Lending Goes Peer-To-Peer
Any industry making a huge profit margin off its customers is a good candidate for disruption. Banking is a classic case -- just think of the 19 percent interest you pay on credit cards and the 2 percent you earn on your savings account.
Zopa is closing that gap by using the Web to allow personal lending on a massive scale. The startup was the first company to introduce peer-to-peer lending in the United Kingdom 18 months ago and is about to launch in America. "What Skype did to telecoms, this could do to banks," says David Cowan of Bessemer Venture Partners, which contributed some of the $31 million in funding the startup has attracted to date.
Scott Anthony, a managing director of Clayton Christensen's consulting firm, Innosight, is intrigued by the disruptive potential of peer-to-peer lending. "Are there ways to loan amounts that banks won't lend because they're too small," he asks, "or to serve customers who would otherwise never be served?"
The idea is simple. People join Zopa online as either borrowers or lenders. The lenders proffer money not to individuals but to a pool of people grouped together because of similar creditworthiness. Zopa assesses the credit risk of the borrowers, pools the capital, and matches consumers who need money with consumers who want to lend it. Since Zopa is not technically a bank and doesn't lend money itself, the capital requirements to run the business are relatively small.
The average interest rate on a Zopa loan is 7 percent. For the lenders, that's much better than even a CD, and for the borrowers, it sure beats a credit card or most bank loans. Zopa takes a 1 percent fee, split between the borrower and the lender. So far, about 90,000 people have signed up, and more than $100,000 is lent every day (totaling more than $10 million so far). And only 0.05 percent of Zopa's loans have turned into uncollectible debts.
"We are moving from a consumer society of mass production to a society where we are defined more as individuals," says Zopa CEO Richard Duvall. Yet in banking, Duvall points out, "there are still enormous corporations controlling our money." Duvall believes that a nimble Zopa can trounce banks in assessing credit by gauging things that banks typically don't review, such as a person's eBay ratings. And he's injecting a social aspect into lending. Just as in a social network, lenders can read the online profiles of the people borrowing their money. "If I borrow from real people," Duvall says, "I'm more likely to pay back than if I borrow from a faceless bank."
Managing a Consumer Lending Business