Contemporary Issue in Financial Services - Essay Example

? Contemporary Issue in Financial Services The ZOPA Model will soon dominate personal bankingin the UK Any business generating a huge profit margin off its clientele is a fine contender for interruption. Banking is a typical case - one can just think about the 19 percent interest that he pays on credit cards and the 2 percent that he earns on his savings account. The undisclosed fact about banks’ profitability is their capability to measure risk, mostly in lending. The loan departments in banks are charged with appropriately calculated loan risk and lending cash on a much higher charge as compared to what is statistically essential. In response, banks double dip by charging a risk taking premium for depositors. Banks assure deposit returns in return for a discount. This spread amid deposit interest compensated and loan interest charged equivalents to much of a bank’s revenue (Macneil & O’Brien, p.66). A Web 2.0 company that is attempting to upset the banking industry is ZOPA in the United Kingdom. Peer lending websites, like ZOPA (2011), intimidate the conventional banking model. These websites link conventional depositors with borrowers. These websites let depositors to turn into direct lenders and agree to risks usually received by bankers as well as project entrepreneurs. By presuming a little amount of risk, investors can get much higher returns. ZOPA also has a risk assessment department like a loan sanction department in a bank. For a little amount of added risk, depositors can receive more than 8 percent as compared to 1.5 percent on a CD or 4 percent on a treasury of 10 year (UK Government Decontamination Service, p.25). ZOPA (2011) was established in “London during March 2005, and by the end of January 2007, it had 40 workers as well as 105,000 registered member users including lenders and borrowers. ZOPA sets up more than 100,000 US Dollar in loans on a daily basis”. During the year 2009, ZOPA extended to incorporate other nations, together with the United States of America, Italy, and Japan. During the earlier period, the single method to get rates higher in comparison with banks was to turn into an angel depositor. This involves huge risk as well as huge prospective compensation. The standard project funds return on investment is more than 30 percent. Nonetheless, the majority of individuals can not access angel ventures or project investment. Websites like ZOPA (2011) exist in the middle of conventional banking and venture investment. They let standard individuals to guess some banking risk and create large profits for the problem (Reuvid, p.90). ZOPA (2011) is leading the ‘person to person’ lending model in the U.K. by means of the Internet to smoothen the process and produce what it describes “a community of like-minded individuals and lend to them and borrow from them in a trusting but secure way” (BPP Learning Media,, p. 66). ZOPA is a latest online market and an eBay for savers as well as borrowers. Apparently, this is a latest alarming danger to the quite a lot of year-old conventional banking models. Their objective is to group people’s investments and lend to other individuals on reciprocally approving charges subsequent to spreading out the risk between adequate numbers of people. ZOPA is really innovating by creating the current conventional CU saving and lending procedure more clear for the end member or user and by leveraging the inexpensive Internet medium. Securing the Loans ZOPA ensures the conditions of borrowers by carrying out a credit rating research by the use of Experian, Equifax, or any alike corporation; by going through the borrower’s eBay ranking if it is available; by going through borrower’s profile provided that it is available online; by permitting only one account for each borrower; and by checking the chance of identity theft by a borrower by raising queries regarding previous borrowing, demographics, and so on (Finaccord Ltd, p.10). Additionally, ZOPA recommends lenders to spread out the risk by lending to more than a few borrowers. ZOPA as well presents indemnity on the loan for a particular fee. The risk, though, is not great; the real bad debt rate is not more than 0.05 percent. A possible justification of the low non-payment rate is that borrowers are more expected to pay off actual individuals as compared to a faceless bank. The unlucky lenders can utilize a collection group, as with any other due balance. Finally, ZOPA covers any harm from deception done to a ZOPA account by intruders given that the client has kept his or her personal account details safe. Credit-market competition makes it all the more significant for small businesses to be aware of the complete variety of possible sources for investment. An increasing substitute to conventional sources is ‘person to person’ lending Web sites (Hale, p.32). These websites, including ZOPA, bring social networking tools into play in addition to other software to shorten the borrowing as well as lending of capital among unfamiliar persons and even relatives and acquaintances. For industrialists, ZOPA offers an option as well as essential source of investment. For lenders, the ZOPA offers economical rates of return in addition to the chance to simply take part in the foundation stone commotion of free enterprise. The Revenue Model ZOPA gets 0.5 percent of the loan total from both the lender as well as the borrower. There are no concealed charges, and the single other cost, which is optional, to the lender is the indemnity along with the charges that ZOPA takes for planning the insurance. At this moment in time, the website does not have funded advertisements. However, it is possible that in the future traders will attempt to advertise linked products or services to either the lenders or the buyers (Mayer, p. 192). The Lending Procedure The following are the stages in ZOPA’s lending procedure: 1. If a lender has 30,000 US Dollar and he transferred it to his ZOPA account giving his compliance to acquire an 8.5 percent interest rate from borrowers of excellent credit rating, for 3 years. 2. ZOPA arranges a group of, for instance, 40 borrowers with a related credit value of excellent rating, one that meets the lender’s conditions. Each one will acquire 30,000 US Dollar divided by 40, which is 750 US Dollar (ZOPA, 2011). 3. The lender can examine the profile of the potential borrowers as well as the projected application of the funds. The borrowers can examine the lender’s profile also. This promotes an individual association among borrowers and lenders as well as facilitates them in dropping non-payment(s). 4. ZOPA organizes the agreements. 5. ZOPA gathers interest payments and sends the lender a monthly check. 6. ZOPA organizes reimbursement of the loan following 3 years (Dilley, p.214). ‘Person to Person’ Lending Those who would like to borrow cash may be obliged to pay 10 to 20 percent interest if they make use of their revolving credit cards. At the same time, they get 2 to 5.5 percent interest on their investments. The banks receive the difference, but they as well receive the risk from the lenders. Imagine that an individual lender can discuss openly with an individual borrower. It is possible that each one can be at an advantage as compared to what would have been with the bank. Presume they agree on 8 percent interest. The lender will acquire a lot more. The borrower will pay a smaller amount. The difficulty is how they come across one another and bargain and secure loans. This is where pioneering websites such as ZOPA come into the picture. The central thought is that of ‘person to person’ lending, indicating you lends cash directly to a customer instead of “selling” the cash to the bank, and the banks after that loan their money to customers (Grown & Valodia, p.298). ‘Person to person’ lending lends itself to those monetarily well informed persons who are at least partially familiar with the banking business procedure of discount and lending. This is not similar to the awareness with saving or borrowing with a financial institution. This could intrinsically restrict the group of individuals who may want to involve themselves in ‘person to person’ lending. One has to value the self-service, internet-only representation for ZOPA as well as the latest achievement it has had for ING Direct, although this approach will not indulge every person, and credit unions have to be cautious in how they follow this or they risk isolating a huge segment foundation of existing trustworthy full-service associates. On the other hand, banking unmistakably wants a helpful reaction to risk losing an additional key section of members. Possibly, the thing that worries conventional banking for the most part is the obvious placing of ‘person to person’ lending by ZOPA as an equivalent product to indemnified savings accounts. For instance, the website promotional pitch declares; "Lenders are, on average, getting better rates than savings accounts and with more predictable returns than share” (Singh, p. 75). Possible Agreements in Negotiation Assume that someone wants to sell his old car. More often than not, that individual has some range of expectation in which he will be ready to settle. He knows that he will never get more than 11,000 US Dollar for the car, although, in the most unpleasant case, he will agree to 7,000 US Dollar. The consumer as well has a settlement range, for instance, 6000 US Dollar to 8000 US Dollar. In this sort of a case, there is an overlap amid the ranges, which indicates that a contract is feasible. The seller will begin with 11,000 US Dollar, dropping the value gradually, and the buyer will begin with 6,000 US Dollar, raising it gradually. If the ranges do not overlap, there will be no contract. Otherwise, one will sell his car with a value in the overlapping region. This overlapping region is known as the “Zone of Possible Agreements” (ZOPA), and this is as well the name of the revolutionary company. Contract within this zone should as well be extra advantageous to both sides in comparison to what they can acquire in the bank. ZOPA has a lesser limit, which indicates the seller’s ‘walk out on’ point. If a bid is lower than 7,000 US Dollar, the seller will not think about it. In the same way, the buyer’s ‘walk out on’ point is 8,000 US Dollar; as a result, he will not think about any higher price (Butler, p.195). The similar thought is also pertinent to lending. Nonetheless, this time one need intermediation, and this is where ZOPA come in the picture. This, together with other similar companies, is using the Web to let personal lending on an enormous level. ZOPA was the earliest company to bring in such ‘person to person’ lending. This is exactly what Skype did to telecoms as well as what Amazon.com did to retailers; it is being done here to conventional banks, that is to say - disintermediation. ZOPA says that lenders can get a higher rate as compared to what they would get from a savings account and borrowers pay a smaller amount as compared to that on a credit card. As said by Richard Duvall, Zopa's chief executive, ‘Interest rates on ZOPA have averaged 7 percent ahead of bad debts of which there have so far been nothing. That contrasts with the 4.5 percent paid on a good British savings account and the 15 percent normally charged on credit-card debts’ (Shah & Clarke, p.242). By and large, the online market for ‘person to person’ lending is still small, as are the amount of loans. The majority loans presented by ‘person to person’ websites max out at 25,000 US Dollar. With the rise in the amount of Websites within this market, though, both the extent of the market as well as the loan amount could raise significantly in the several following years. Works Cited BPP Learning Media. UK Financial Services, Regulation and Ethics. BPP Learning Media, 2011. Butler, T. The Complete Guide to Your Personal Finances Online: Step-by-Step Instructions to Take Control of Your Financial Future Using the Internet. Atlantic Publishing Group Inc., 2009. Dilley, D. K. Essentials of Banking. Wiley, 2008. Finaccord Ltd. Channel Metrics: UK Personal Loans - Trends in Consumer Distribution Channel Usage. Finaccord Ltd, 2008. Grown, C. and Valodia, I. Taxation and Gender Equity: A Comparative Analysis of Direct and Indirect Taxes in Developing and Developed Countries. Routledge, 2010. Hale, N. Managing My Money: Banking and Budgeting Basics. Woodbine House, 2010. Macneil, I. and O’Brien, J. The Future of Financial Regulation. Hart Publishing, 2010. Mayer, C. W. Invest Like a Dealmaker: Secrets from a Former Banking Insider. Wiley, 2008. Reuvid, J. The Handbook of Personal Wealth Management. Kogan Page, 2007. Shah, M. and Clarke, S. E-Banking Management: Issues, Solutions, and Strategies. Information Science Reference, 2009. Singh, D. Banking Regulation of UK and US Financial Markets. Ashgate, 2007. UK Government Decontamination Service, UK Government Decontamination Service Annual Report and Accounts for the Financial Year Ended 31st March 2009. Stationery Office Books. ZOPA. Official Website of ZOPA. Retrieved on April 11, 2011: http://uk.zopa.com/ZopaWeb/ Read More