eBay, BetFair, and now Zopa Exchanges for Everything Written by Chris F.

. Masse on March 20, 2007 2 Comments Via Read & Write Web, Zopa (an exchange for personal loans): Social Lending is a financial category of genuine and increasing importance and it makes much more sense than the traditional banking model. Banks have huge overheads, with thousands of employees to pay, hundreds of branches to feng shui, and countless fat cats to feed. And they take far more than their fair share of peoples money last year, the Big Five (HSBC, Barclays, HBOS, LloydsTSB and RBS) reported combined profits of over 30bn. By cutting out the banks with their huge overheads and large margins, both lenders and borrowers get better rates. Social Lending works because you get a fairer deal on an open marketplace than behind closed doors. Social Lending has been happening on a small-scale in families and social groups for hundreds of years and the internet has opened it up to everybody. The power of the internet to bring people together quickly and safely is why Social Lending on a largescale is now possible and why it will continue to grow and grow. [...] Theres no smoke and no mirrors unlike at a bank. Because banks use your money to make even more money for themselves. They lend some of it out, gamble some on the price of tin or the Yen depreciating, and invest the rest in any other money-making schemes they can think of. Whereas at Zopa, people who have spare money lend it directly to people who want to borrow. There are no banks in the middle, no huge overheads, and no unethical investments. So that the Zopa marketplace works smoothly, weve put a series of checks and balances in place. This is how it works: - We look at the credit scores of people looking to borrow and work out whether theyre an A*-, A-, B- or C-rated borrower. If theyre none of these, then Zopas not for them. - Lenders make lending offers Id like to lend this much to A-rated borrowers for this long and at this rate. - Borrowers size up the rates offered to them, and snap up the ones they like the look of. If they dont like the rates today, they can come back tomorrow to see if things have changed. - To reduce any risk, Zopa lenders only lend small chunks to individual borrowers. A lender lending 500 or more would have their money spread across at least 50 borrowers.

- Borrowers enter into legally binding contracts with their lenders. - Borrowers repay monthly by direct debit. If any repayments are missed, a collections agency uses the same recovery process that the high street banks use. - Zopa earns money by charging borrowers a 0.5% transaction fee and lenders a 0.5% annual servicing fee. - And everyones happy lenders get great returns, borrowers get great rates, and theres not a bank or a bank manager in sight. Watch this BBC2 piece (click on the Lending Exchange option and then click on Play) CNN Money Zopa - Lend And Borrow On The Revolutionary "eBay Of Banking" Date 21/07/2007 Zurich Club | By Michael Wilson If youve ever bridled at the perceived injustice of paying 10% plus on borrowed money from a bank but getting only 5% on savings deposits, then listen up. Of course, the 5% differential is swallowed up in an array of bank overhead costs; administration, branch fees, salaries and big expensive television adverts telling you how "wonderful" they are. And then theres the bank profit margin on top. All told, using a bank for your conventional lending and borrowing is a pretty high cost and inefficient way of employing your money in the internet age. Thats why the banks are starting to get rattled by a new "social" model of lending that cuts out the middleman and delivers all the benefits of a low-cost infrastructure to both its borrowers and its lenders. The borrowers pay lower fees; the lenders get higher rates. So who needs those banks anyway? Zopa (Zone of Possible Agreement) is an internetbased system that introduces lenders directly to borrowers, using a credit checking system that protects lenders from risking their money on complete chancers. Its only been going since 2005, but already it has 150,000 members, with borrowers paying an average of 6.75% gross. Its 50,000 lenders average 6.25% return after a 0.5% annual fee. Not a fortune but ahead of most savings rates and likely to increase in a rising interest rate cycle like that currently prevailing. And Zopa hardly ever spends anything on advertising. Indeed, why would it need to when the basic deal it offers is so competitive?

Zopa, then, is fast becoming the banking equivalent of eBay. It isnt a bank, any more than eBay is a shop. Instead, it lines up lenders and borrowers and then sets up a structure whereby they can find out whether there are enough people interested to make a deal work. By no particular coincidence, its backed by the people who started eBay in America. Zopa was originally dreamed up by Dave Nicholson, a strategy manager at Egg, who split off, together with a group of his senior colleagues, to set up the new venture. The team has grown somewhat since then, with operations in both Britain and the United States. The UK arm is led by CEO James Alexander, a former Strategy Director at Egg, and Tim Parlett, who managed Barclays settlement systems. Chief Financial Officer Giles Andrews comes from Tesco Personal Finance, and Global CEO Doug Dolton has previously run two internet lending agencies in the States. How Zopa works Zopas online credit vetting system invites potential borrowers to subject themselves to online credit scrutiny by ratings agency Equifax, using a sliding scale that runs from A* (excellent) down to D (poor) . If the borrowers dont score at least a C, then Zopa wont deal with them at all. The system, at www.zopa.com, is online and operational 24 hours a day. Zopa approved lenders get invited to set out the terms on which theyd like to lend their money. For instance, a lender might say: "I want to lend 10,000 to B-rated borrowers for five years, but Ill want an 8.5% return because they arent A-rated." And Zopa will put together a package whereby the lenders 10,000 gets spread among several hundred B-rated borrowers each of whom individually gets only a tiny fraction of the money, so as to spread the risk of default as thinly as possible. For C rated borrowers, the returns to a lender can be as high as 14%! It might take a short while for the lenders loan package to be assembled, but he or she gets 4.5% interest right from the word go. Then once the deal with the various borrowers is finally done, the borrowers make their monthly repayments to Zopa in the usual way by direct debit, and Zopa passes the accumulated cash back to the lender. The cost of the service is covered by a 0.5% one-off fee to the borrower, plus a servicing fee of 0.5% a year to the lender. Which is a whole lot less than a bank creaming off 5%. Any missed loan repayments are chased up by Zopa in exactly the same way your bank

would do. Defaults? Currently theyre running at only 0.05%, which is less than a tenth of the rate that the banks normally claim. And obviously, since youre shouldering the risk of default when you lend through Zopa, that means that youll take the full impact of any shortfalls from your borrowers. (Bear in mind here that your risk has been spread among hundreds of different borrowers, so the chances of any one of them hitting you for more than 10-20 are fairly slim.) But a quick word of warning here Zopas 0.05% default rate is likely to rise as time goes on, because defaulters tend not to show up until a loan has been running for a fair while, and Zopa simply hasnt been going for long enough to have reached normal "operating temperature" on defaults, as the banks have done. Its too early to be comparing like with like. Already some of the leading banks are starting to whinge about the amount of business that seems to be going the way of Zopa and its American counterpart, Prosper. Considering the loss of business, who could blame them? Lend up to 25,000, borrow up to 15,000 But many of the lenders cite a more personal reason for preferring Zopa to the usual bank deposit route. With Zopa, they say, they feel theyre helping people more directly than a bank would do, and the interpersonal element makes a real difference to how they feel about it. Borrowers, for their part, feel less ripped-off and less generally hostile to their lenders, because of that same interpersonal element. Which is rather odd when you consider that theyll never meet their benefactors either. If you want to lend, think about the interest rate cycle... As a borrower, can you pay off your loan at any time without incurring any penalties? Yes, apart from your initial 0.5% arrangement fee which will still need to be covered. As a lender, can you vary the terms of your loan if bank interest rates change? No, theyre fixed for the life of the loan. So this year, when bank rates are probably at a cyclical high, could prove a good time to be considering lending money. What are the limits for borrowing and lending through Zopa? For borrowers, loans can be between 1,000 and 15,000. Lenders, on the other hand, can invest anything from 10 to 25,000, or even more if theyre prepared to go to the hassle of getting a

Consumer Credit Licence from the Office of Fair Trading. Do you need to pay income tax on the interest from your Zopa lending? As youd expect, yes. Are you covered by the Financial Services Compensation Scheme in case it all goes wrong and Zopa goes bust? No, its not a member of the scheme, though it does have its own Consumer Credit Licence from the Office of Fair Trading. And Zopa says that it will indemnify its lenders against actual fraud. How to get started As a borrower, your first step is to complete the online credit application. Youll need to be earning at least 25,000 a year, be on the electoral register and have a good credit record. Once youre in the system, with an A*, A, B or C rating from Equifax, youll be shown a range of loan offers from various lenders, and itll be up to you to choose one of them. If you dont find one you like, come back and try another day. Then, when your loan is finally ready to roll, youll be asked for a 0.5% arrangement fee, which will be tacked on to your loan. As a lender, you set out your terms using the online form and wait to see whether Zopa can match your demands with a suitable parcel of borrowers. (Remember, therell be several hundred of them, so your risks will be very well diversified.) Once the loan is ready to roll, you move the money from your bank, or from an online Paypal account, to a holding account at Zopa. As mentioned, youll get 4.5% interest from the moment you transfer the money and for all the time it is not being lent. Both sides will be locked into a legally binding contract with each other which, in both cases, means that therell probably be a hundred or more tiny bilateral contracts. You wont be aware of that panoply of complication, obviously, and nor will you need to deal with it personally. But its good to know that your risks are being properly spread. Viable alternatives for your investment money? There are plenty to choose from. Current high-yielders include the Halifax Regular Saver account, which pays you 7% over a fixed one-year term. (Or 10% for a Halifax Childrens Regular saver account.) And the National Savings Direct ISA still pays 6.3% tax-free, which is equivalent to well over 10% for a top-rate taxpayer. But if you feel that helping other people to escape the greedy clutches of the lending banks is your way of saying thank you for the

success youve had in life, a loan to Zopa might well be the way to go. Action to take: For further information on how to lend and borrow over the internet log on to www.zopa.com P.S. If you enjoyed this article then we encourage you to sign up for The Zurich Club. Gain access to a seasoned panel of experts, whose tips and advice are intended to deliver top notch gains. ^ Back to top

bringing Web 2.0 to Australia. Monday, August 08, 2005 Zopa : The ebay of P2P Lending ? Another great profile by TechCrunch, the New Red Herring as Jeff Jarvis calls them. Expect more in the Web 2.0 Financial Services space : Zopa, peer2peer lending. Kewl. Another 4 letter 2.0 start-up. (they just profiled yorz.com - there must be more 4 letter URL' available later in alphabet) Company: Zopa Launched: March 2005 Status: Funded by Benchmark Capital and Wellington Partners Location: London Overview: Zopa, based in London, is a lending network. Zopa synidicates loans requested by borrower members out to lender members, based on criteria and parameters set by both parties. Zopa stands for Zone of Possible Agreement, which is the overlap between one persons bottom line (the lowest theyre prepared to get for something) and another persons top line (the most theyre prepared to give for something). Its the way people negotiate all sorts of stuff - buying a car, getting a mortgage - even a teenager negotiating with parents about staying out late. If theres no Zopa, theres no deal. Zopa is the first lending and borrowing exchange. What we do is very simple. We put people who want to lend in touch with credit-worthy people who want to borrow. And because theres no middle-man - the borrower pays just a 1% exchange fee to Zopa upfront - both benefit. Were not sure about the no middle-man argument since Zopa is, in effect, acting as a middle-man and taking a 1% cut, but the idea is brilliant nonetheless, and it certainly seems to make it easier for people to borrow small amounts of money at reasonable rates.

Borrowing and Lending:

In order to lend or borrow, Zopa does a background and credit check on you to ensure that you are appropriate for their market. They attempt to do this online and with as little hassle to you as possible. Once you are approved you can lend or borrow money within various limits. For instance, you may borrow from 1000 to 15000, in 500 increments. Lenders can loan a minimum of 500 and a maximum of 25,000. If youd like to lend more than 25,000, you must obtain a license to become a consumer lending business. Zopa will help you through this process. Zopa spreads the lending risk among many borrows to reduce overall loss risk. Contracts are set at 10 each and must be spread among at least 50 different borrowers. And Zopa aggresively pursues bad debts: How does Zopa deal with bad debts? If one of your borrowers defaults, Credit Resource Solutions Ltd, a collections agency, will undertake to recover any money outstanding. Should it be unable to do so after 120 days, you agree to sell the debt to a collections agency for a price that will be agreed at the time, but which will not be less than 10% of the amount then outstanding. The agency will pay a fixed percentage of the outstanding amount to us which we will pass back to you. We will not allow that borrower to borrow again and will suspend their membership. Furthermore, we will pass their details back to our credit referencing agency which may affect their ability to get credit in the future. Zopa claims 16,000 registered members. Currently, Zopa is only open to U.K. residents

who are more than 18 years old and have a bank account and personal Equifax credit rating. Additional information is available at their Help site. The Zopa team (quite a long list) can be viewed here. Additional Links: Scott Loftesness (we first saw this at Scotts site), Johnnie Moore (podcast interview with Zopas CFO, James Alexander and its Inventor, Dave Nicholson - includes partial transcript), Wired, PaymentsNews, Business 2.0, Matt Asay, BubbleGeneration, UserDriven posted by redbarren at 12:05 PM

Zopa: lending the eBay way

Published:08-March-2005 By BR staff writer An online exchange called Zopa has been launched that enables members to borrow or lend up to GBP25,000 from peers rather than using a traditional bank or building society. Building on the eBay concept, the website is a market for lending which provides investors with higher returns and borrowers with preferential rates to those offered on the high street. However, the concept may be a tough sell. The founders of Egg financial services have launched a revolutionary online marketplace for loans. Individuals can sign up to Zopa as either a borrower or a lender. On application, a borrower's credit rating is checked with Equifax and Zopa undertakes anti-fraud checks. The borrower is then placed into one of two markets depending on their credit rating, one catering for applicants with a medium to good credit rating and one for individuals with a very good rating. The borrower then stipulates a rate at which they are prepared to borrow, the amount of the loan and the repayment period. Lenders choose which market they wish to lend in depending on their appetite for risk and the rate at which they are prepared to lend. Borrowers and lenders are automatically matched up based on each party's specified criteria.

Zopa charges borrowers a 1% fee and acts as the intermediary, undertaking credit checks, facilitating all collections and transactions in the marketplace. It will also outsource bad debts to a debt collection agency on behalf of lenders. It estimates that average returns will be 6-7%. To limit overexposure, lenders can only lend a maximum of GBP200 to any one borrower and their investment will be split among at least 50 borrowers. So for a GBP15,000 investment, a lender is automatically matched up with at least 75 different borrowers. Thus, if one borrower defaults, the maximum a lender could loose is GBP200. For the marketplace concept to be successful, it will quickly need to attract a large number of lenders and borrowers. This presents somewhat of a Catch-22 situation. Prudent investors will be attracted by the returns but will first want to see proof that the company's credit scoring was perfect before investing their money. Equally, financially astute borrowers may be attracted by the promise of preferential rates, although without a large volume of lenders signed up, it's unlikely that they will get significantly better deal considering some of the exceptionally low rates currently on offer from direct lenders. Replicating eBay's impact in banking, while not impossible, seems somewhat unlikely at the moment.

Why banking is about to get the eBay treatment

By Annie Shaw, Moneyextra.com December 13 2006 If you are a bit of an individualist, don't like the idea of always doing business with big corporations and are the sort of person that shops on eBay and uses the internet for social interaction, then you are just the sort of person who could be in the market for "social lending". Social lending is not a new phenomenon. Long before a visit to your friendly high street bank for a loan became the norm, you would have had to approach friends, family someone you knew, or someone you knew of - even the local pawnbroker or moneylender. Now the internet is bringing the practice back, with "peer to peer lending", known for short as "p2p", using so-called "Web 2.0" technology that allows online collaboration and sharing. In other words, the technology that allows us to bid for goods on auction sites and interact with strangers on social networking sites, such as YouTube and

MySpace, now allows us to lend money to each other. The prime mover in the UK p2p lending market is Zopa, dubbed "the eBay of lending online", which was established in March 2005 by members of the team that launched Egg, the Prudential's internet bank, and is backed by the same investors who backed eBay, Betfair and Skype. It currently has 105,000 members. This week's best rates on loans What is Zopa? Zopa stands for Zone of Possible Agreement. This zone is what the founders describe as the overlap between one person's bottom line (the lowest they are prepared to get for something) and another person's top line (the most they are prepared to give for something). The idea is that, by cutting out the banks, the borrower pays less and the lender receives more in the way of interest. The scheme is not unique. Earlier this year www.prosper.com, was launched in the US by Chris Larsen, co-founder of the online mortgage and personal loan lender www.ELoan.com, and backed by the same financial backers as Zopa. A more recent entrant into the US market is www.paltrust.com, which allows borrowers and lenders to negotiate not just personal loans but also the raising of start-up capital for a business. There are also similar sites in the US that raise funds for worthy causes and projects, such as www.givemeaning.com and www.fundable.org. What's the attraction of peer-to-peer lending? A study of "internet-based social lending", carried out by the Social Futures Observatory, found social lending growing in popularity. It attributed this to people's appreciation of both the increased transparency and the connectedness with others that comes from lending to and borrowing money from like-minded people, Just as important was that p2p lending does indeed offer higher rates of return on investment for lenders, and a lower rate of interest than is offered by banks for borrowers. The survey, which was based on Zopa members, found that 81% of lenders felt that Zopa offered "significant control", whereas only 4% felt that mainstream financial services offered the same level of control. Zopa borrowers felt the same way; with 70% of borrowers saying they felt Zopa offered "significant control", and only 1% that mainstream banks offered the same level of control. Additionally, 74% of Zopa members felt that Zopa "greatly" facilitated self-help and entrepreneurialism, while only 4% felt that high street banks offered these benefits. On the other hand, in the survey of general bankers, almost three-quarters felt that their

high street bank facilitated only minimal or partial self-help and entrepreneurialism. Simon Woodroffe, the founder of conveyer belt Sushi chain YO! Sushi and one of the original dragons on the BBC Two show Dragons Den, is one of the most high-profile of Zopas 105,000 members and believes it is a brilliant idea. I think it's just a taste of the future, he said. It seems so obvious. You cut out the middlemen, cut out the bank, cut out the High Street, it makes all the sense in the world. Im totally, totally into it." How does Zopa work in practice? Lenders sign up online and, much in the way that eBay sellers display the goods they have on sale, they display how much they are prepared to lend and for how long. Different lenders will offer different interest rates, just as eBay sellers offer different items and prices, or matched betting sites offer different odds. The rate on offer will usually reflect the degree of risk the lender is prepared to take. Higher rates will indicate a higher tolerance of risk and a diminished likelihood of being paid back in full. Cautious lenders will receive lower rates. Those who want to borrow must first have their creditworthiness rated by Equifax. Zopa has a special arrangement with Equifax, so that the search does not affect the applicant's credit rating. Lenders then move money from their bank, or via Paypal, to a Zopa holding account, from which it is passed on in the form of a loan or loans. All loans are repayable on a monthly basis over a period agreed by both lender and borrower. Lenders can lend out between 500 and 25,000, at whatever rates or terms they wish. Borrowers can borrow any sum between 1,000 and 15,000. Borrowers are allowed to repay the entire loan early without penalty. The difference between the amounts available to borrow and what is actually lent out by individuals is the result of a risk management strategy. To cut risk to a minimum the money each lender puts in is spread between at least 50 borrowers, and each borrower obtains their loan from several lenders. In other words, the risk to the lender is spread in a way similar to the way a bookie offsets his bets. All lenders and borrowers enter into a legally binding contract with their respective borrowers and lenders. Zopa manages the collection of monthly repayments, and, if any of that money is not paid on time, uses exactly the same sort of recovery processes that the high street banks use. Check your credit report for free

What's the downside to social lending? Probably the main drawbacks are a lack of awareness of the availability of the service, and lack of confidence in the system until it grows in size and prominence - and the fact that many of the high street lenders are still able to offer keener rates. And while the risk is spread, peer-to-peer lending doesnt have the financial security enjoyed by leading banks, which have multi-billion pound reserves to draw on in the event of becoming overstretched. Will Zopa prosper? Well, when friends of Pierre Omidyar heard he was about to set up an online auction site and call it eBay, they probably laughed and said it would never catch on. Google's founders, Larry Page and Sergey Brin, did a lot of head-scratching in the early days about how they could ever make money, and Friends Reunited was set up as a hobby site before it was sold to ITV for 120 million. People are certainly looking for ways to avoid tangling with banks, so Zopa will appeal to a wide audience and offer an attractive alternative for borrowers and lenders. The site is already planning its entrance into the US market. Will it become a force to reckon with? Only time will tell. Useful links Visit the Zopa website to find out more How to claim money back from your bank Why were driving media men nuts See if you can reduce your debts by consolidating your existing loans Eight steps to find the right personal loan