philipg27 is a lender at Zopa, sometime contributor to the Discussion Board and an habitual moaner about the design of the Zopa website. [His words, not mine! Dave]
Recently I was listening to a comedy program on Radio 4. In one sketch there was a Professor who cynically dismissed a number of "new-Age" ideas. As part of the sketch the Professor referred to his book "It’s not a Dreamcatcher it’s a piece of String". Whilst the sketch itself was not a classic the title of the book stuck in my head.
Why is this at all relevant for Zopa? Well my blog piece is a bit of comment about the nature of Zopa, and re-working the book title I thought this piece could be called "It’s not a Community it’s a Market".
I’ve previously seen Zopa referred to as a community, in the same way that the micro-credit institutions in the developing world work at a community level. For me Zopa fails to pass the two tests I would have for a community.
- The two parties (borrowers and lenders) know each other.
- There are shared communal values that encourage the repayment of debt, and conversely would stigmatise any borrower who failed to complete repayment.
I am a lender at Zopa and there is clearly no way, or mechanism, that requires me to know any of the borrowers at Zopa. Regarding the second test I’m not convinced that any borrower at Zopa feels more obligated to repay a P2P loan than any other "commercial" loan. I suspect that the main motivators for borrowers to repay loans are both honesty, and the need to maintain a good credit rating.
As an aside I guess the most likely group of Zopa participants to be capable and willing to form a community would be the Lenders, but such as situation would probably result in raising of the rates at Zopa and accusations of operating as a cartel!
The other "myth" I want to comment on is the reference to Zopa as the eBay of P2P finance. I don’t agree with this. eBay is a brilliant example of natural, highly scalable, monopoly. The more people that use eBay the greater is the incentive for both sellers and buyers to use eBay. In addition as a company eBay requires relatively little addition investment to host the second million auctions than the first. Contrast this with Zopa. Zopa will never become the single source for individuals to lend and borrow money, if only for the reason that most people probably prefer the safely of collective lending, such as via a Building Society" where the problems (and risks) of an individual defaulting are hidden from the lender.
A better analogy for Zopa would be the insurance market that Edward Lloyd set up in his coffee house. Here people met and did business, thus creating an insurance market. In fact this analogy is even better when you consider the actual mechanisms employed at Lloyds of London. As well as providing a "market” for buyers and sellers to meet Zopa provides two additional functions that mirror the market at Lloyds (Or at least as I remember them from my time there in the late 1980s).
Firstly Zopa itself provides the function of assessing the risk of each and every loan, in the same way that the Lead Underwriter at Lloyds would assess the policy being requested by the Insurance Broker.
Secondly Zopa provides the matching mechanism to bundle a set of loan contracts by the Lenders into a single Loan for the Borrower, in the similar way that the insurance broker at Lloyds would go around the Syndicates at Lloyds until the policy was fully underwritten. As an aside Zopa demonstrates almost perfectly what an ‘O’ level Economics student is taught about markets, at least on the supply side. When the price goes up the amount of money available to borrow goes up. Zopa even publish copies of this information on a weekly basis.
Having banged on about Zopa being a market I should finish by commenting on why this is important. Well most importantly for Zopa the message is that Zopa should be working towards making the market easy to use rather than attempting to foster a sense of community. The website is notoriously difficult to use, it should be as simple to use as my online-stockbroker, and provide me with enough information to make informed decisions on the most effective options to lend money. I don’t really need need pictures of people jumping over mountains whilst baking bread I need cash flow statements, better reporting and maybe even some idea of what’s happening to my loans being processed that are currently lost in the Zopa Triangle …