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Interview: Zopa gives social lending a Web 2.0 spin

In my case, social lending is usually what happens when I go to meet mates in the pub and forget my wallet, but still want to buy a round. Thankfully, that’s not the general idea behind Zopa.

Instead, it’s like a financial cross between eBay and spread betting, matching up lenders and borrowers, making its money by charging the borrowers 0.5% of their loan amount, and the lenders a 0.5% annual service fee.

I talked to co-founder Dave Nicholson about how the service has developed, whether it’ll face competition from traditional lenders like banks, and how it could evolve with some new Web 2.0
features in the future.

The site’s three co-founders all left internet bank Egg in 2003, keen to get working on another startup. They identified a group of consumers who weren’t being well-served by existing financial services organisations – for example self-employed people, or people with irregular incomes. But at the same time, eBay was a huge influence on what would become Zopa.

“I was looking at eBay, and thinking how would it work if eBay did money,” says Nicholson. “If you went on eBay and sold £1,000 to someone, and asked for it back in a year’s time with interest. But of course you can’t do that on eBay – money is one of the long list of things you can’t sell on there. And that fundamental idea fitted well with the group of consumers that we’d identified.”

The idea of matching up lenders with borrowers in the same way that eBay matches buyers and sellers is logical enough, although Nicholson admits that Zopa is constantly short of one or the other, although it varies which (currently, lenders are in short supply). However, he stresses the benefits to the latter group.

“Lending to someone to improve their house or buy a new car is much more grounded than investing in exotic shares or funds,” he says. “There’s a sense of tangibility about these investments. Obviously, they do it for a financial return, but there’s also a social return, and the knowledge that they’re helping somebody.”

This is bolstered by the fact that Zopa lenders can see details of the people they’ve lent to. Not their real names and addresses, but ther user name, where they live, and what they’ve taken the loan out for. Nicholson says Zopa also encourages borrowers to leave messages for their lenders saying what they’re doing. That’ll be the ‘social’ part then. This would be the point for a brave man to use the old George Best joke (“I spent the money on women, drink and fast cars: the rest of it I just wasted”). Maybe not.

Zopa has marketed the service to borrowers by getting listed on loan comparison websites like Money Supermarket, where due to its cheap rates, its loans will often be near to the top of best buy tables.

“Lending has been trickier, as it’s a genuinely new product,” says Nicholson. “Nobody’s had the opportunity to lend directly to other people before. The best marketing for lenders has been PR or word-of-mouth. We’ve also found that lenders typically lend more and more over time, so they’ll start off with a relatively small amount of money, and over time as they see that this works, they start to lend more and more.”

Nicholson stresses that Zopa isn’t targeting risky borrowers, and explains that the company declines 40-50% of applications, particularly when they’re from people who are already indebted. “We started in the prime end of the market to earn trust, and although the plan is to move into the riskier end, we’ll do it very slowly,” he says, pointing out recent news stories on banks facing an increase in bad debts.

One of the things that interested me about Zopa was what it does with profiling. Although based mainly on traditional credit checks, Zopa is also taking in additional information on borrowers, which although it’s not being used to decide loans yet, may do in the future.

“Over time we’re hoping to build up information on whether these things correlate with credit performance,” says Nicholson. “An eBay rating, which we can verify, is actually a good measurement of trust. But it could be other things too, like your number of LinkedIn contacts, or SlashDot karma levels, or even the number of MySpace friends you have.”

In other words, at some point in the future, Tom from MySpace will be able to buy a small planet, probably. More seriously, this sort of thing will tie into the whole privacy debate too, I think. Will people moderate their behaviour online if they think the trail they leave could affect their future chances of a loan? It remains to be seen.

Right now, Zopa offers an alternative to the main banks. But could the banks get involved in this sort of social lending model in the future? Nicholson thinks it would be difficult, and speculates that since the banks do pretty well out of personal lending already, they’d be cannibalising their existing business.

“We know we’ve been looked at, and we’re on various banks’ radar screens, but no bank has decided they want to try and take us out,” he says. “They want to see if this thing works. If we’re still around in a year or two, and still growing… Well, it would still be very hard for them to compete on price, and to undercut our loan rate would be considered predatory pricing.”

In the future, Zopa may expand to other forms of financial products, from mortgages and insurance to credit cards. The company is also about to launch in the US, which is a big task, but important if the company is to fight off startups with a similar idea.

What other Web 2.0 features could be brought into Zopa, I wonder? “One thing we’ve been talking about is to create communities or groups within Zopa,” says Nicholson. “This could literally create groups that could transact among themselves, like a friend and family group, where we wouldn’t need to do the same level of identity checking as the Zopa model.”

Another variation on the same idea would be to allow lenders to make their lending decisions based on more than a simple credit rating.

“You could offer people the ability to say ‘I’d like to lend to A-rated nurses living in London for 12 months,” says Nicholson. “Or you could lend to charities for a zero percent return, or at least a very low interest rate. That’s where the social networking side can come in. We have to be very careful with privacy issues though, when it comes to stuff like letting people connect and chat online.”