As banks fall spectacularly from grace, three year-old online "social lending" brand Zopa is going from strength to strength. In the process it is beginning to change consumers' assumptions about financial services.
But it is also a good example of how a groundbreaking business was created by adapting ideas culled from elsewhere.
Zopa facilitates the lending and borrowing of money by consumers. But whereas banks fix interest rates that allow them to make a profit on the difference between the two rates, Zopa allows its lenders to decide the interest rate they want to lend money at, depending on the borrower's credit rating and financial circumstances. It makes money by charging a flat arrangement fee.
The inspiration for this idea came from the corporate bond markets, which makes a similar calculation on the rate at which it will buy a company's debt, based on its creditworthiness.
"We thought: why shouldn't consumers benefit from this type of system?" says Giles Andrews, managing director of Zopa.
The result is a highly transparent and democratic system, which creates a community out of lenders and borrowers and gives both sides better deals, on average, than they could get from traditional banks. Borrowers post statements on the site explaining to lenders why they want the money and defend their likelihood of repaying the debt. Their income and outgoings are also displayed to help lenders decide whether they can afford repayments.
Last month for example, Nathan, a 20-something actor rehearsing for panto, was looking for £1,900 to pay off some expensive store card debt. He raised the sum from 38 individual investors at an average interest rate of 11.6%. Braydon wanted £3,100 to invest in new equipment for his window-cleaning round. After answering a variety of questions on the site about the prospects for his business and receiving some advice, 77 people lent him the money, some as little as £10 each, for an average interest rate of 16.24%.
Unsurprisingly, Zopa had some fairly hefty challenges to overcome at its 2005 launch. It experienced difficulties acquiring the debt rating data it needed to be able to analyse borrowers' credit-worthiness for lenders. "The companies selling this data were worried about upsetting their principal customers — the high-street banks — by dealing with us," recalls Andrews. "Luckily, we found someone at Equifax who believed we were worth investing in." A need for money transfer facilities also required a direct relationship with a bank, a deal eventually struck with Royal Bank of Scotland.
The tone of the site is very important, says Andrews. "We were heavily influenced by the success of Ebay. We saw its success resting on the fact that people like dealing with other people; they enjoy the interaction. So we tried to emulate that in our planning, establishing the system for lenders to have a publicly viewable dialogue with borrowers. We want our users to feel that getting involved with Zopa means more than just the financial transaction."
Community
As well as making the brand more attractive, adds Andrews, this strong sense of community acts to minimise borrowers defaulting on their loans as "people behave better if they feel part of a group".
The language on the rest of the site mirrors this very conversational tone, avoiding any complicated financial services jargon. Discussion boards encourage borrowers and lenders to chat about any aspect of Zopa's workings, and this also acts as feedback for Zopa's management. "Criticism is helpful," says Andrews. "In every stroppy posting there's something of use."
The team that came up with the idea of Zopa had all come out of Prudential's Egg brand — and the parentage is clear. The Egg brand, although a conventional bank in mechanics, was designed to have a friendlier brand image than traditional high-street banks, taking up the reins of banking innovation from First Direct. Zopa, says Andrews, was conceived to take this revolution in style on to a totally new way of operating.
Andrews, an Oxford graduate who built up a chain of car dealerships before taking up the helm at Zopa at its fundraising stage in 2004, has had a crash course in managing innovation over the past three years.
His advice to others is to concentrate on the system of bringing ideas to market: "People worry too much about the idea creation stage. If you look at most companies I think there's a wealth of ideas. Where they often fall down is in the development phase."
Prioritisation, he believes, is key. "There's often complete inertia about delivery. People don't want to develop others' ideas or there are issues finding the budget to invest. You need to think ruthlessly about what is most likely to succeed and then plough all available resources into that. If you hedge your bets with two or three competing ideas, there's a good chance nothing will get delivered."
Andrews isn't claiming that all the Zopa team's ideas have been successful — a venture in the US is being wound down, and the company is still working on encouraging as many borrowers to interact with the site as lenders. But it continues to look for ways of underlining its radical beginnings with new developments. Volunteers have been recruited from Zopa's army of borrowers to act as "Zopa ambassadors", answering questions on the site from potential borrowers.
The credit crunch has only been good news for the brand, with loan application having accelerated sharply over the past year; £25m has now been lent since Zopa's launch.
"Banks were never liked, but they were trusted," observes Andrews. "That is changing."
Weblinks
Zopa: zopa.com
