Why the banks need Zopa
As an external adviser who has worked closely with Zopa for many years now, this may seem an odd title for my first Blog on the site. But the events of this week serve to underline this fact more than ever before.
As Barclays and HSBC post half year profits akin the GDP of a small country (£3 billion each, in just 6 months) and the bonuses at Canary Wharf appear to be flowing like honey again, it is a bit like punk never happened.
Despite some Cheshire cat smiles in Docklands, things are very different for these banks’ customers. The charges banks are taking – primarily through the spread between the interest they charge on lending and the interest they pay on savings – have never been higher. They’ve stopped lending to anyone other than the most secure borrowers, and even then at rates in the teens or worse, despite Bank of England and LIBOR rates being at record lows.
Despite Alistair Darling’s threats, the Conservatives promising major reviews of the banks if they are elected, Mervyn King saying it’s all quite outrageous, and the FSA standing in the wings like some giant toothless dinosaur, the banks are just carrying on as if nothing has happened.
But of course something has happened. Our children’s children’s children will still be paying off the costs - direct and indirect - of the banking industry’s enormous mistakes of the recent past. Without effective action from the Government and regulators, these mistakes will be made all over again, as personal greed and the arrogance of bankers stomps all over the lessons that should have been learned on the way to being bailed out by the taxpayer.
The problem is that unlike so many other far healthier industries, the banks have no effective competition. Microsoft is kept in check by Apple and increasingly Google. Warner, EMI and Sony are battling it out with the digital download phenomena. Tesco has to watch out for Sainsburys, M&S and Waitrose. Even the BBC has to keep something of an eye on ITV and Channel 4.
Banks don’t have the self-righting mechanism of genuine competition. It’s become a cosy club where customers are simply the supplier of money for banks to punt in their casino operations, politely called ‘investment banking’.
Meanwhile, Zopa – the world’s first online peer-to-peer lending marketplace – passes the £50 million of loans milestone and does 40% of that in just this year alone. Compared to the banks the numbers are of course tiny, but the pace of growth is quite remarkable.
Could Zopa become the first real competitive pressure banks feel to put their customers more at the centre of what they do? I think so. And that would be good for all of us – even ultimately the banks themselves. Imagine a world in which people liked their bank…
But when I have suggested this to one or two bankers in charge of strategy for a couple of the big banks, they laugh – out loud.
They are amused because in their eyes, peer-to-peer finance is so small, they think it doesn’t even warrant thinking about. When I made the point that P2P finance is growing fast and that every new phenomena had to start somewhere (iPods etc) there is a chilling response. In hushed, conspiratorial tones they say, “If Zopa ever gets big enough to matter, we will just undercut it on price for as long as it takes to kill it off, then get back to normal. Simple.”
As memories of British Airways v Laker and then Virgin Atlantic come rushing back, I feel room for optimism by remembering another new kid on the block, much closer to Zopa in many ways, and one that every big retailer laughed at in their early years – eBay.
It took them many years, but they have now not only revolutionised the second hand goods industry, they are the largest retailer in the world.
Maybe those bankers are laughing just a little too loudly…
Jamesd
Posted on August 10th, 2009 at 5:27 pm
What do you propose as the solution to the shrinkage of the money supply if Zopa lenders replaced all bank loans? Perhaps lending via Zopa should be banned during times of fiscal easing?
How can I effectively leverage my lending via Zopa?
Zopa is innovative in one very relevant way: it’s not doing the lending so the loans don’t show up in its own books and bad debt can’t quickly make Zopa insolvent. That’s also a structural vulnerability, since Zopa in theory could manipulate acceptance criteria without direct financial cost. With no external auditing and reporting on this to lenders the risk will remain, so eventually there will be some lender-visible external auditing to counter this risk. It can wait a while, Zopa is still in the early days with high reputational risk for getting it wrong. Though the historic bad debt experience in C60 could have attracted more adverse publicity than it did, so this control may not be as effective as it could be yet.