Zopa: You too can be a bank

Business & entrepreneurship, Internet, Personal finance

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piggy bank

I don’t know how many people in the US have heard of , but it’s a year-old UK company that’s applied P2P in a whole new way by cutting out banker middle-men. Think ebay, but for lending and borrowing. I think it fits in nicely with the whole web 2.0 concept. Due to regulations, right now you can only participate as either a lender or borrower if you’re in the UK, but they’ll soon be coming to the US. Zopa stands for “zone of possible agreement”, a term in negotiation.

It’s gotten rave reviews so far in the UK, and the customer base has grown to over 60,000 people. Basically, you as an individual can either lend to or borrow money from other individuals in a technological twist on the traditional that’s worked so well in India, Bangladesh (think Grameen Bank) and other developing nations. Zopa earns money by charging a small fee matching lenders and borrowers (again, much like how eBay operates).

The business model has met with some skepticism — e.g. it sounds all well and good, but will it work, or will people default on their loans? — but members rave about it. Among other things, it’s nice to think you’re lending to and helping another fellow person who needs it and vice versa (not borrowing anonymously through a stuffy institution like a bank); it should be a novel way to earn a decent return on extra money you have on the side; and it’s also a more flexible way for those with untraditional incomes or irregular cash flows (such as the self-employed) to participate. Another company, Prosper.com is also doing something similar.Applying microfinance in developed nations and in the for-profit sector has been notoriously difficult. A few years ago, there was a microfinance fund called in Canada that aimed to be both for-profit and help the poor at the same time that closed because the mutual aims of making money and the cost of assessing and finding appropriate borrowers conflicted with each other. They could not reach acceptable economies of scale because assessing non-traditional borrowers took too much time and money (using credit scores doesn’t work), and default rates soared. They were brave and admirable to have published a case study in MS Word format a few years ago (scroll down on the site linked above) describing what happened in case you’re interested. Insightful stuff.


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