa took a cautious approach
to acquiring borrowers rather than rushing in gung-ho
andaccepting those with even the most patchy credit histories.
We could have taken much more risk. We could have lent
more unwisely and we could have grown our business aster
by accepting more o our applicants. We could have pitched
the business at more risky consumer groups where the rates
o return might have looked more exciting, so that subprime
lenders made returns in the high teens compared to prime
lenders making returns o eight or nine percent. But had we
done any o those things then we wouldnt necessarily have
been able to get the money back to our lenders and I suspect
we wouldnt be here.
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While the banks get involved in
everything rom mortgages to betting
on the price o aluminium, Zopas
business model is ocused on unadul-
terated lending. Andrews says both
parties on either side o the deal likethe simplicity o it all.
Alongside the
knowledge that their money is help-
ing real people, lenders particularly
appreciate the returns available rom
Zopa, ar outstripping current savings
rates. UK savers have had a bum deal
since rates were slashed by the Bank o
England rom ve percent to a pitiul
0.5 percent in order to kick-start the
ragile economy. Zopas eye-catching
returns have tempted plenty out-o-
pocket savers to become anonymous lenders through Zopa.
Savers in the UK are being hit where it hurts very hard,
says
Andrews. People who depend on savings or an income,
like retirees, are in real trouble and desperately looking
or
alternatives to get a better return. Likewise, the banks
have
been reluctant to lend to customers, so have hiked up their
interest rates. Its been a win-win situation or Zopa.
Back in 2005, Zopas ounders made a conscious deci-
sion not to throw money at aggressive marketing campaigns,
choosing instead to let the company grow through word o
mouth, and its uniqueness generate its own publicity. Te day
o Zopas launch saw the site reported in Londons respected
Financlal imes newspaper and Te Economist as well as
a clutch o other print and web publications. Te medias
inquisitiveness about the business still exists today, which
is reected by a media section on the Zopa website stuedwith
press cuttings and V and radio clips. As o August o
this year alone, Zopa has been covered by 45 media outlets.
Were terribly lucky that the story remains interesting, the
boss notes. Aer the launch, Zopa created a stir,
particularly
among techies and I proessionals who were au ait with
groundbreaking internet start-ups. Our early adopters were
heavily dominated by I proessionals and a ew people who
worked in the City. With any new products like this, the I
boys like to have a look around and talk to each other, be-
cause they are interested in technology.
Nowadays, Zopas customers come rom all walks o l ie,
although the majority tend to be men, especially the
lenders,
who are oen middle-aged or retired men with disposable
incomes. Its probably air to say that our very big lendersare
typical ly older and either in or approaching retirement,
Andrews reveals. However, weve also got lots o young
people lending very small amounts o money, presumably
because they think it s interesting.
Zopa also strives to generate an online community so
that users get to interact with one another and discuss the
business o lending and borrowing.
Its online orum, or instance, is especially handy or
those getting to grips with the ins and outs o the site.
Were
very lucky that weve got a group o users who are prepared
to give up their time and knowledge to help educate new
Te riskiergroups pay higherinterest rates tothe lenders but
the default ratewill be higher
people. Tere is also a healthy ol-
lowing on the companys blog, Face-
book and witter the latter being
a convenient platorm to answering
users queries. We nd that i cus-
tomers tweet us with a question ittends to get answered very
quickly
indeed compared to email. So its just
a very efcient way o dealing with
people. Te customers like it and the
people here like it.
Market forces
Zopas success in the UK led to
Andrews and his team eyeing up
the almost endless opportunities
that lay overseas. However, it wasnt
as simple as just setting up shop in a oreign country and
then counting the cash as the punters came ooding to the
site. Markets like the US oer huge potential according to
Andrews, but regulations vary greatly across the world and
ultimately proved to be a thorn in the companys side. Te
regulatory challenges are enormous in every country its
not like eBay, which is easy to roll out rom one country to
another. Zopa launched in the US in 2008 but regulatory
pressures meant the business was dierent to its UK coun-
terpart. We ended up launching a business in conjunction
with credit unions, which are a rather bigger group in the
United States than they are here. It wasnt as strong a peer-
to-peer business model as it is here, and we also launched
in
2008 right in the ace o global Armageddon.
Aer a year, the decision was taken to withdraw rom
the US. Eorts to break into Japan ran into difculties andin
Italy Zopa was orced to operate through a ranchise. Its
absolutely not trivial to launch in dierent countries and
indeed in some countries its not even possible. Andrews
describes the companys retreat rom the US, the biggest
market in the world, as painul but is ocused on the UK
or the time being. Well conne our ambitions to the UK
or a year or two and see how we get on, because the UK is
a big enough place or us to build a substantial and exciting
business and then maybe think again internationally.
With Zopa garnering increasing attention and other
peer-to-peer lenders such as YES-secure in the UK, Smarva
in Germany and Boober in Holland, does Andrews believe
traditional bricks-and-mortar banks and other nancial
institutions should be quaking in their suits? I think
wedenitely represent an enormous threat to them in this seg-
ment o the business because we do it more efciently, he
states condently. So yes, they should denitely be wor-
ried, but i we and other person-to-person lenders were to
take hal o the banks personal loan business away rom
them in the next ve years, then that represents an enor-
mous opportunity or us but its not a terriying loss or
the banks because they do so much else. So we could
take a very a protable niche away rom them, and
it might impact share price a bit but its not
going to kill them. n
