Thursday, 14 October 2010

Of Exhaust Pipes, Tyres And Social Lending

I was lucky enough to be invited to Tuesday night's Financial Services Club talk by Giles Andrews, CEO of Zopa. It was a real treat to hear an update on progress at the 'old firm', especially when Giles showed the unmistakable 'hockey stick' inflection point in the £100m of social lending on Zopa since March '05. Zopa estimates that its members have cornered a 1% share of the personal loan segment of the UK lending market, but with an average default rate of 0.7%.

In an intriguingly fresh take on the social lending phenomenon, Giles explained that savings and loans are in the same class of vulnerable, cosy-little-profit-centre for retail banks that exhaust pipes and tyres once occupied for car dealerships before Kwikfit came along. And just as Kwikfit's focus on price and convenience enabled it to steal an unassailable march on the incumbents in the car servicing market, Giles estimates that in another 5 years Zopa members could easily achieve a 10% share of the personal loan segment of the UK lending market - and people's participation in social lending of all forms could account for half of all UK personal loans.

Given everything else likely to be going on in the retail banking market over the next 5 years, I guess banks could be forgiven for leaving a little more money on the table for the rest of us.

Of course, economically, the reality of social lending is starkly different from the cosy-little-retail-bank-profit-centre represented by traditional savings and loans. Individual lenders and borrowers divide most of the 'spread' between social lending and borrowing rates, not Zopa itself - and certainly not retail banks.

In addition to the economics, Giles believes that transparency is a key driver of Zopa's success. That's not an empty statement, given that members set their own terms and seasoned Zopa members moderate their discussion boards rather than Zopa staff. Zopa also encourages members to use Twitter for informal requests, queries or non-sensitive admin, because it's faster and more accessible, efficient and transparent than email or spending ages holding on the phone or visiting a physical branch.

With these competitive advantages, social lending is definitely here to stay.

Here is Chris Skinner's in depth report on the evening.
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