Zopa

Zopa is a UK-based company providing an online money exchange, allowing people who have money to lend to offer it to those who wish to borrow, instead of using savings accounts and loan applications at traditional banks. The process is sometimes referred to as peer-to-peer lending. Zopa acts as the man in the middle operating the markets.

Launched in 2005, Zopa is led by a management team that comprises many of those that founded Egg in the UK. The company is based in London and backed by Benchmark Capital and Wellington Partners.

Zopa operates within the United Kingdom, United States, Italy and a service is being developed for Japan. Each geographical area operates a slightly different model.

The name, Zopa, stands for Zone of Possible Agreement, a negotiating term identifying the bounds within which agreement can be reached between two parties. The idea for the service was identified following extensive socio-economic research which itself identified a group of individuals, coined Freeformers. [cite news |last=Bingley |first=Lem |url=http://www.itweek.co.uk/2159011 |title=Interview: Zopa shows what Web 2.0 can do |publisher=IT Week |date=2006-06-23 |accessdate=2007-03-13] Freeformers were identified as displaying different attitudes towards many aspects of life, including their money

In 2006 the Social Futures Observatory published a study titled Internet Based Social Lending. [cite news |last=Bingley and Wright |url=http://www.socialfuturesobservatory.com/pdf_download/internetbasedsociallending.pdf |title=Internet Based Social Lending |publisher=Social Futures Observatory |date=2006-10-01 |accessdate=2008-07-05] , which seeks to understand the antecedents of Social Lending, drawing parallels with Friendly Societies, and using Zopa as a major source of case study material.

Variously likened to eBay and Betfair in the UK press, Zopa is an addition to the emerging group of peer-to-peer services enabled by the internet. Prosper is a similar service based in the US.

Zopa UK

There are two different systems called "Markets" and "Listings". Customers can be a "Lender", a "Borrower" or both.

In Markets the potential borrower is graded by risk from their credit report from Equifax. The five risk bands are A*, A, B, C, and since late July 2008, Young (specifically for borrowers aged between 20 and 25, who are prohibited from using the other Markets, but not Listings). After initial online credit checking those borrowing from the Markets also get full underwriting checks by humans and many applications are rejected by the very strict checks at this stage. There are two loan periods available, 36 months or 60 months. There have been terms of 6, 12, 24 and 48 months previously although these markets were removed in an attempt to simplify for both Borrowers and Lenders and facilitate adding other specialised markets like Young.

The system will match money from Lenders who are prepared to offer their money to potential Borrowers as a function of the risk and loan term, hence the name Zone of Possible Agreement. Matching is done on a many-to-one basis, so that each Lender's loan is spread across many Borrowers, thus reducing the effect of any defaults.

In Listings the potential Borrower is able to state their reasons for wanting to borrow money and their preferred interest rate. They can chose a repayment period of 12, 24, 36, 48 or 60 months. Lenders offer funds to the potential Borrower in a reverse-auction where the lowest interest rates win. The Borrower is then able to accept or reject the loan. Borrowers from Listings do not get full underwriting checks from Zopa, mainly identification and employment checks.

For Borrowers the loans are very flexible, allowing variation of monthly payments and early repayments without penalty. For Lenders, their money is committed for the duration of the loan, with no way to exit early.

The bad debt risks are taken by the Lenders, and priced into the rate offered to Borrowers. If a Borrower defaults, the debt is normally sold to a debt collection agency and Lenders will be paid a portion of any money recovered. Zopa Markets applicants have slightly worse credit profiles than the UK average but the very strict underwriting and possibly the human to human lending and benign economy have resulted in very low default rates, well below the estimates used by Zopa.

Both Borrowers and Lenders are charged fees by Zopa. Zopa charges the borrower a fixed fee of £94.25 for each loan (whether from Markets or Listings). Before 5th April 2008 this fee was 0.5% of the loan value. Most Lenders pay a fee of 0.5% per annum on funds that have been lent. The fee is deducted monthly from the Lender's account. The Lender fee is increasing to 1.0% for Lenders who join after early August 2008. Founder Members are exempt from the Lender fee.

Zopa also pays Lenders interest on the balance in their holding accounts. This is the Bank of England base rate - 0.75%. The interest is paid monthly.

As a result of the credit crunch of late 2007 and 2008, interest rates charged by Zopa lenders rose, proving the system is responsive to prevailing lending and borrowing conditions. [cite news |last=Staff article |url=http://monevator.com/2008/03/27/are-rising-zopa-interest-rates-an-opportunity-or-a-time-bomb/ |title=Feature: Are rising Zopa interest rates an opportunity or a time-bomb? |publisher=Monevator |date=2008-03-26 |accessdate=2008-03-27]

Zopa US

Zopa launched in the US in partnership with six Credit Unions on December 4, 2007 but it closed to new business due to the US Government bailout of financial institutions on October 8, 2008.

The US model was significantly different from that elsewhere due to regulatory restrictions. Customers can be "Investors" or "Borrowers".

Borrowers can obtain a loan via Zopa from one of the Credit Unions. Borrowers will then post a profile on Zopa giving some details about themselves.

Investors buy a Zopa Certificate of Deposit. Investors are able to help Borrowers by offering them a slice of the return on their CD, reducing the amount of interest the Borrower has to pay. If enough Investors help a single Borrower then all of their repayments can be covered.

Zopa Italy

Zopa Italy runs a very similar model to that of Zopa UK, with the exception that the fees to Borrowers are a function of their risk.

Zopa Japan

This is currently under development.

Other countries

The name Zopa has the sound of the Russian swear word meaning ass. [cite news |last=Zopa Ltd. |url=http://uk.zopa.com/ZopaWeb/public/promo/newsletter/issue6/index.htm |title=This Month at Zopa, issue 6 |publisher=Zopa Ltd. |date=2006-08-01 |accessdate=2008-07-08] It's common for companies to use different trading names in such cases and Zopa may choose to do so if it seeks to enter Russian-speaking markets.

ee also

* Prosper - a similar service based in the US
* Lending Club - similar service based in the US
* Virgin Money - similar service based in the US

References

External links

* [http://uk.zopa.com Zopa UK]
* [http://us.zopa.com Zopa US]
* [http://it.zopa.com Zopa Italy]
* [http://jp.zopa.com Zopa Japan]
* [http://uk.intruders.tv/James-Alexander,-Zopa-co-founder,-on-peer-to-peer-lending_a123.html Interview with James Alexander, Zopa co-founder, on peer-to-peer lending ]
* [http://brandshift.corante.com/archives/2005/04/04/podcast_interview_with_the_founders_of_zopa.php Audio interview with Zopa founders] - a podcast recorded in April 2005
* [http://www.youtube.com/watch?v=D4vA6yDkr0A BBC News item aired on 23 Nov 2006] on YouTube
* [http://www.youtube.com/watch?v=gOGhMuEbwiY Channel 4 News item aired on 28 Feb 2007] on YouTube
* [http://www.itweek.co.uk/2159011 Text interview with Zopa founders] by IT Week published in June 2006
* [http://www.sas.com/offices/europe/uk/solutions/customer_successes/zopa.html?utm_source=newsletter&utm_medium=email&utm_content=Success_Zopa&utm_campaign=FinancialNews_2Q07 Credit Scoring benefits lenders and borrowers] by SAS_Institute published on 20 Jun 2007
* [http://www.socialnetworkingwatch.com/2008/07/zopa-ceo-dougla.html CEO Douglas H. Dolton Interview, Social Networking Watch, July 08]