Zopa is a UK-based company providing an online money exchange service, allowing people who have money to lend it to those who wish to borrow, instead of using savings accounts and loan applications at traditional banks. The process is sometimes referred to as peer-to-peer lending. The name, Zopa, stands for "zone of possible agreement", a negotiating term identifying the bounds within which agreement can be reached between two parties.
Launched in 2005, Zopa was the first peer-to-peer lending company and acts as the "man in the middle", facilitating the loans process. It was set up by a management team that comprised many of those that founded Egg in the UK. The company is based in London and backed by Benchmark Capital and Wellington Partners.
Zopa operates within the United Kingdom, Italy and a service is being developed for Japan. Each geographical area operates a slightly different model.
In 2006 the Social Futures Observatory published a study entitled "Internet Based Social Lending",[1] which seeks to understand the antecedents of social lending, drawing parallels with friendly societies, and using Zopa as a major source of case study material.
Variously likened to eBay and Betfair in the UK press, Zopa is an addition to the emerging group of peer-to-peer services enabled by the internet. Prosper is a similar service based in the US and P2P Financial is a similar service based in Canada.
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Customers can be a "Lender", a "Borrower" or both. Requests to borrow are matched to offers to lend in a number of 'Markets' of which there are currently ten. A separate system, known as 'Listings', was discontinued in July 2011.
A potential borrower is graded by risk by the credit reference agency Equifax. The five risk bands are A*, A, B, C, and since late July 2008, Young (specifically for borrowers aged between 20 and 25, who have not yet established a credit history). After initial online credit checking those borrowing from the Markets also get full underwriting checks by humans and many applications are rejected by the very strict checks at this stage.[2]. There are two loan periods available, 36 months or 60 months. There have been terms of 6, 12, 24 and 48 months previously although these markets were removed in an attempt to simplify for both Borrowers and Lenders and facilitate adding other specialised markets like Young.
The system will match money from Lenders who are prepared to offer their money to potential Borrowers as a function of the risk and loan term, hence the name Zone of Possible Agreement. Matching is done on a many-to-one basis, so that each Lender's loan is spread across many Borrowers, thus reducing the effect of any defaults.
For Borrowers the loans are very flexible, allowing variation of monthly payments and early repayments without penalty. For Lenders, their money is committed for the duration of the loan, though early exit is possible in certain circumstances using a system known as 'Rapid Return' to transfer loans to other lenders.
The bad debt risks are taken by the Lenders, and priced into the rate offered to Borrowers. If a Borrower defaults, the debt is normally sold to a debt collection agency and Lenders will be paid a portion of any money recovered. Zopa Markets applicants have slightly worse credit profiles than the UK average. Zopa publishes bad debt forecasts as well as actual outcomes, which reveal that outcomes are generally better than forecast but loans issued in 2008 (a time of economic crisis) experienced bad debt at almost double the forecast rate.[3]
Both Borrowers and Lenders are charged fees by Zopa. Zopa charges the borrower a fixed fee of £100 (Oct 2011) for each loan. Before 6 April 2010 this fee was £118.50 and prior to 5 April 2008 the fee was a variable 0.5% of the loan value. New Lenders currently pay an annual fee of 1% of the amount lent, which is deducted monthly from the Lender's account. The Lender fee was 0.5% for lenders who joined before August 2008. Founder Members are exempt from the Lender fee.
In times when the Bank of England base rate is above 0.75%, Zopa also pays Lenders interest on the balance in their holding accounts. The holding account interest rate is equal to the Bank of England base rate - 0.75%, with a floor of zero. The interest is paid monthly.
As of September 2011, Zopa had lent almost £150m.[4]
In August 2011 Zopa joined with Funding Circle and Ratesetter to launch the Peer 2 Peer Finance Association to act as a trade body for the UK's peer-to-peer financial industry.
Zopa launched in the US in partnership with six Credit Unions on December 4, 2007 but it closed to new business on October 8, 2008 due to Zopa's concern that the bad debt rates of new Borrowers could potentially rise beyond acceptable levels as the economic situation deteriorated in the US.
The US model was significantly different from that elsewhere due to regulatory restrictions. Customers could be "Investors" or "Borrowers".
Borrowers could obtain a loan via Zopa from one of the Credit Unions. Borrowers would then post a profile on Zopa giving some details about themselves.
Investors bought a Zopa Certificate of Deposit. Investors were able to help Borrowers by offering them a slice of the return on their CD, reducing the amount of interest the Borrower had to pay. If enough Investors helped a single Borrower then all of their repayments could be covered.
Zopa Italy runs a very similar model to that of Zopa UK, with the exception that the fees to Borrowers are a function of their risk. On July 10, 2009, Zopa was written off from the Italian financial brokers register by the Italian Ministry of Economy and Finance, on indication by the Italian Central Bank. Zopa Italy has suspended new admissions but it is still managing existing loans.[5][6]