|Founded||United Kingdom (2004)|
|Founders||Giles Andrews, James Alexander, Richard Duvall, David Nicholson, Tim Parlett|
|Headquarters||London, England, UK|
Zopa is the world's oldest and Europe's largest peer-to-peer lending service having now lent over £1 billion. Zopa peer-to-peer lending works by bringing together individuals who have money to lend, and individuals who wish to borrow money. Instead of going through traditional banks, borrowers looking for low rate loans are matched with lenders looking for better returns on their money. The name, Zopa, stands for "zone of possible agreement", a negotiating term identifying the bounds within which agreement can be reached between two parties.
Founded in 2004 and launched to the public in 2005, likened to eBay and Betfair by the UK press, Zopa was one of the first companies in an emerging group of peer-to-peer services enabled by the internet. It was set up by a management team drawn from many of those that founded Egg in the UK. The company is based in London and backed by Benchmark Capital, Wellington Partners, Bessemer Venture Partners, Augmentum Capital and Arrowgrass Capital.
In 2006 the Social Futures Observatory published a study entitled "Internet Based Social Lending", which seeks to understand the antecedents of social lending, drawing parallels with friendly societies. The study used Zopa as a major source of case study material.
Zopa operates in the United Kingdom. It used to operate in Italy, Japan and the USA, each under a slightly different model. However, the overseas operations have now either closed down or been spun off.
Zopa by country
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 three. 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 current risk bands are A*, A, B, C and S (standing for Soletrader business loans). A risk band called Young was introduced in July 2008 specifically for borrowers aged between 20 and 25, who have not yet established a credit history  but was discontinued for new loans in mid-2012. After initial online credit checking, borrowers also get full underwriting checks by humans and many applications are rejected by the very strict checks at this stage.
There have been various loan terms over the years but as of late May 2012 these are simplified to just two - 'short' (24/36 months) and 'long' (48/60 months). In early 2013 short was amended to include 12 month as well as 24 & 36 month loans. As of July 2013 lenders' money is matched with borrowers only after the final underwriting is complete, to improve the matching process between available funds from lenders and loans ready to be disbursed.
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. Lenders are matched to a variety of loan terms and risks to spread out risk and get an average return that is better than a savings account. Matching is done on a many-to-one basis, so that each borrower's loan is spread across many lenders, thus reducing the effect of any defaults on each lender. Currently, a lender can choose how much they wish to lend to any one particular borrower, in multiples of £10, with £10 being the minimum they can lend to any one borrower.
For borrowers the loans are very flexible, allowing variation of monthly payments (providing it is above that of their usual repayment amount, which will always stand until the full repayment of the loan) and early repayments without penalty. Paying more in any given month decreases the amount of interest paid over the life of the loan and also allows the loan to be paid off more quickly. Indeed, many borrowers are able, and do, pay off their loans before the end of the loan.
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. As well, borrowers repay lenders monthly, so the lender's full investment in Zopa begins receiving monthly repayments as soon as loans are formed. Lenders can choose to 'recycle' repayments into other loans as they are formed, or keep the money in a holding account. To maximise returns, many lenders choose to recycle their monthly repayments. For Rapid Returns, lenders can only choose this option on loans which have not had any late payments by the borrower. The lender who takes on a rapid return loan gets the interest rate which is already on the loan; therefore by accepting rapid return loans, a lender can get higher rates than they are offering. Some lenders even drop their rates when they have under the minimum amount for new loans (£10) in their holding account in the hope of catching a rapid return loan, so as their money is lent out more quickly.
Since the launch of Safeguard in May 2013, bad debt risks for lenders have been eliminated. If a borrower defaults, the debt is normally sold to a debt collection agency. Approved Zopa loan customers currently have better 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. Between 2010 and 2013, the default rate was lower than 0.30%. However, loans issued in 2008 (a time of economic crisis) experienced bad debt at almost double the forecast rate.
Both borrowers and lenders are charged fees by Zopa. Borrower fees are currently between zero and £190, allowing Zopa to set the overall cost (in terms of representative APR) of loans in different markets. 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. Due to the current financial situation (May 2012) and the Bank of England base rate being below 0.75%, there is currently no interest being paid to lenders for money in their holding account. The interest is paid monthly.
The discontinued "listings" worked by borrowers writing a small application, which was published on the website in the listings section, detailing often in a personal style how much they would like to borrow, what kind of rate they are looking for, why they are a reliable borrower, and often what the money is required for. The lenders could then pledge money to the borrower, in multiples of £10 and at a rate set by the lender. The listing then remained for a predetermined length of time. Once this time period was up, the borrower received a report detailing the rate of the loan their listing has achieved. Often, as the listing aged, the average rate on the loan would drop, as more lenders tried to lend money to the borrower, as only the lowest pledges are included in the resulting loan. Many initial lenders would lend at a very high rate in a hope they will be included in the loan. Offering a higher rate if the loan has already been totally pledged was often futile as the lower rates offered by others would be preferentially used to make up the total of the loan.
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.
In December 2012 Jacob Rothschild invested in the company, the UK Government declared they would become a lender of money to sole traders through the platform and that it would be regulated by the successor to the FSA. Bank of England Director, Andy Haldane, stated that peer-to-peer lenders could challenge the banks.
In May 2013, Zopa launched its Safeguard fund and Safeguard lending option, which steps in to pay out lenders in the event that a borrower defaults on their loan. Zopa lenders choose one of two terms; 2/3 years or 4/5 years and get a higher rate for lending for longer. Lenders are then given a basket of loans across Zopa's credit markets which make up an average rate known as tracker rates, rather than allowing the lender to choose the rate and risk class at which they wish to lend. This automates lending and in order to make it simple and fair. This is in contrast to similar peer-to-peer lending schemes that let users set their own rates. Zopa's Safeguard fund now has over £6 million in it to pay out to lenders in the event of a default.
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.
On July 10, 2009, Zopa Italy 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 suspended new admissions but continued to manage existing loans. After this Zopa Italy terminated its ties with Zopa in December 2011 and changed its brand name to Smartika. Smartika received a new authorization as a Payment Institute by the Italian Central Bank in February 2012 and restarted operations in March 2012.
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