NetBanker 2.0

More supply than demand at Zopa

In a blog post today, person-to-person lender Zopa told its U.K. lenders that, due to a seasonal "lack of creditworthy borrowers," it would take a bit longer to lend out their money this month. However, the company predicted a seasonal upturn in January as more good borrowers looked for funds. The company reminded lenders that they still earn 4.25% on idle funds held by Zopa.

Top 25 Web 2.0 financial sites

Since its September launch,  Your Credit Advisor <yourcreditadvisor.com> has posted several trendy lists to attract traffic to its credit card application portal. The latest entry, "Top 25 Web 2.0 Apps for Money, Finance, and Investment."

The article includes helpful summaries of each site's capabilities. It's a good jumping-off point to do a little outside-the-box thinking about Web-based finance (see also, Online Banking Report #135/136, "How to Web-2.0 your Online Banking").

This list includes:

• Two loan sites: Zopa and Prosper (see previous coverage here)
• Six personal finances sites: Three we've covered: Dimewise, foonance, ioweyou (see our previous coverage here) and three new entrants: NetworthIQ, MedBillManager and Wesabe, a fascinating social money site we'll cover later this week
• Five real estate sites: Homethinking, iiProperty, Rentometer (owned by iiProperty), Trulia, and Zillow (see our Zillow coverage here)
• Two miscellaneous sites: PayScale, cFares
• Ten investment sites: BullPoo, Motley Fool's CAPS, DigStock, FeelingBullish, GStock, MoneyTwins (foreign currency), SaneBull, StockTickr, WikiFinancial

Zopa to offer lender guarantees

In a blog post today, person-to-person lending pioneer Zopa announced several usability improvements in its upcoming release, a new My Zopa screen and Quick Lend area.

But what caught our eye was Zopa's upcoming option to guarantee the return of principal for its lenders. There's no free lunch, of course, so an insurance premium must be paid when lenders choose this option. Even though that will cause returns to fall to a more "normal" rate, it could be a psychological boost that brings in more funds. At minimum, it will generate press coverage.

The new guarantee is still awaiting U.K. regulatory approval. We'll look at it in more detail when it becomes available. 

Zopa emphasizes community with new homepage

Although you may have little interest in the niche market for person-to-person loans (previous coverage here), you should keep tabs on the websites of Zopa and Prosper to see how they build a community of borrowers and lenders.

The new Zopa homepage (see screenshot below) features several interesting community-involvement devices:

1. "I'd like to meet..." tool in upper left
2. Community factoid ticker running across the middle of the screen (see list of factoids below)
3. Community tab in primary navigation (top)

"I'd Like to Meet" tool
This tool, placed in one of the most-viewed areas of the homepage (upper left), allows users to find like borrowers and lenders. Using drop-down boxes, users may narrow their search to just borrowers in a single city, or those of a certain age or age range, and so on (see inset). 

Unfortunately, we were unable to see the results since our search queries just showed an endless "search in progress" graphic image.

Community factoid ticker
Even though scrolling tickers are annoying, they do draw attention. Since Zopa must make prospective users comfortable with its novel service, it makes sense to be mildly annoying to get the point across that Zopa is a vibrant and fast-growing community. However, the 3-minute cycle time (before stopping) is too long; a 30-second scroll along with a link to more factoids would be better.

In our test at 7:00 PM London time Oct. 18, there were 17 items running across the screen in this order: 

• 1,571 Johns have joined since we launched ...
• 4,350 members have registered so far this month ...
• 480 Zopa members have logged into their accounts today ...
• 553 Sarahs have joined Zopa so far ...
• Adrian from HULL has just joined ...
• In the last hour, 8 new members joined ...
• Lorraine just offered 50 to Zopa borrowers ...
• Mark from OXFORD just had a loan reserved in the B market ...
• More members come from London than anywhere else ...
• The average age of a Zopa member is 36 ...
• The last member from the Isle of Wight to lend was Laurence ...
• The last person to join from Aberdeen was Clare ...
• The most common name amongst Zopa members is David ...
• There have been 4,875 requests for loan quotes in the last 24 hours ...
• Thomas recently paid in using their debit card ...
• We have 595 members from Leicester ...
• Yesterday, 251 new members signed up ...

Community tab
The Community tab in the site's main navigation leads to a page jammed with more community-building features and tools including (see screenshot below):

• Company blog
• Member discussion board
• Finance news as gathered by "Zopa and friends"
• Zopa newsletter
• Member story (monthly feature)

Summary
A good effort by the person-to-person lending pioneer. We look forward to the company's U.S. launch while passing along our regrets to the recent passing of its founder Richard Duvall (memorialized in this Oct. 17 Zopa blog entry).

Zopa courting U.S. credit unions

According to OpenSourceCU, a blog operated by website designer Trabian, person-to-person lender Zopa is actively soliciting credit unions to partner with the U.S. version of its service scheduled to open later this year (see FMW Sep 9). One idea floated by Zopa's Wade Lagrone to attendees of the Taps Lending Symposium put on by Forum Solutions, was requiring Zopa borrowers to join a credit union in order to participate.

It's not as far-fetched as it sounds. In our analysis of peer-to-peer lending published in March (see Online Banking Report #127), we identified a number of ways financial institutions could benefit by referring customers to competitive loan marketplaces. It helps you serve the "long tail" of borrowing, those specific situations that your underwriting cannot accommodate, but where you still want to satisfy the customer to retain their other banking business.   

Update on Zopa's U.S. release date

Zopa <zopa.com> continues to work towards a 2006 launch of the U.S. version of its person-to-person lending exchange. The company is trying to spur a bit of word-of-mouth in advance of its launch by buying a case of beer for anyone sponsoring a Zopa barbecue this summer.

The company website also contains a newsletter-like posting <www.zopa.com/ZopaWeb/ promo/newsletter/ us/issue1/> with info on the U.S. division (click on inset for closeup).

Beside promoting the free beer offer, the newsletter profiles Bruce Brenkus, VP Credit and Risk at Zopa U.S., an excellent choice of subject matter since credit management is the biggest concern for prospective Zopa lenders.

Facilitating loans between individuals

A few weeks ago we published our first report on so-called person-to-person lending (see OBR #127). Two companies have created P2P lending exchanges, Prosper in the U.S. and Zopa in the U.K. (see FMW Feb. 25). While we like the concept, these exchanges have a number of hurdles to overcome. One of the challenging issues is how to convince individuals to loan money to strangers.

Most P2P lending is between family and friends. And that won't change no matter how big the loan marketplaces becomes. Government reports peg the interpersonal loan market at $80 to $90 billion.

One of the stickiest issues in friends-and-family lending is keeping the borrower current on their agreed-upon repayment schedule. It's easy for kids to "forget" that loan payment to mom and dad; likewise, parents don't want to put a damper on Sunday dinner with a discussion of junior's financial situation.

Financial institutions could play a role in automating personal loan repayments, by putting the repayment transactions on autopilot. It can already be done through bill payment systems that support automated recurring payments. But users still need to do their own research to come up with the correct amortization schedule.

How it would work
With a little programming, a bank could develop a module that allows lenders to set up a repayment plan by entering the loan details (amount, interest rate including zero, and term) and borrower info (name, email address). An email would go to the borrower asking them to agree to the terms, authorize the deduction from their bank account, and provide bank account details. The borrower would also be required to authenticate their access to the account through username/password or by correctly identifying small deposits made to their account.

The lender or borrower (if authorized) should be able to log in at any time and suspend or alter the automatic deductions.

The business case
Borrowers and/or lenders could be charged a set-up fee for each loan, plus small transaction fees each month. For example, a $75 set-up fee plus $3 per payment. Pricing could be tiered by loan size.

If 2% of your online banking base eventually used the service, it could generate $1,000 to $1,200 in annual revenues per 1,000 online banking users (assuming average loan term of three years). For Bank of America, that's $15 to $20 million per year. But for a community bank or mid-size credit union, it might generate only a few thousand dollars annually.

Unless you are large, that's not enough to justify programming it yourself; however, if a software company made it available for a reasonable fee, it might make a good new feature for online banking. As the industry matures, banks will need to add value to their services to attract more users. Also, the long-term nature of loan repayments, especially with family lending, could help tie both the lender and borrow to your bank for years.

Service providers
There is already one company that's been facilitating person-to-person loans for more than four years: CircleLending.com, a company we first learned about in a favorable Wall Street Journal article published in 2002. The company has taken the concept to a high level, facilitating not just personal unsecured loans, but also owner-financed real estate, commercial loans, and other complex secured funding (click on screenshot right for details). It charges $199 plus $9 per payment for simple loans, up to $1000 or more for mortgages.

Another newcomer, PalTrust, is an apparently small startup that has a two-page website, <paltrust.com> with a mockup of its personal lending application. The patent-pending process looks much like PayPal (click on screenshot for a closeup).

--JB

Interview with Prosper's Chris Larsen

Chris Larsen, who helped invent financial e-commerce by creating E-Loan <eloan.com> in 1997, is back on the scene mere months after selling the company to Popular Inc. last summer for $300 million. His new company, Prosper.com, first discussed here on Feb. 6, is built around the idea of creating communities of people who lend to and borrow from each other. The idea, he says, isn’t too far away from Jimmy Stewart’s savings and loan in Frank Capra’s film, It’s a Wonderful Life, where ordinary people lent to each other and made them all more prosperous.

The business premise is comparable to the model of Zopa, the UK-based, person-to-person lending site that opened last summer (see FMW Nov. 22) with funding from Benchmark's European unit. But while Larsen concedes the similarity, he says he had the idea first. “This is something Bob [Kagle] and I talked about long before the Zopa guys had come to Benchmark [Europe] —since 2003, in fact,” he says.

Robert Kagle is a Benchmark Capital partner who provided much of the original financing for E-Loan, and who served as an E-Loan director. The Prosper idea attracted them, adds Larsen, because while the E-Loan idea worked relatively well—it originated and sold $26.7 billion in mortgages between 1997 and June 2005—it wasn’t really what they’d wanted to do, which was more along the lines of Prosper.

Larsen says, “[At E-loan] we were beholden to the capital markets, rather than being able to create a whole new marketplace that’s supported just by people. This is more of a pure model, an opportunity to start from a clean sheet of paper and design something from the ground up.” Plus, he adds, the public that could support a Prosper didn’t exist in 1997. “You couldn’t do [Prosper] back then. PayPal very much blazed a trail, and you really couldn’t do this until they had come along.”

The company
Prosper is funded by venture capital funds that include Accel Partners, Benchmark Capital, Fidelity Ventures, and the Omidyar Network. Prosper opened with something of a bang the week of Feb. 6, getting plenty of high-profile press in the mainstream media, and, according to Larsen, attracting more than $750,000 to its loan pools in the first week of business. And the first week’s business seems promising: As of Feb. 24, 301 loans were up for auction, up from 168 a week earlier. Loan sizes range from $1,000 to $25,000.

How it works
Prospective borrowers are first given a credit rating by Prosper after being vetted by credit score, a fraud check, and income. The borrower then lists the reason for their loan, uploads pictures if desired, and selects a starting interest rate, essentially the highest rate they would accept.

Individual lenders, who go through their own authentication process before being allowed to participate, can bid for as little as $50 of any particular loan, specifying the minimum rate they will accept. Prosper charges the borrower a 1 percent loan-origination fee and levies a 0.50 percent annual servicing fee to the lender on the outstanding balance.

Analysis
One of the problems faced by the venture is adverse selection, the tendency for loan applications to be dominated by those most in need of credit and least likely to repay. If poor credit risks overrun the venture, higher quality applicants, and the investors looking for them, will desert both Prosper and Zopa.

Another question is whether lenders will feel adequately compensated for their risks. Larsen says he wants his lenders to “capture the 10 percent spreads between short-term money and credit card deposits,” and compares the expected returns at Prosper to the AA corporate credit market, which currently gives investors a 7 percent return, or 6.5 percent after defaults. Zopa says it has provided lenders a 7 percent average return with no defaults in the seven months it’s been open for business, but this is not a period statistically significant enough to predict future performance.

On the other hand, much of business is betting on horses, and on jockeys, and Larsen has proven himself adept at both picking horses and riding them. It may be that the time is right for a business built more along the lines of Jimmy Stewart’s small town savings and loan, and less along the lines of a modern bank's unyielding underwriting algorithms. (Contact: Prosper.com, Chris Larsen, 415-362-7272)

--AR

Previous articles:
-- Prosper Feb. 6
-- Zopa Nov. 22

P2P lending rates a NYT article

While person-to-person (P2P) lending will never create the buzz or user base of eBay's PayPal or Google's GBuy, it passed a milestone yesterday with a favorable article in The New York Times. The short article looked at UK-based Zopa <zopa.com>, a recent OBR Best of the Web winner (FMW Dec. 1) and a similar service being hatched in Silicon Valley, Prosper <prosper.com> (formerly CircleOne).

Prosper, like many Internet startups before it, bears watching not only because of its relatively minuscule user base–currently, just 12 transactions are pending–but also because of its VC backers, Benchmark Capital, Accel Partners, Benchmark Capital, Fidelity Ventures, and Omidyar Network, along with its famous founder Chris Larsen, who launched E-Loan nearly a decade ago. The company has raised $20 million according to its website. Click on the screenshot, right, for a closeup of its homepage.

We'll look at both companies in more detail in the next Online Banking Report (Number 127), due out at the end of the month.

--JB

The next big thing in online lending?

The Internet has changed a lot of things in the past 10 years, but banking isn't one of them. Sure, it's now much easier to check your balance or see who you wrote check #1127 to. But these are incremental improvements. Nothing like what online brokerages did for trading stocks, or eBay for selling junk.

Thanks to government guarantees, and consumer cautiousness with their money, it's a bit hard to disintermediate the banking system. Or is it? 

Take a look at UK's Zopa, a recently-launched online loan exchange built by execs from Internet-only bank Egg. Zopa matches lenders and borrowers, cutting out the middlemen (actually inserting themselves in the middle instead of a bank), potentially creating a more transparent and less expensive system (Zopa takes a 1% loan fee).

Like the U.S. mortgage system, risk is spread around by splitting each loan into 50 or more pieces that are pooled and repackaged into loans that are placed with individual investors (i.e. lenders). The borrowers and lenders remain anonymous to each other.

Funding from Benchmark Capital and Wellington Partners is further insurance that the company will be taken seriously.

Analysis
Is this a disruptive banking technology? Maybe. Variations on this theme, such as Circle Lending, are in existence. But there hasn't been an effort as well funded and stocked with talent as Zopa. If anyone can pull this off, it's the Egg folks. The Zopa website is fresh and irreverent, taking on banks at every step of the way (click on inset above).

Banks are easy targets, but to make this work, it's going to take an extremely user-friendly system, some fantastic marketing, and a little luck. One of the big problems any startup lender faces is adverse selection. In other words, too many borrowers will be on the verge of a sharp decline in their creditworthiness; a decline not yet reflected in the credit score used to screen borrowers and price their loan.

The only real cure for that is perfect underwriting and lots of volume, that's why preapproved credit card direct mail has worked so well for several decades.

The company hopes to take the concept to the United States later this year. Given the speed of our regulatory approval process, that seems unlikely. Look for it in late 2006 or early 2007, if the UK version begins to gain traction.

We'll take a look at the concept in much more detail in an upcoming Online Banking Report.

--JB