October 30, 2007
Zopa and Listed Loans
Zopa has a new service that looks like you can post your ideal loan and get people to contribute. I'm not sure how this makes it different to its previous offerings (which would be probably obvious if I followed the site more closely) but it is curious to look at.
Apparently, being an Elvis fan is a key advantage in getting loans. One muses that social anthropologists are going to have fun comparing the public's preferences to those of banks.
From an FC perspective, we can see the same thing as over at other leading edge offers of payment systems and applications such as Second Life. By aggregating enough of the FC space within the offering, the cohesive application emerges, but the limits to scaleability are clear. OTOH, the emergence of strong pure-play FC players pretty much failed due to the various barriers, so it may be that this is the way forward.
Today's pop quiz: knowing what we know today, would we start again with a pure-play FC provider or a totally aggregated and simplified top-to-bottom application? A simplified way of looking at this question is whether we would go for a pure payments system, say for games, or rather build a game with integrated accounts?
Back to Zopa's market. Another issue (and many such remote microfinance concepts) is that although it can benefit from the Internet's disintermediation of banks, it can't necessarily compete against the banks' superior knowledge of the borrower. This was a core advantage of Grameen's _5 local women_ approach, something also seen in the social insurance industry (getting health insurance for a group is much easier than for an individual). Even though the risk is shared across the lenders, in theory at least, the borrower knowledge is an advantage that the banker maintains.
Posted by iang at October 30, 2007 04:32 AM | TrackBackWhile we're on the subject of microloans a la Grameen Bank, note that the eBay-sponsored Microplace site just went live recently. It's an interesting contrast with Kiva, another site allowing people in developed countries to make loans to individuals in developing countries. Among other things, Kiva allows people to evaluate and select the individuals to which they provide loans, while Microplace does not; on the other hand Microplace lenders receive interest, Kiva lenders do not. There's a good article at Nextbillion.net [1] with more information.
[1] http://www.nextbillion.net/blogs/2007/10/24/kiva-vs-microplace-whats-the-difference
Posted by: Frank Hecker at October 30, 2007 06:51 AM'Would we start again with a pure-play FC provider or a totally aggregated and simplified top-to-bottom application' - I have no idea what this means, maybe you could post a clarification??
Being simple-minded, my simple answer to the simplified question would be that it depends on whether my strength is game design/ build or payments and accounts design/ build (and this is the whole offering, NOT the technology)
I would build that where my strength lies and be ready to work with any of the other my customers want...
Unless my strength is BOTH...
Hmmmmmm...
THEN I would convert all BofA branches into gaming arcades...
1% mortgage interest discount for the first to reach level 'n'!
Zopa is not currently in the business of competing with or disintermediating Banks, who are 'Credit Intermediaries' creating Credit = 'Money as Debt' on the basis of Capital requirements set by the Bank of International Settlements.
Zopa competes - to the extent that they match depositors with borrowers - with Credit Unions, which do NOT create Credit but merely act as 'Deposit Takers' and Lenders, with the addition of a Guarantee, itself backed by government deposit insurance - which is just as well
http://www.rochdaleobserver.co.uk/news/s/1020621_christmas_cash_fear_as_credit_union_closes
The actual function of Banks as Credit Intermediaries is to guarantee the credit of borrowers, and Interest is essentially the charge they make for doing so.
To the extent that a rate of Interest exceeds the cost of system provision, and of defaults, then it is excessive, and arguably inflationary. Moreover, we have seen how Banks have been busily offloading the risk of their implicit guarantee through the use of Credit Derivatives, which are essentially guarantees of finite duration.
In fact, Credit has no 'Cost', when created.
The Grameen model involves, as you say, an additional '5 local women' guarantee of the borrower's credit.
Such a 'Guarantee Society' approach is the model which I advocate for a mutualised form of "Clearing Union" based credit creation which would truly disintermediate Banks.
ie members of an exchange network/Clearing Union simply advance each other "trade" credit backed by mutual guarantees within a partnership-based legal protocol. They all share system costs, and the guarantee user (who has a 'guarantee limit') makes a provision into a 'Default Fund' for the use of the Guarantee, and if he defaults, and does not pay either in conventional money or a barter/ 'money's worth' alternative, then the Default Fund does, and collects from the defaulter, if it can, or wishes to.
Banks would love this model, because they would no longer be risking capital by creating credit based upon it, but instead would be acting purely as service providers.
So much for Credit.
Capital investment is quite another thing, and here I see new forms of investment - using trusts or partnerships, instead of conventional Limited Company 'Equity' - in renewable energy, infrastructure, and housing.
Again, in this model Banks would create no (secured, this time) Credit, but instead would act as Investment Bank service providers bringing together Investors with Investments etc etc.
The attached recent submission to the UK Treasury Committee aims to explain the model. Feel free to publish it if you think there may be interest.
What if some one tried to securitize these loans as it is happening in the micro-finance world why not the unknown borrowers world surely there must be some delta for that transaction it probably replicates the US Mortgage Market in that the information while it might seem available is really faux. We have reached a point where the ever expected upswing in the ability of the borrower to pay is going down. This is not simply related to one commodity like housing there are other markets experiencing downswings in unit purchase prices and therefore the bottom line. So as loans are adjustable to interest rates via resets or pricing.
Posted by: Jim Nesfield at October 30, 2007 04:49 PM* I work for Zopa, but the opinions expressed are my own. *
Iang has a good point. The credit summary Zopa provides is less detailed than the credit record [and deposit/pay-cheque history] a bank would lend on. This does not necessarily mean Zopa lenders have inferior information. Loans are uniquely identifiable. The borrower can reference a loan on the web and make claims about it. If you know the identity of FluffyBun73, you probably know *a lot* more than their bank.
For example, this listing is by our former UK CEO: [https://www.zopa.com/ZopaWeb/Listings/other/seeking-a-cash-float-for-2-months/9898372c.html]. Everyone at Zopa knows who he is. Even a full credit report wouldn't be significant to us.
(There's no *technical* reason we couldn't let users verify their full real-life identities to some or all lenders. I have no idea about the legal implications, but I'm certain there would be plenty!) You could look on Listings as a venue for friends & family lending. One that forces a credit check without the social agony of asking someone to pull their own credit file and show it to you.
If you are lending to a stranger, then the inability to verify most of the information given is a *huge* weakness. I don't think there's any point denying that. There's a gap that needs filling there. In the UK, at least, people go into debt privately, so will never choose to reveal anything identitifying. Perhaps a Prosper type Group model, or a system of trusted referrers... needs to be a bridge of trust in there someplace...
I think Chris [who I think meet some of our founders when we were just starting out] is misunderstanding Zopa if he thinks we're like a credit union. Zopa does not have a Guarantee fund. If your borrower defaults, they default. You lose money, that's life. Zopa is just operating financing platform - we're not a party to any of the loan contracts formed through our platform. (Which means you'll receive repayments on your loan portfolio even if Zopa goes under.)
Posted by: Thomas Barker at November 1, 2007 08:50 PM