Zopa Online Borrowing/Lending

Zopa. This intrigued me. A market based lending service which uses credit ratings to assess risk and risk to assess the rate of interest you borrow/lend at.

As they say:

Lenders can choose what rate to lend at and, by looking at the markets, decide what sort of people to lend to and when. Borrowers can choose to take a rate offered or to wait and see whether the rates drop. Both avoid paying needless chunks of commission to Financial MegaCorp plc and can get better rates of interest as a result.

How have they done it? Zopa create "non-commercial" loan agreements [within the meaning of the Consumer Credit Act] to allow people to lend. They make their money through a commission i.e. facilitating the exchange. Reminds me of some of the cooperative lending societies [especially those flourishing in India] except Zopa seems to me to favour those who are already in a strong financial/credit position. The poorest are not even online, so I doubt that it's even aimed at those who struggle to get credit through other means. There are also huge trust issues for any suspecting user to grapple with even though you do not lend to individuals but to at least 50 borrowers. However, the idea of lending to *real* people works - it creates a relationship of value, quite literally. It may only break down when someone defaults on payment. Who calls in the heavies?


More about Lending and Borrowing at Zopa

All lenders and borrowers enter into a legally binding contract. Zopa manages the collection of monthly repayments and, if repayments are not made, uses the same sort of recovery processes used by banks. While Zopa has an Office of Fair Trading credit licence, it is only authorised and regulated by the Financial Services Authority in respect of its repayment protection insurance. The protection afforded to Zopa members by the Financial Ombudsman Service and Financial Services Compensation Scheme also only applies to insurance business.

Some experts advise individual lenders (who are effectively investors) that for the extra risk, they should expect far better rates than they currently receive from Zopa. They also argue lenders and borrowers may be able to get better rates in the conventional saving and investments and borrowing markets. But [Richard Duvall] argues Zopa is not trying to directly compete with bank savings: 'You accept a bit more risk for a higher return and the satisfaction of knowing where your money is going.


I loathe banks. It makes me very angry how much gets creamed off any product and it rocks me to my soul how much I spend on interest ... it feels so greedy said Rebecca, 36, a Zopa

Zopa offers some advantages, such as greater flexibility - if you wanted to pay that Giraffe Loan off early, you'd still have to pay all the interest you'd pay if you were sticking to the normal schedule. With Zopa, you pay it off as soon as you can and pay no more interest. It will also lend to some people who the banks would penalise, or turn away.

For all Zopa's open-minded approach to lending, it's backed up with some serious credit assessment work to make sure that lenders are a worthy risk, with a heavyweight lending team led by former Abbey and Alliance and Leicester credit expert Karen Why.


It is important to remember that the rate you choose is an Annual Equivalent Rate (AER), and that you only earn this return on money that is currently lent out. As you receive back some of your lending every month, you will need to re-lend this money to get the full amount of interest.

For example, if you lent £1,000 for 1 year at 6% (and assume everyone pays back), your total interest would be £31.92, not £60. Your borrowers do not borrow the full £1,000 for one year, so do not pay interest on the entire amount for that period. In this example, after 6 months you would have received back over £500 which you could then re-lend.

One final consideration is that the interest rate you set could affect the bad debt you experience. By setting very high rates, it is more likely that only bad borrowers will accept loans offered at those rates, and in that case the level of bad debt could be considerably higher than the above predictions.

I think they will have more difficulty getting lenders to sign up than borrowers, all things considered. Typical lenders will be internet-savvy types with specific grudges against the banking system :-)

About the founders

The three founders of Zopa are chief executive Richard Duvall, chief financial officer James Alexander and David Nicholson and. All were involved with Egg, with Richard Duvall creating the online bank for Prudential in 1998. Mr Alexander had been strategy director at Egg after joining in 2000, and previously had written the business plan for Smile, another online bank owned by the Co-operative. The founders were also joined by Sarah Matthews from Egg was Egg's brand development director.

Richard Duval said: "We're being very careful.
We've set out to keep Zopa a safe place for people to lend their money.
We make sure that each lender lends to at least 50 people to ensure
there's a low chance that they will lose any capital and take great care
with credit assessments to make sure lenders get their money back."

Cutting out the middle man

Be clear about what Zopa is and is not. It is not a bank. It is, however, fully regulated as an introducing broker by the Office of Fair Trading and as an introducer of credit insurance by the Financial Services Authority. Zopa was founded by Richard Duvall, Dave Nicholson and James Alexander all of whom had previously worked together on marketing and strategy for online bank Egg. It is backed by Benchmark capital, the American venture capital firm behind eBay and the German company Wellington Partners.

Whether Zopa will grow to be a major player in the financial arena will depend on the number of people self-confident enough to go outside the usual banking channels. It has been described as an extension of the "eBay model" and is already generating interest from societies and minority groups that would like to lend to their memberships. Self-help groups that club together to reduce borrowing costs are nothing new. This is, after all, how many friendly societies and other long-established mutual financial organizations actually began.

As an individual, if your credit is in good shape you might be pleasantly surprised by the interest rates on offer at Zopa. You may borrow over one, two or three years and any amount up to £15,000. Unlike traditional bank loans that tend to be more expensive for small amounts over shorter periods, Zopa loans are actually cheaper for smaller amounts and short periods.

Zopa operates two credit bands, A and B. Anyone qualifying for category A could borrow £1,000 over 12 months for 4.8% - that's only 0.05% over the Bank of England's base rate and compares with rates from more usual sources of 5.6% from Northern Rock to an eye-watering 17.8% from HSBC. As Giles Andrew points out, Zopa has "a huge price advantage in smaller value loans".

Zopa will not be for everyone. It is for what it describes as the creditworthy only. Its loan options are also limited in values and terms. Nevertheless, if you are looking to borrow money for three years or less, you may want to check out what Zopa has to offer and compare it against the best in the rest of the loan market.

Don't be evil

Looking at the deals available on Zopa, they're right - they're competitive but not exceptional, and it doesn't seem to be as risky as they thought. But for Duvall, comparing it to a bank is missing the point - It's for people who just don't like banks at all.

"80 per cent feel that they are paying back to real people, not a bank, not contributing to their excess profits," says Duvall.

"Our lenders like lending to other people because they can see where it is going. That is a major part."

The whole business is soaked in Googlesque post-corporate groovyness, from the ultra-friendly emails to users which start "Hello there, Ben", to the CFO who spends one day a week working at a charity.

Its target market is people who dislike oppressive, greedy banks, and people who banks dislike for their freeform, suit-dodging, self-employed ways.

Duvall says that he and his colleagues are not necessarily looking to be bigger than eBay by tomorrow. "Obviously we have business plans, but we are not targeted on size," he says.

His backers may feel differently. One of the first to put money into Zopa is Benchmark Capital, the VC firm that backed Betfair and eBay. They will be looking to make something pretty big out of it.

Duvall says he has had over 50 offers to take Zopa to other countries, of which the US is likely to be the first.

It's also received a positive response from the punters. Five months from launch, Zopa has 25,000 registered users, offering over £3m in loans.

Zopa doesn't seem likely to eat HSBC's lunch just yet. It might just nibble the corner off its amuse-bouche, though, and that would still make for some very tasty business.

Target market

The idea for the business was developed from market research that showed there was a potential market of "freeformers" to be tapped. Freeformers are typically not in standard employment, rather they are self-employed or complete work that is project-based or freelance. Examples include consultants and entrepreneurs. Consequently, their incomes and lifestyles may be irregular, although they may still be assessed as credit worthy. According to James Alexander, "they're people who are not understood by banks, which value stability in people's lives and income over everything else.". IOD (2005) reported that the research showed that freeformers had "much less of a spending model of money and much more of an asset model". Surprisingly, the research indicated a large number of freeformers. New Media Age reported Duvall as estimating that in the UK there may be around 6 million freeformers (of a population of around 60 million). Duvall is quoted as saying: "it's a group that's growing really quickly. I think in the 10 or 15 years time most people will work this way. It's happening right across the developing world. We've been doing some research in the US and we think there are some 30 or 40 million people there with these attitudes and behaviours".

Some of the directors see themselves as freeformers, they have multiple interests and do not only work for Zopa; James Alexander works for one day a week in a charity and Sarah Matthews works just 3 days a week for Zopa. You can see example personas of typical borrowers and lenders on the web site.

From reviewing the customer base, lenders and borrowers are often united by a desire to distance themselves from conventional institutions. James Alexander says: 'I spend a lot of time talking to members and have found enormous goodwill towards the idea, which is really like lending to family members or within a community'. But he also says that some of the lenders are simply entrepreneurs who have the funds, understand portfolio diversification and risk and are lending on Zopa alongside other investments.

Marketing communications

Financial services is arguably the lamest category when it comes to marketing. One reason is the widespread notion that financial services are boring, so a lot of branding and advertising avoids talking about reality, and instead distracts with wacky creative treatments. Zopa actually treat their subject (borrowing or lending) as if it is interesting. Their blog shares lots of insights to the subject. And they uncover that beneath the sweeping generalities are lots of details... including the human stories behind their borrowers. Sure, they may be a market for the entertainers. I'm just glad to have Zopa offering something with a bit more intelligence.

Also, the launch of Zopa has been quite different from Egg and other dot-coms at the turn of the millennium. Many companies at that time invested large amounts in offline media such as TV and print to rapidly grow awareness and to explain their proposition to customers.

Instead Zopa has followed a different communications strategy, which as relied on word-of-mouth and PR with some online marketing activities where the cost of customer acquisition can be controlled. The launch of such a model and the history of its founders, makes it relatively easy to have major pieces about the item in relevant newspapers and magazines such as The Guardian, The Financial Times, The Economist and The Institute of Directors house magazine, which its target audience may read. Around launch, IOD (2005) reports that Duvall's PR agency, Sputnik achieved 200 million opportunities for the new company to be read about. Of course, not all coverage is favourable, many of the articles explored the risk of lending and the viability of the startup. However, others have pointed out that the rates for the best-rated 'A category' borrowers are better than any commercial loan offered by a bank and for lenders, rates are better than any savings account. The main online marketing activities that Zopa uses are search engine marketing and affiliate marketing.


Zopa initially received funding from two private equity groups, Munich-based Wellington Partners and Benchmark Capital of the US. Although the model was unique within financial services, its appeal was increased by the well-publicised success of other peer-to-peer Internet services such as Betfair, the gambling website, and eBay, the auction site.

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