The ZOPA model will soon dominate personal banking in the UK - Essay Example

Topic: How the ZOPA model will soon dominate personal banking in the UK, discuss. Introduction Zopa is not a bank but offers to be a personal banking medium by lending peer-to-peer. It is an intelligent, better and humane mean of handling money matters prudently. It is just like borrowing and lending among friends and relatives with the only difference that the list of such people goes to thousands. Zopa UK has been operating in the UK virtual environment for 6 years. ZOPA has been providing a lending and borrowing medium to people at cost-effective and competitive rates unlike banks that charge higher rates to borrowers at their own terms and conditions. Zopa member strength was just 300 when it started in 2005. Within next 4 months, it reached to 26,000 members. Zopa has been able to offer competitive rates as its products are riskier to other market players (Chaffey, 2008). The company was established by the three founders namely chief executive Richard Duvall, chief financial officer James Alexander and David Nicholson. All the three founders of Zopa had some connection with Egg; Richard Duvall was the leading man behind the creation of online bank for Prudential in 1998; Mr. Alexander had been the strategy director when he joined Egg in 2000 and before that he was working for Smile, an online bank. Egg’s brand development director Sarah Mathew also joined the league to write a successful story on Zopa in 2005 (Chaffey, 2008). Zopa is an online marketplace that brings investors and borrowers on the same platform for the realisation of a personal loan at competitive rates to both the parties unlike banks that charge higher interest rates. At Zopa there is no need to worry about overhead charges, unethical investments, managing employees in thousands and branches in hundreds. That’s why both lenders and borrowers get competitive rates. Rates are different each day and are decided by the amount to be borrowed and the extent of time (Zopa, 2010). Seeing the business success of Zopa at first glance gives the confidence to use the Zopa online medium without doubting the safety element by putting one’s hard-earned money on the Zopa exchange to be made available to borrowers. Zopa has made huge strides in business growth, which has been steady throughout 2009-10. In September 2010, its lending has crossed £ 100 million. At Zopa, loans are at least 20% less costly than banks. Lenders get better returns than they would get against depositing in saving accounts. Lenders have gained an average return of 8.2% per year in the previous 12 months. More than 1% of all unsecured loans in the UK have been realized through Zopa (Zopa Press Release, Sep. 2010). Positive factor is that Zopa has survived the recession. Unlike banks indulging in credit default swaps and other tactics, Zopa has presented a viable lending and borrowing option. Zopa spreads the risk for lenders and follows a lenient view over delayed payments. Actual defaults in payment are only 0.1% of the total loans, quite less than the banks. Average return to lenders on loans comes nearer to 8.9% after deducting 1% one-time fee and one-off charge, which was £94.25 in 2008 (Keegan, 2008). Zopa borrowers can get smaller loan at reduced rates unlike banks that charge less for long-term loans only. This can help in attracting traffic to the Zopa website from such customers whose needs are smaller to be paid back in short time. There is no need to get credit ratings unlike banks before sanctioning loans to attract such customers. Some more resources need to be allocated for better customer servicing by offering text messaging service although the website provides a comfy feeling to the visitors with its blog, discussion board, This month at Zopa, Member story and other regular features like Zopa Newsletter and Community (Zopa, 2011). The Zopa business model It is an exchange that offers a platform to borrowers and lenders to meet to get solutions to the monetary needs in the form of personal loan. There is not a single borrower to whom a lender’s money is parcelled out; it is at least distributed among 50 borrowers to reduce the risk to lender’s money. Zopa earns from borrowers 1% as fee against the loan and commission against repayment protection insurance. Zopa wanted to gain a market share of 0.2% to break even the UK loan market, which it seemed would be realised in the next 18 months after its operation. The primary advantage to borrowers by opening their account at Zopa is that they can borrow in small quantities at cheaper rates for brief periods. Banks do just the opposite of it where loans get cheaper if taken in huge for a long period of time. Such borrowers whose credit rating is not good enough in banks can avail personal loans at Zopa easily by borrowing through their online marketplace (Chaffey, 2008). Zopa lenders also remain in better positions than they would have been if they had invested in banks, as Zopa marketplace offers better earning; they earn 20-30% more at Zopa than what they would earn through a deposit account. To remain on the safe side, lenders select the minimum interest rate at which they would lend after taking note of bad debt in various markets within Zopa. Borrowers are out in various risk divisions with varying interest rates based on their credit records to help lenders select their risk against the return; Zopa uses the same Equifax-based Credit Ratings as used by banks (Chaffey, 2008). Zopa marketplace is somewhat similar as well as different with the policies practiced at banks in the case of non-payments to lenders by the borrowers. Borrowers who don’t repay back to lenders are followed via the same mechanism as pursued by banks but lenders cannot claim compensation against their investments until hey have been found cheated. Whether Zopa would present a big challenge to banks in the UK in near future is a big question. According to one financial analyst, Zopa won’t be able to compete with banks. It has no contact office. Any enquiries can only be answered via email within a limit of 3 hours although (Chaffey, 2008). Within a short span of 6 yeas the demand for such arrangement of fulfilling monetary needs through online meeting place between lenders and borrowers, according to Financial Times (2005)) has been made from overseas by such people who are interested in taking a franchisee from Zopa. Such countries include the US where Zopa has been in the process of adhering to regulatory norms while other countries include China, India, New Zealand and South American countries (Chaffey, 2008). Target market Whether Zopa would be successful in capturing the desired business targets in the UK financial market depends on its target market response and to a greater extent on the company’s marketing communication strategy (Chaffey, 2008). The very idea of providing a marketplace from business generating perspective had “freeformers” in the minds of the owners. Freeformers possess a huge capacity as customers to generate online lending and borrowing business in the UK. These are the target markets for Zopa, the people who find funding from banks beyond their reach as they are in freelance work, which the banks don’t recognize; consultants and entrepreneurs don’t have regular sources of income. These “freeformers” need to be approached by Zopa as they are almost 10% of the UK population, which in the next 10 to 15 years would multiply as this business model of working would be in great demand worldwide, offering huge business potential to Zopa (Chaffey, 2008). Freeformers may not have regular income and maintain life style but their credibility is not a risky proposition. According to James Alexander, “theyre people who are not understood by banks, which value stability in peoples lives and income over everything else”. These people working in freelance mode, according to IOD (2005)) had “much less of a spending model of money and much more of an asset model”. The number of such people in the UK, according to Duvall, as reported by the New Media Age, could be 6 million. Duvall was quoted as saying, “it’s a group that’s growing really quickly. I think in the 10 or 15 years time most people will work this way. It’s happening right across the developing world. We’ve been doing some research in the US and we think there are some 30 or 40 million people there with these attitudes and behaviours”. This fact is well substantiated from profile of borrowers and lenders at the Zopa website. Taking the case of Zopa directors, they have multiple interests; Alexander does not devote all working days at Zopa, similarly Sarah Matthews works just 3 days a week for Zopa. All lenders at Zopa don’t belong to the same category, as Alexander; there are others who are entrepreneurs having enough money to invest on various portfolio risks such as Zopa (Chaffey, 2008). Marketing communications Zopa has been treading cautiously on the path of dominating personal banking online marketplace unlike other dot-coms by approaching potential customers through its unique communication strategy of depending on word-of-mouth and PR with some online marketing functions to increase customer database cost effectively. It has used the print and online media to propagate its financial products through newspapers and magazines such as The Guardian, The Financial Times, The Economist and The Institute of Directors house magazine to attract the attention of the desired audience. Reports of the PR agency Sputnik have been very encouraging capturing 200 million opportunities when Zopa came into existence (Chaffey, 2008). All articles did not speak favourably about the company and the nature of business especially at the initial stage of starting the business and isk factors for the lenders. Interesting and comforting factor has been the comparatively reduced rates of interest offered to ‘A category’ borrowers than offered by commercial banks. At the same time lenders are satisfied with the rates charged by them, which are higher than what banks offer on savings account. Otherwise, Zopa has been using the online marketing mediums in a big way such as search engine marketing and affiliate marketing. Zopa also got publicity benefit from other peer-to-peer Internet services such as Betfair, the gambling website, and eBay, the auction site although initial funding for Zopa was arranged by two private equity groups, Munich-based Wellington Partners and Benchmark Capital of the US (Chaffey, 2008). Zopa has made the otherwise dull business of borrowing and lending more interesting through extensive use of blogging, an online medium, by discussing stories behind borrowings, entertaining Zopa prospective customers intelligently. Zopa can further get more leverage through online marketing by using its resources wisely. It should mix PR and word-of-mouth publicity with other marketing functions to save cost on customer acquisition. Related magazines and newspaper readers from The Guardian, The Financial Times, The Economist and The Institute of Directors house magazine should be its target audience as readers. It should involve PR agencies regularly to publish related articles on the risk of borrowing from banks and the leverage to prospective customers from virtual sites such as Zopa UK , explaining the difference in interest rates between the banks and online companies like its selling of ‘A category’ loans at reduced interest rates, costing less than a bank’s saving account . The maximum online marketing functions of Zopa can be accomplished through search engine marketing and affiliate marketing, the tools of internet marketing (Financial Spread Betting, 2011). On the lines of Lending Club, using Face Book audiences for finding customers to compete with Zopa, it should also use such online mediums smartly to get competitive advantage from its close competitors like Proper Marketplace Inc., in raising money. Zopa also need to support Face Book applications as Bay Partners and Altura Ventures have done by remaining inside the social networking sites aggressively (White, 2007). Conclusion Zopa growth so far within a span of 6 years has been phenomenal. There is no reason why it won’t be a successful in dominating the UK personal banking market in the coming years. A number of factors have added to the success story of Zopa. The very reason that it did not face the impact of recession on its business itself is a big achievement. The very concept of peer-to-peer lending as if you are borrowing from your own fraternity of friends and relatives via online media makes it one of the most innovative concepts in the history of financial products. It has already captured the market share earmarked for the UK business. In near future, the practice of freelance business would get boost because of advances in technology. So, more and more people would use the Zopa marketplace for fulfilling their urgent short term loan needs. Zopa should also consider expanding its wings outside the physical boundaries of the UK as well. References: Chaffey, Dave., 2008. Zopa.com E-commerce case study. Available from: http://www.davechaffey.com/E-commerce-Internet-marketing-case-studies/Zopa.com-Case-study [Accessed 21 March 2011]. Financial Spread Betting., 2011. Zopa Online Borrowing/Lending. Available from: http://www.financial-spread-betting.com/Zopa-loans.html [Accessed 21 March 2011]. Keegan, Victor., 2008. Zopa shows banks how to do it right. The Guardian. Available from: http://www.guardian.co.uk/technology/2008/nov/13/zopa-credit-crunch [Accessed 23 March 2011]. Kennaugh, Cindy., 2011. Develop a marketing communications plan. On The Mark. Available from: http://office.microsoft.com/en-us/word-help/develop-a-marketing-communications-plan-HA001171113.aspx?CTT=5&origin=HA001168402 [Accessed 23 March 2011]. White, George., 2007. Lending Club gets VC round for Facebook startup. TheDeal.com – Tech Confidential blog. Available from: http://shsonline.com/by/investment/lending-club [Accessed 23 March 2011]. Zopa Press Release, September 2010. Press release: for immediate publication - 30th September 2010: Zopa lending passes £100 million milestone. Available from: http://uk.zopa.com/ApplicationResources/press/2010/Zopa%20lending%20passes%20100%20million%20milestone.pdf [Accessed 23 March 2011]. Read More