If you are the Head of Investment Committee and you decided NOT to invest in Zopa. Why? Please give at least three compelling reasons on NOT investing in Zopa, based on the information memorandum below.

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1.1 Company History

Zopa is a UK company set up on 7th March, 2005. It is the world's first online money exchange, promising to put borrowers in touch with people who are willing to lend them money. In addition, Zopa is backed by the Wellington Partners and Benchmark Capital, one of the founding venture capitalists of e-Bay. It was started by a small cluster of very experienced money people including several members of the original Egg plc management team. The following is the organization chart of Zopa.

Until now, there are many strategic alliances worked with Zopa. Each of them has their own and unique responsibilities. All these alliances have taken a punt on Zopa's idea and give 100% back up to Zopa. The following table shows some of the strategic alliances of Zopa

1.2 Business Nature

Zopa has revolutionized the way of people how to act on money. It becomes more or less the same way of e-Bay in which buying and selling things online. People with spare cash can offer to loan it to people who need to borrow through the Zopa exchange portal. The rationale of Zopa is similar to e-Bay or Betfair and other online betting exchange platforms, i.e. cutting out the middleman so as to minimize the transaction cost. Usually, when you are looking to borrow money, you can either use a bank, building society or other loan companies, such as financial institutions. And if you want to lend money to someone, you have to stick to an informal arrangement or apply for a consumer credit license. Now, in the present of Zopa, it claims that lenders will be able to get a higher rate of return on their money than through a savings account. And as for borrowers, they may be able to secure a loan at a lower interest rate than what is available on the High Street and other financial institutions. As a result, Zopa brings out a win-win situation. Moreover, through the presence of credit rating of each member in Zopa, it gives the lenders the rights to choose their ideal borrowers. Zopa has target customers aged between 18 to 40. Within this range, customers are active Internet navies. Moreover, they are pioneer group and are willing to try new products. As a result, this group of people forms the company's core customer base. The table below shows the bad debt rates for people in different credit rating sectors

1.3 Corporate Mission

The mission of Zopa is: "putting people who want to lend in touch with creditworthy people who want to borrow in a win-win situation". It could be done by matching the potential lenders with potential borrowers in Zopa's system. Zopa only asks for 1% exchange fees from the borrowers in the transactions. Zopa hopes that it will help to consolidate the online money exchange activities in UK and eventually worldwide. The name ------ Zopa is actually a term taken from business theory, it stands for "Zone of Possible Agreement". That is the overlap between one person's bottom line (the lowest they prepare to get for something) and another person's top line (the most they prepare to pay for something).

1.4 Value Model

Zopa provides four main values to consumers. First of all, the return provided by Zopa outweighs the risk faced by the lenders. As we mentioned in the Business Nature, the rate of return for the lenders will be higher than that with the same level of risk. Secondly, Zopa provides a very convenient channel for personal financing. Everyone is able to borrow money whenever there is a computer that can access to the Internet. Thirdly, the website provides an alternative source of financing. In the presence of Zopa, you can both lend or borrow money through this online portal. While comparing with the past, you had to stick on banks or some informal arrangements. Fourthly, Zopa provides a platform for the members to manage the risks themselves. It can be done since the lenders can set their own required return for borrowers who have different credit ratings. For example, they can lend their money to a lower credit rating person who needs to pay a higher interest cost

1.5 Revenue Model

The main source of revenue generated by Zopa is the exchange fee. And this fee is only charged on borrowers and it is equivalent to 1% of the total loan. On the other hand, Zopa will not charge lenders a bean, i.e. Lenders do not have to pay any fee when using Zopa. In addition, the company can make money through the sale of loan payment protection insurance to the borrowers. For instance, if borrowers take out repayment protection insurance on their loan, Zopa will receive commission from its insurance provider.

2.1 Five Force Model

2.1.1 Risk of entry by potential competitors

The role of Zopa is an intermediary which provides the channel and information for both the lenders and borrowers. The lenders deal with the borrowers directly and Zopa itself do not hold a large amount of funds. Unlike the banks, the set up capital for such a business is much smaller. For this business model, the accuracy of the credit rating is the key. Once an institution is able to provide credit rating of borrowers, it can build up its own system in the online lending market such as the insurance and finance companies. Though Zopa takes the first mover advantages in the market, the risk of entry by other potential competitors is high. Unless Zopa builds up a "super brand" and fix up a huge number and stable customers, the rivals arose by new comers will be a great challenge.

2.1.2 Threat of substitute products

It is easily access to different types of lending and borrowing services in the market. Varieties of substitutions are available. Borrowers can make loans from banks, financial institutions and even their family members etc. Lenders can invest their money in different financial products like time deposits, bonds, stocks, currencies and funds etc. The threat of substitute products is quite high. The advantage of Zopa is to lower the transaction cost and provides lower interest to the borrowers while higher interest income for the lenders. The lenders can also enjoy the freedom on managing their risks and returns by selecting the borrowers with different creditability. These are the reasons supporting Zopa to grow in the market.

2.1.3 Rivalry among established firms

As explained earlier, rivals can be physical institutions in Britain, like HSBC, Crown Agents Financial Services Ltd etc. Apart from the physical institution, Zopa has to face the competition from the worldwide online financial services like e-banking. As most of them target at the mass market for funds, keen competition will be inserted into the money market. There are indirect competitors such as the bond, stock markets. However, the rivals between Zopa and them are relatively small. Zopa states that it just provides loans for personal purposes and the risk level is relatively lower while bond and stock market targets at institutional fund raising and higher market risks will be generated. They target at different market segments as the result of different risk and return approach. On the other hand, Zopa is the first mover in terms of eBAY 's business model targeting financial services in lending and borrowing service. So far, there are no any similar competitors. To conclude, the major competitors of Zopa are the banking services and the rivals will be keen soon.

2.1.4 Bargaining power of suppliers

Suppliers for Zopa can be anyone in Britain who owns spare cash and is willing to offer a loan. They offers loan to the borrowers directly and no handling fees will be charged to the lenders. The number of the lenders is huge and no one can ask for a special deal with Zopa. In fact, the interest is paid by the borrowers directly instead of Zopa and it becomes meaningless to bargain with Zopa. The lenders can ask for a higher return by choosing the lower credit rating borrowers. They can make their own decision in balancing the risks and the returns. The bargaining power of suppliers is therefore quite low.

2.1.5 Bargaining power of buyers Buyers are British who want to raise funds from others. They can borrow money from many different parties such as the banks, financial institutions and even the loan sharks etc. However, the costs of borrowing through Zopa are relatively lower than those parties because of the lower transaction costs. The cost of borrowing depends on borrowers' own credibility which is graded by the Equifax similarly. As lenders and borrowers deal with the interest rate directly, it is unnecessary to bargain with Zopa. Thus their bargaining power to Zopa is low.

3.1 Value Chain model of Zopa

3.1.1 Human Resources

System engineers, web designers, customer relation management officers are the three main staff in Zopa. Their professional knowledge and skills are crucial for Zopa's success. Moreover, co-ordinations among these departments are indispensable so that they can provide the best service which can match with the needs of customers. Furthermore, with the fundamental training in IT and Finance, staffs can better understand the contemporary situation and business of the company.

3.1.2 Information Technology

The most important element for the whole business model is its portal. It is the exclusive channel for Zopa to communicate with their clients, as well as the sole way for lender and borrower to meet. Hence, a reliable, secure and user-friendly portal is the key of success. The layout of the portal is designed by Zopa while its strategic alliance, Equifax, provides the online identification to ensure the security.

3.1.3 Finance

Large amount of capital is required for setting up the website and the promotions. Apart from the capital generated by the entrepreneurs, there are two venture capitalists, Benchmark capital and Wellington Partners, to support the daily operations of Zopa. As Benchmark capital is one of the venture capitalist of e-bay, a portal which is having similar business modal as Zopa, it can even share e-bay's experience and act as an advisor of Zopa.

3.1.4 Strategic Alliance

There are nine strategic alliances in Zopa's business. All of them are the expert in their respective business and play an important and unique role in the development of Zopa, such as Equifax is responsible for credit referencing and online identification, while Magex is responsible for the payment service. Their support to Zopa is indispensable

3.1.5 Marketing

Promotion is the most crucial part at the beginning of setting up the portal. This is because according to Metcalf's rule, the value of the portal is directly proportional to the square of number of users. Therefore, aggressive promotion strategy is adopted so that the value of the website can be raised sharply in a short period of time. Hence, the primary task at the beginning is to make everybody know about Zopa and persuade the potential clients to try Zopa. Consequently, the goodwill and brand of Zopa can be developed.

3.1.6 Operations

Matching appropriate lenders and borrowers is the primary tasks of Zopa. Based on the required return and risk aversion of lenders, Zopa need to find the best borrowers so that administrative fee, their only source of income, can be earned.

3.1.7 Services

Due to the limitation of resources, Zopa do not have a significant personal call centre in order to minimize the operational cost. Therefore, there is a "What is Zopa?" and "Help section" in the website to solve the problems of the user. If the clients are still facing dilemma, the only way to communicate with their clients is email. A team of officers are responsible for answering the email.

4.1 Strength

4.1.1 Strong alliance

Zopa allies with Equifax that a borrower's credit rating is checked with Equifax and Zopa undertakes anti-fraud checks. Equifax was the first credit reporting agency to establish a national customer service center and it utilized world-class technology and processed to assure maximum accuracy of credit files. And the data items of Equifax are updated all years round. So Zopa can effectively manage the default risk and provide reliable loaning services.

4.1.2 Auto reinvestment

As some of the money is repaid every month, Zopa will auto re-lend the money in order to make the lender have approximate full amount of interest. The process is customer orientated so the customers' satisfaction can be increased.

4.1.3 Satisfactory Security

The security of exchange is the most concern by users, so Zopa allied with a strategic alliance called Equifax to monitor credit rating of the borrowers. An online identification has to be done after credit referencing. It is to ensure that Zopa has all the information about the borrower.

4.1.4 Rights of choosing

The lending platform is appealing because it could provide individuals with quicker loans and more choices. There are no charges for people lending money. People can choose the level of risk prepared to take, with an interest rate that reflects the risk. They can also choose which market they will lend into.

4.1.5 Minimization of default risk

An individual lender doesn't lend to an individual borrower because it is too risky. Instead a lender lends their money across at least fifty Zopa borrowers, and similarly a borrower borrows from a group of Zopa lenders. So the risk is shared. All lenders and borrowers enter into a legally binding contract with their respective borrowers and lenders. Zopa manages the collection of monthly repayments and if any of that money is not paid on time, the lender could choose to sell it to the collection agency.

4.1.6 Low Operation cost, purely click only

Zopa is a click only company. It has no issue of managing operation cost. When they run a company with brick element, there are fixed costs which cannot be avoided. Zopa is in the business of connecting lenders and borrowers through the online website. The operation cost is low.

4.1.7 User Friendly

The "help" function is very useful as there are a lot of information and many problems can be solved by reading the "help". Moreover, if we ask any question though the "contact us", Zopa will reply us within a few hours. The efficiency is very high. In addition, the website is easily accessible from anywhere. Because of that, both borrower and lender can do the transaction where there is a computer.

4.1.8 Further improvement can be made

As mentioned before, Zopa business model is similar to e-Bay, the venture capitalists can share the prior experience of e-Bay with Zopa. Further improvement can be made. (For more details, please refer to the business model of Zopa)

4.1.9 Value added service

Zopa provides a service for borrowers to buy insurance for a fear that they cannot repay the debt due to some accidents. In order to lower the default risk, lenders can also buy insurance through Zopa. As a result, both lenders and borrowers can transfer the risk to insurance company

4.2 Weakness

4.2.1 Not enough advertising

The advertisement cannot attract customers and the promotion campaign of Zopa is not aggressive enough. Customers are not accurately informed of the Zopa operations and missions. Hence, it cannot create the awareness in the public.

4.2.2 Undeveloped goodwill

Zopa is a newly established company which is not known by many people. The brand is not yet well developed, so only few people are confident with Zopa. On the other hand, it is difficult to approach well known companies to form strategic alliance.

4.2.3 Localized

Zopa conducts its business in United Kingdom only. It has not fully utilized the advantages of internetborderless. It should new markets. However, there are a lot of constrains and limitations. This part will be further elaborated.

4.2.4 No guaranteed security

For consumers looking for guaranteed security may prefer to choose a deposit account to Zopa, because Zopa has its risks and may not be for everybody.

4.3 Opportunities

4.3.1 Great demand for loan

Zopa is the world's first online lending exchange. With the internet penetration and the great demand of loan, Zopa takes the first-mover advantages of the large online money market. With the lower interest expenses to the borrowers and higher interest incomes to the lenders compared to those offered by the banks and other financial institutions, it is likely that borrowers and lenders would choose to use the services provided by Zopa in order to get a lower cost and higher return.

4.3.2 Pioneering multinational online lending market

The online lending market of Britain is limited; there are rooms for Zopa to increase its scale. After the success of Zopa in Britain, Zopa can open its multinational market by applying the same system in other countries. It is believed that Zopa will lead the new market trend towards the online lending exchange.

4.4 Threats

4.4.1 High risk of entry by potential competitors

It is not difficult to imitate the matching system of lenders and borrowers of Zopa. Once an institution is able to provide credit rating of borrowers, it can set up its own system in the online lending market. Although Zopa is the first one to enter the online lending market, the market is easily invaded by potential competitors. Zopa may face keen competitions in the online lending market in the future.

4.4.2 Numerous substitutions of borrowing and lending services

Apart from Zopa, there are a lot of ways for borrowers and lenders to choose. Borrowers can make loan from banks, financial institutions and friends. Lenders can invest their money in the financial products such as time deposits, government bonds, mutual funds and corporate bonds and stocks. If Zopa cannot provide lower interest expenses to the borrowers or higher interest incomes to the lenders and maintain a small number of loan defaults, borrowers and lenders do not have any rationale and incentive to choose Zopa

5. Potential Changes

The market and the company interact with each other. The changes of market definitely affect the development of company while the new services provided by the company make changes to the market.

5.1 The potential changes of market which affect the development of Zopa

5.1.1 Acceptance for online lending

With the increasing accessibility of internet, online financing is getting more popular. Besides, the improved security of internet grants customers confidences in online financing. The public gradually accepts lending and borrowing through internet.

5.1.2 Technological development in online lending and borrowing

Advanced technology greatly reduces the cost of development of online financing. With the popularity of personal computers and PDA's, customers can make online loan anywhere and anytime.

5.1.3 Emergence of new loan services

The great demand for loan services encourages the emergence of new financial services with lower cost and better services. It is likely that Zopa would face a lot of competition in the loan market in the future.

5.2 The potential changes of market caused by the emergence of Zopa

5.2.1 Customization in lending and borrowing

The emergence of Zopa changes the habit of financial market. Instead of accepting the fixed interest rate set by the financial institutions, customers can set their own lending and borrowing rates. This increases the benefit of lenders and borrowers in customization according to theirs needs and desires.

5.2.2 Transfer of risk to customers and insurance companies

The module of Zopa reflects that customers are willing to bear the risk of lending to an unfamiliar person in return for a higher interest. Besides, some default risk can also be transferred to insurance companies, given that the borrowers had bought the insurance for the loans. Hence, lenders can still get repayment in case the borrowers are unable to repay the debt. The middleman can avoid bad debts by transferring all the default risk to customers and insurance companies

5.2.3 Outbreak of online financial vehicles and services

Since the setup of middleman for matching online lending and borrowing costs a much lower cost than those of banks or others financial institutions, this kind of online middleman can outpour in a short time if the market is profitable. Also, supporting and complementary services such as credit rating, insurance will be increasingly demanded to facilitate the operation of online loan.

6. Core Competencies

Zopa is the world's first online money exchange platform, based on the above analysis, we had summarized six core competencies.

6.1 Excellent security

opa provides an excellent security for its members, both lenders and borrowers. Security here means that all members are safe to lend or borrow money through Zopa. It is because anyone needs to sign up as a member before enjoying the services provided by Zopa. To sign up as one of the members, first of all you must be an individual over 18, resident in the UK, with a UK current account. Then you need to get in touch with Equifax, a partner of Zopa, which is a global credit rating company to get a personal Equifax credit rating. This not only let Zopa know everyone's background information, but also provides professional credit ratings for all members. In case if the credit-rating of one of the members is below the average or too low, Zopa might not let he/her borrow through Zopa. This ensures that no one is allowed to borrow or lend money through Zopa before signing up as a member. As a result, both lenders and borrowers feel that Zopa is a secure portal to deal with their financial needs.

6.2 Rights to choose

After joining Zopa as a member, then you can lend or borrow money safely through Zopa. Moreover, lenders can choose who they lend to. Since different people may have different credit rating, thus the required return for everyone should be different. As a result, a person has lower risk aversion may choose to borrow money to a person who has a lower credit rating and in return of a higher interest rate. Below shows the policies which are adopted by Zopa: For lenders, when their loan offers are effective, there are specific terms on the loan offers that, when accepted by a borrower whose bid matches those terms, are necessary to produce 10 loan contracts with that specific borrower. For borrowers, this is effectively what you are doing when you make a Confirmed Bid. Your bid is specific about all the key terms that are necessary to produce 10 loan contracts with each specific lender. Therefore, lenders can choose who they lend to while borrowers are able to choose who they borrow from. As a result, Zopa provides a win-win situation for lenders and borrowers.

6.3 Minimization the default risk

First of all, Zopa works with Equifax for accurate personal credit rating and only the customers with grade B or above can enjoy the loaning services of Zopa. It is important to screen out the reliable borrowers in order to protect the lenders and the risk of bad debts. Secondly, Zopa applies the risk sharing system. The funds of a lender will be divided into fifty equal pieces and loan to fifty borrowers with the same credit rating. It will lower the default risk by sharing the funds with a group of borrowers. The losses from a bad debt will be shared and thus, minimize lenders' loss. Thirdly, if one of the borrowers defaults, Credit Resource Solutions Ltd, a collections agency, will undertake to recover any money outstanding. The lenders can choose to sell the debt to a collections agency with a discount (not be less than 10% of the amount outstanding). The agency will pay a fixed percentage of the outstanding amount to Zopa which will be passed back to the customers. It is effective to minimize the losses of the lenders. For default borrowers, Zopa will suspend their membership. Furthermore, we will pass their details back to our credit referencing agency which may affect their ability to get credit in the future. Lastly, borrowers can choose to add Zopa Repayment Protection insurance to their loans. The insurance policy protects their loan repayments to lenders in the event that they are unable to repay due to accident, sickness or unemployment. It is common in the loaning market, but it is really important to provide more choices of protection for the borrowers. It means to protect the loan system and operation flow of Zopa

6.4 Low operational cost

Since Zopa is an online portal which deals with financial issues, the main operating cost is the maintenance of the server and update of database. When comparing with traditional "brick and mortar", Zopa suffers a much lower fixed cost and variable cost.

6.5 Professional Partners and Branding of partners

There are many professionals and strategic alliances working with Zopa so as to make the portal real. The followings are some examples of Zopa's partners.

(a) Equifaxas we mentioned above, Equifax works as a credit referencing and online identification to provide information of customers to Zopa.

(b) Karmaramathis company provides brand and communications development to Zopa.

(c) Pynk and Fluffysince Zopa is an online portal, its website design is very important. Therefore, Pynk and Fluffy helps Zopa to design its website and also provides customer experience to Zopa

(d) Actually, there are still some partners who work with Zopa, they include Naked, BJSS, Magex, Sputnik, Credit Resource Solutions Ltd, etc. In conclude, in the presence of many partners, Zopa is capable working better and thus enlarge its customer base

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