It might be thought that innovation in business models was left behind in the dot-com era, but still fledgling businesses are launching new online services. Zopa is an interesting example of a pureplay social or peer-to-peer lending service launched in March 2005 with US and Italian sites launching in 2007 and a Japanese site launched in 2008. Zopa is an online service which enables borrowers and lenders to bypass high street banks. There are over 150,000 UK members and 200,000 worldwide. Zopa is an example of a consumer-to-consumer (peer-to-peer) exchange intermediary. 

Zopa stands for ‘zone of possible agreement’, which is a term from business theory. It refers to the overlap between one person’s bottom line (the lowest they’re prepared to receive for something they are offering) and another person’s top line (the most they’re prepared to pay for something). This approach underpins negotiations about the majority of types of products and services. 

The exchange provides a matching facility between people who want to borrow with people who want to lend. Each lender’s money is parcelled out between at least 50 borrowers. Zopa revenue is based on charging borrowers 1 per cent of their loan as a fee, and from commission on any repayment protection insurance that the borrower selects. At the time of launch, Zopa estimated it needed to gain just a 0.2 per cent share of the UK loan market to break even, which it could achieve within 18 months of launch.

In 2007, listings were launched (www.zopa.com/ loans) where loans can be requested by individuals in a similar way to eBay listings. Borrowers can borrow relatively cheaply over shorter periods for small amounts. This is the reverse of banks, where if you borrow more and for longer it gets cheaper. The service will also appeal to borrowers who have difficulty gaining credit ratings from traditional financial services providers. 

For lenders, returns are in the range of 20 to 30 per cent higher than putting money in a deposit account, but there is the risk of bad debt. Lenders choose the minimum interest rate that they are prepared to accept after bad debt has been taken into account for different markets within Zopa. Borrowers are placed in different risk categories with different interest rates according to their credit histories (using the same Equifax-based credit ratings as used by the banks) and lenders can decide which balance of risk against return they require.   

Borrowers who fail to pay are pursued through the same mechanism as banks use and also get a black mark against their credit histories. But, for the lender, their investment is not protected by any compensation scheme, unless they have been defrauded. The Financial Times reported that banks don’t currently see Zopa as a threat to their high-street business. One financial analyst said Zopa was ‘one of these things that could catch on but probably won’t’. Zopa does not have a contact centre. According to its website, enquiries are restricted to email in order to keep its costs down. However, there is a service promise of answering emails within three hours during working hours.

Question 

Imagine you are a member of the team at the investors reviewing the future viability of the Zopa business. On which criteria would you assess the future potential of the business and the returns in your investment based on Zopa’s position in the marketplace and its internal capabilities?