that the borrower selects. At the time of writing, Zopa esti-
mates it needs 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.
The main benefit for borrowers is that they 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, higher returns are possible than through
traditional savings accounts if there are no bad debts.
These are in the range of 20 to 30% higher than putting
money in a deposit account, but of course, 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 dif-
ferent 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.
TheFinancial Timesreported 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
web site, enquiries to Zopa are restricted to e-mail in order
to keep its costs down. However, there is a service promise
of answering e-mails within 3 hours during working hours.
Although the service was launched initially in the UK in
2005, Financial Times(2005) reported that Zopa has 20
countries where people want to set up franchises. These
include the US, where Zopa has a team trying to develop
the business through the regulatory hurdles. Other coun-
tries include China, New Zealand, India and South
American countries.
About the founders
The three founders of Zopa are chief executive Richard
Duvall, chief financial officer James Alexander and David
Nicholson. 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, who
was Egg’s brand development director.
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 proj-
ect-based or freelance. Examples include consultants and
entrepreneurs. Consequently, their incomes and lifestyles
may be irregular, although they may still be assessed as
creditworthy. 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’. The
Institute of Directors (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 Agereported Duvall as estimat-
ing 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 that in 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: http://www.zopa.com/ZopaWeb/
public/how/zopamembers.shtml.
From reviewing the customer base, lenders and borrow-
ers 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.Business status
TheFinancial Times (2005) reported that Zopa had just
300 members at launch, but within 4 months it had 26,000
members. According to James Alexander, around 35 per
cent are lenders, who between them have £3m of capital
waiting to be distributed. The company has not, to date,
revealed how much has been lent, but average loans have
been between £2,000 and £5,000. Moneyfacts.co.uk isn't
showing any current accounts with more than 5 per cent
interest, but Zopa is a riskier product, so you'd expect
better rates. Unlike a deposit account, it's not covered by
any compensation schemes.CASE STUDY 2