Tuesday, March 08, 2005
Dot Com 2.0
Zopa - p2p (retail) finance - ie, p2p lending & borrowing for individuals. Killer idea - like an open-access Lloyd's for retail finance.
Things to note:
1) Two very big potential Achilles heels. First, Zopa attempts to diversify lender risk by spreading borrowing across 50 lenders, who then establish a price on the Zopa exchange. This means the rate will be dynamic, but probably not hugely volatile.
The bigger problem is the underlying one: that Zopa's rate is likely to be higher than the market rate even for the same level of risk, because Zopan lenders still can't competitively scale (even at 50x), because they still simply have less relative resources than, for example, HSBC. A 2k hit to a Zopa lender is much more costly than the same 2k*50 hit to a financial institution. This means Zopa's real target market is finance retail banks won't handle - either microloans or junk loans.
Second is the problem of adverse selection - lemons selecting themselves into the market. This is less of a problem, because I think lenders will intuitively feel this. But this problem could reduce Zopa - which could be really cool - to the equivalent of CheapLoans4U.com, where, sure, you can get a loan to buy a new Porsche even if you're only making 20k a year - but you'll be paying it back at 142% for 30 years. In fact, Zopa's already being spidered by guys like badcreditworld.
Both of these issues are related. They could be addressed by creating incentives for risk-seeking in lenders, and by creating mechanisms to deal with asymmetric info at a very good price/quality ratio (ie Equifax is not going to be a great solution for Zopan lenders, as Zopa probably knows).
2) Open-access, radical innnovation, industry revolution, post capitalism...tick all the boxes.
3) The retail finance industry has really been asking to get deconstructed for almost as long as I can remember.
4) Bad name, guys. Not because it sounds bad (it actually sounds cool), but because ZOPA's an acronym for 'Zone of Possible Agreement' in MBA-land (which is likely where the name came from), and so Googling 'Zopa' reveals much noise and little signal.
5) I think this is the most important: Zopa is only half the paradigm. By this, I mean that the model that's revolutionizing entire industries has two parts. Open-access production/distribution on the supply side, but equally important, some form of sharing on the demand side. That sharing can be explicit (file-sharing) or implicit (links to torrents, playlists, etc). The point is that Zopa is not exploiting demand side effects, which I think could revolutionize it's value prop even further.
It's top spot on Google and the rates look pretty good to me.