Industry blog, P2P-banking.com recently compiled a list of peer-to-peer  loan volumes from around the world. The chart is reprinted by permission below.

These numbers are cumulative, all-time volumes since inception. More than half is from Virgin Money USA which has helped individuals put $370 million in loans together since it began as Circle Lending in 2001.

Because these companies don't all use the same model, I've revised the tables somewhat, excluding: 

• Facilitators: My definition of peer-to-peer lending excludes Virgin Money and Loanback because they do not serve as matchmakers (note 1). They do play a crucial role in putting a legal framework in place for friends-and-family loans and often end up servicing the loans as well. They are more like PayPal where Prosper/Lending Club are like eBay.
• Microfinance markets: I would exclude Kiva as well. It's an awesome platform that allows U.S. citizens to loan money to third-world merchants at zero interest. A powerful tool for philanthropy, yes, but not really peer-to-peer. The same goes for MyC4 and Microplace.

So excluding the above companies, total worldwide originations are $262 million, with two-thirds of that from Prosper.

Here are the market shares of the 8 true P2P lenders that have originated more than $1 million since launch:

Source: P2P-Banking.com, 28 Oct 2008

Note:
1. This does not mean I dislike Virgin Money's business model, just that its loan volume is not comparable to the others on the list.

2. For more info on the P2P lending market, see our Online Banking Report on Person-to-Person Lending

Article updated at 2 PM Pacific with quote from one of Zopa's partner CUs, Affinity Plus. 

Zopa's U.S. social deposit/lending site will be shuttered, just 10 months after its launch (see previous coverage here). The site, which delivered loan applications and CD customers to six credit union partners, apparently was closed by Zopa. At this point the exact reason is unclear (see update below). Zopa blamed the U.S. credit situation and said it wanted to concentrate its efforts in other markets. 

Here's part of the statement from CEO Doug Dolton that appeared on the Zopa forum earlier today (also here's the official blog entry at Zopa UK):

The facts are: Due to the extremely difficult consumer credit circumstances in the US, we made the decision to focus our ongoing efforts in the UK, Italy and Japan. We have six credit union partners in the US, and we have been working with them to modify our business model to offer our customers the best possible offerings, given the poor credit conditions in the US.

We're certainly facing unprecedented economic times worldwide right now, but I am pleased to report that our UK and Italian operations are doing better than ever, and I look forward to continuing to develop those marketplaces. I apologise for any confusion regarding our circumstances.

As of this morning, the Zopa US homepage is unchanged, but you can no longer sign up as a new member and all the Learn More links redirect to USA Federal Credit Union. 

Implications
It's surprising that the company would throw in the towel on the significant investment it made here. However, if Zopa's CU lending partners had curtailed, or stopped, making loans through the site, something noticed last week by the Prosper Lending Review blog, the whole strategy would no longer be viable (see update below).

But this has nothing to do with what Prosper, Loanio (which launched last week) and hopefully Lending Club (expected be accepting new lenders shortly) are doing with person-to-person lending. Zopa US, unlike Zopa UK, was NOT a P2P lending site, it was a lead-generation site for six credit unions. When those CUs stopped needing loan-leads due to the credit crunch, it took the legs out from under the U.S. division. Even continuing to just take deposits made no sense, since each depositor was required to assist a borrower by gifting a portion of the deposit interest.

We wouldn't be surprised to see Zopa back in United States in the future as a true P2P lending site, copying the model of its U.K. and Italian divisions. The social aspect of its offering certainly resonated with consumers and industry players as well. The company was one of four Best of Show winners in our April Finovate Startup conference, an award by majority vote from the audience (video here).

For more information, see our Online Banking Report on Person-to-Person Lending. And those attending our Finovate next week will see two companies demo P2P lending. 

Update: 2 PM PDT, 9 Oct 2008

As one of the credit unions who were partnered with Zopa, I would like to clarify that we have no credit availability issues and have changed none of our lending practices. This decision was made by Zopa.

-- Sarah Mason, SVP, Affinity Plus Credit Union

Now that we are well past the mid-point of 2008, it's a good time to look at where we are with one of the most talked-about online financial subjects of the decade: person-to-person or social lending.

Currently, two U.S. companies are actively originating unsecured, multi-purpose P2P loans (note 1): 

• Prosper: Through July, the leader in the market is running 10% ahead of its 2007 loan-origination pace. The company has funded $55 million and is on pace to do just under $100 million for the year. Website traffic is up 15% compared to a year ago (see graph below) and through July there have been 13% more loan listings (see previous coverage here, Finovate 2007 Best of Show video here; monthly volume reports here).
• Zopa: The company, which isn't technically person-to-person (the loans are originated by six credit union partners) but definitely has a social aspect to its loan program, has not revealed any numbers, but they list 475 loans on the "browse all borrowers page." Assuming average loan size of $8000 to $9000, they are doing less than $1 million per month. Zopa is using Google AdWords to pitch "instant approval" with a credit score of 640+ (see screenshot below), an aggressive marketing move, especially combined with the 8.49% APR touted on the landing page (see screenshot below; previous coverage here; FinovateStartup 2008 Best of Show video here).

In addition, three more P2P lenders appear very close to launching or relaunching:

• Lending Club: The company, launched in May 2007, has been essentially closed to new business since March as they retooled loans into securities for regulatory reasons. However, the company is scheduled to present at our Oct. 14 Finovate conference, implying that they will be out of their quiet period by then (previous coverage here; Finovate 2007 video here).
• Loanio: The startup appears to be very close to launching based on an a Sept. 3rd email sent to its house list announcing the launch "in just a few weeks" and adding in parenthesis (yes, we mean it this time!). The company will likely be the first to offer a co-borrower loan application (previous coverage here; Finovate Startup video here).
• Pertuity Direct: The newest competitor in the space is Pertuity Direct which we wrote about last week. Its website claims a Sept. 15 launch, and we look forward to seeing their first public demo at Finovate on Oct. 14.  

Finally, several companies are looking to launch P2P services in 2008 or 2009, including Globefunder, Community Lend (Canada) and one we just heard about today, Swap-A-Debt.

Forecast revision
Last December we published our second detailed Online Banking Report on Person-to-Person Lending. In that report, we predicted just under $200 million in originations this year. However, due to the inactive period at  Lending Club, the delay in Loanio's launch, and the more conservative approach by Prosper lenders, we are lowering the 2008 forecast by 25%, with an expected total of $135 to $150 million for the year as follows:

• Prosper ($95 to $105 million)
• Lending Club ($25 to $30 million)
• Zopa ($5 to $10 million)
• Loanio ($1 to $5 million)
• Pertuity Direct ($1 to $5 million)

P2P lending traffic from Compete (July 2007 through July 2008)

Zopa AdWords ad on "loanio" search
(4 Sep 2008, 1 PM PDT from Seattle IP address)

Landing page (4 Sep 2008, link here)

Notes:
1. Specialists are involved in the student loan piece (GreenNote and Fynanz) along with Virgin Money and Loanback which help with person-to-person loan documentation and servicing. 

2. Top-right graphic from April 2008 ABC News segment on Lending Club and person-to-person lending.

An important part of Finovate Conferences, at least for the winners, is the voting process for best demo. All non-presenting attendees receive a ballot which allows them to rate each demo on a scale of one to seven. At the end of the final demo sessions, the ballots are tallied and the presenters ranked 1 through 40 based on the average score. A majority of attendees complete a ballot so it's a good indicator of the group consensus.

There were dozens of awesome demos to choose from, but the peoples' choice yesterday are shown below (in alphabetic order). Congratulations!

 First ROI (BancVue)             Jwaala

Zecco                                                                        Zopa

Videos of all the demos will be available soon at the FinovateStartup website.

Looking at February's Compete data, estimated traffic (see comment 3) at the three major U.S. person-to-person lenders grew by approximately 100,000 unique users compared to January, a 16% gain. Prosper still dominates the category with nearly 10 times as many unique visitors as its nearest rival, Lending Club. 

Update: In terms of funded loans, Prosper had double the volume of Lending Club in February: $6.0 million vs. $2.9 million. In January, the volume was $7.2 million vs. $2.8 million.  

Source: Compete.com, estimated unique site visitors during Feb. 2008                                         *Not launched

In researching our latest report on P2P lending, we visited the websites of Zopa's six credit union partners to see how they were promoting, and explaining, the relatively complicated new product. Overall, they gave Zopa surprising prominence. Five of the six mention it on their homepages, with three of those running large banners, usually in rotation with other offers (see list below as observed on Dec. 6). USA Federal Credit Union is the lone holdout, with no mention of Zopa on its website so far.

Analysis
I understand why the credit unions are featuring their Zopa relationship. It's new, it's different, it's exciting and the helping-others message fits right in with the holiday spirit. However, for the most part, the program is woefully under-explained when clicking through the banners. I have to believe the most common member reaction to seeing the Zopa product info is, "Huh?"

It must lead to some interesting conversations on the phone and in the branch. Some of which may result in sales, so it's not all bad. But I don't think the ultimate purpose of partnering with Zopa is to confuse members to the extent that they call. There are easier ways to do that.

Examples
First Tech CU has two images on its homepage, both emphasizing Zopa's core message of helping. And the educational aspect is helpful (see screenshot below).

Addison Avenue CU takes a light-hearted approach on its homepage ad, saying:

Introducing Zopa (And no, it isn't a new energy drink)

And Addison Avenue does the best job explaining the service, although I still think it raises more questions than it answers.  

For much of the past four or five weeks I've been researching and testing person-to-person lending sites. I've become a lender and have gone through the borrowing process at all three major U.S. P2P lending exchanges: Prosper, Zopa, and Lending Club. Plus I set up friends and family with loans at Virgin Money USA and LoanBack.

It was all part of the research process for the latest Online Banking Report entitled, Person-to-Person Lending 2.0: Disruptive service or market niche? That report is now available at our main website (here).*  

I had originally intended on publishing it in early December. But as I was trying to wrap things up, Zopa launched its new U.S unit. So I stopped the presses and added an analysis of its unique model. Then as I was finishing that, Lending Club made a significant change last week, becoming a national lender instead of state-sanctioned one. That too is now in the report. 

Here's a summary of the major fourth quarter activity in the person-to-person lending sector:

• Oct. 2: Prosper overhauled a number of its lending tools, which were announced at our FINOVATE conference Oct. 2 (video here) 
• Oct. 6: Virgin Money (formerly CircleLending) launched its revamped friends-and-family service with a splashy debut in Boston with Virgin founder Richard Branson leading the parade (coverage here)
• Dec. 3: Zopa launched its U.S. version, an entirely new way of looking at the P2P space (coverage here)
• Dec. 13: Lending Club went national in a unique partnership with WebBank

________________________________________________

*Subscribers may download the report free of charge.
Others may purchase it as an individual report.

One of the first questions that arose when Zopa began facilitating loans and deposits for six U.S. credit unions earlier this week was, "What about (CU) field of membership requirements?" (see coverage here). It turns out that four of the six credit unions working with Zopa offer membership to anyone in the United States as long as the prospective member joins one of the supported organizations. And Zopa handles that hurdle during the signup process for its marketplace.

For example, when I purchased a Zopa CD earlier this week, I was given the choice of joining either First Tech Credit Union, which offers membership to anyone in my state (Washington) or Addison Avenue Credit Union, which anyone can join provided they pay $5/yr to join the Financial Fitness Association. And to make the process simpler, Zopa covers the first year of association dues (see screenshot below).

Bank Deals blog dug out the membership requirements of the six Zopa partner credit unions (here). Here are the four that offer membership through one or more organizations: 

• Addison Avenue FCU ==> Financial Fitness Association (cost = $5/yr)
• Affinity Plus FCU ==> Affinity Plus Foundation ($25 one-time)
• Provident CU ==> Sierra Club ($25/yr), American Cancer Society and others
• USA Federal CU ==> Prime Meridian Association ($10)
  

Just two days after its semi-public beta, Zopa US opened for business late yesterday. The announcement was in the Zopa US blog (here) and emailed to its house list this morning. See Sunday's NetBanker post (here) for our initial impression of the service.

Below is a screenshot from Day 1, forever memorializing Zopa employee Scott, as the first (and so far, only) Zopa borrower. And since all Zopa lenders are required to help at least one borrower, Scott's payments on his $1,000 9.9% loan have been covered for the first year by the company's first 13 CD depositors.

Zopa US opened a private beta Saturday morning, emailing selected customers that had previously signed onto its mailing list. Both of our listed email addresses received invites.

We'll look closer at the new service in our upcoming Online Banking Report on P2P lending, but what stands out is the business model: part P2P lender, part deposit-taking financial institutions, part charitable organization, part broker, and part lead-generation site. I'm not positive you can be all of those things at once, but it will be fascinating to see if Zopa and its partner credit unions can pull it off.

How it works
To understand how the Zopa US system works, you must first realize that all loans and all deposits are held at the six partner credit unions (see list below). So in that way, Zopa is a pure lead-generation play.

Zopa "investors" put their money in fixed-rate, 1-year certificates of deposits held by a credit union partner. Borrowers take out 5-year fixed-rate personal loans, again from a credit union partner. This part is pure depository financial institution, with Zopa as a broker. 

Finally, the P2P/social finance aspect comes into play with the requirement that all depositors must choose to "help" at least one borrower by reducing the borrower's loan payment. The depositor has the choice of accepting the highest rate of interest, currently 5.1%, and making a token donation, or sharply reducing the APY on the Zopa CD in order to provide more financial assistance to Zopa borrowers. Depositors select who they want to help from the listed loans. An obvious scenario would be a grandparent investing a substantial sum into low-interest Zopa CDs, so that a child/grandchild could take out a 5-year loan to help with a down payment on a house. But depositors may also help a stranger whose story they find appealing. 

Our preliminary take
Zopa has removed much of the uncertainty from the P2P lending process. But by eliminating the risk, they've also reduced available returns. Marketing Director Wade Lagrone, with whom I spoke Saturday afternoon (as Zopa engineers hammered away on the final tests), believes that U.S. investors overwhelmingly prefer low-risk, fixed-income investments and will prefer this P2P model.

I'm not convinced yet. It seems like a somewhat convoluted path to buy a simple CD. First, you must set your deposit rate, choose one or more borrowers to help, and finally join one of the six credit unions. The website makes the process relatively straightforward, but it's not the same as simply dropping a few grand into an online bank. 

On the other hand, the ability to donate all or part of your deposit's interest-yield could appeal to certain investors, especially the well-heeled looking to help family members obtain below-market-rate loans for defined purposes (home purchase, education, business expansion, etc). And eliminating lender risk removes the huge chore of keeping lenders happy and informed about their book of loans. 

Another potential problem is lack of transparency for borrowers. To obtain a Zopa loan, prospective borrowers fill out a nonbinding "loan quote." Not until after this application is made, and a credit inquiry logged, do borrowers find out if they will receive the lowest rate of 8.75% or the highest of 16.99%. And borrowers have no idea whether they will receive "help" from investors to lower their payment, and effectively reduce the APR of the loan.

Screenshot: Zopa CD setup (1 Dec 2007)
Zopa investors (aka lenders) select the rate of return for their 1-year CD and then choose a borrower to help by offsetting a portion of their Zopa loan payment.

 
Appendix: Credit Union Partners
The six U.S. credit union partners of Zopa US:

• Addison Avenue Federal Credit Union
• Affinity Plus Federal Credit Union
• FirstTech Credit Union
• FORUM Credit Union
• Provident Credit Union
• USA Federal Credit Union

Less that two years after the first P2P launched in the U.S., it looks like we'll soon have at least five companies chasing this new market, six if you include Virgin Money.

The most well known is Zopa, the person-to-person lending pioneer which opened in the UK in 2005 and now has nearly 200,000 members. Its long-awaited U.S. launch is scheduled for next week. I'll be speaking with marketing director Wade Lagrone tomorrow, but Jane Kim broke the news in today's Wall Street Journal (here). The market forecast in the article, predicting as much as $9 billion in P2P originations by 2017, is from our upcoming Online Banking Report on P2P lending (note 1). 

Zopa is working with six credit unions, including FORUM Credit Union, to match lenders with borrowers. And unlike other P2P lenders, Zopa's is guaranteeing the lender's principal. That will reduce potential returns, but make participation more like buying a CD from a bank. So, it will be interesting to see how the company differentiates its offering from traditional bank/credit union fare. We'll have more when the site opens to the public next week.

We also hear that GlobeFunder and Loanio are about to launch, possibly yet this year. Loanio has not revealed its strategy, but GlobeFunder is positioning itself as a microlender in the same vein as the Nobel prize-winning approach of Grameen Bank. For more info, read the GlobeFunder blog.  

All three will be included in our upcoming Online Banking Report (note 1). We'll also look at Prosper, Lending Club, LoanBack, and Virgin Money (formerly Circle Lending).

Note:

1. Online Banking Report subscribers will have access to the report as soon as it is published on Dec. 8. Nonsubscribers can put their name on the announcement list here and receive a prepublication discount code to save 10%. Please mention "P2P report" in the subject line.

I think I understand Zopa's delayed U.S. launch a bit better now. Apparently, the company is looking to expand not just in the U.S. but in Asia as well (along with the previously announced Italian licensee).

Here's a quote from a recent blog entry

"...we have had over 100 different teams in over 40 countries get in touch with with us, looking to launch a version of Zopa locally. These have ranged in distance from France to New Zealand, and included countries as diverse as Brazil, Mexico, Canada, India, Japan, Korea, Taiwan, Australia, South Africa, Ghana, Turkey, Spain, Germany, The Netherlands, Poland, Slovakia, Lithuania and Romania."

We've seen that interest at Online Banking Report as well. Our Feb. 2006 report on Prosper and P2P lending was our best selling issue of all time. We're planning an update later this year, hopefully with an analysis of Zopa's U.S. version, which the company still says is coming this year.  

This is a very interesting bit of news today. Virgin Group PLC, the high-flying UK-based company run by Richard Branson, says it will be using Waltham, MA-based CircleLending to enter the U.S. financial services market. Virgin's financial services are marketed under the Virgin Money brand in the UK (see screenshot below) and several other markets.

If you take a broad view, CircleLending was the first pure peer-to-peer lender in the U.S., five years before Prosper got its start (see previous coverage here). However, CircleLending has historically limited its involvement to servicing loans made between family members, not brokering the deals or vetting the applicants like Prosper and Zopa.

However, from the sounds of it, that will be changing under the new majority ownership by Virgin USA. According to Asheesh Advani, CEO/Founder of CircleLending:

"(CircleLending will be the) launching pad to brand Virgin in the U.S. in financial services"

According to the American Banker article here, the new venture's first product, sold under the Virgin name, will be a direct mortgage that blends "friends and family" funds with capital from a financial institution and/or the secondary market. They also said they will have a credit card and are looking at student loans.

It will be interesting to see how they use peer-to-peer finance in its efforts. Anthony Marino, Virgin USA's SVP Corporate Development told American Banker:

"(the CircleLending platform) provides a broad opportunity to address consumer needs, and the Virgin brand allows us to bring a unique tone of voice to the market,"

And,

"We are … building a major, Virgin-branded financial services company in the U.S."

Analysis
These are not new concepts, but with the Virgin marketing muscle behind them and the integration of peer-to-peer tools, the newcomer could carve out a significant niche in the massive U.S. mortgage lending business. The new entity could also leverage the CircleLending platform to compete directly with Prosper and Zopa in the U.S. and  importing the resulting product into the UK to compete with Zopa there.

Without providing specific dates, Zopa sent an email to its house list today providing a progress report on its upcoming U.S. launch (see inset). The person-to-person lending exchange now expects a national launch rather than the state-by-state approach previously announced.

The company said it's completed its site redesign, underwriting system, ID verification system and product lineup. And signaling the importance of its U.S. launch, Zopa named a new CEO, Doug Dolton, who will run both the U.S. and U.K. operations out of San Francisco.  

The email raised more questions about the exact business model to be employed, saying only that it's "made adjustments to Zopa necessary for launching in the U.S." Zopa has been talking to credit unions about partnering, but no announcements have been made (previous coverage here).

The nascent market of online social or person-to-person (P2P) lending turned two as its pioneer, UK-based Zopa, celebrated its second birthday today. In addition to slapping a this enormous "2" button on its homepage (see screenshot below), the company marked the occasion with an open house at its headquarters, an online lunch-time webcast, and an online giveaway of ten iPod shuffles (see the text of the email message sent to Zopa lenders and borrowers here).

The Latest Numbers out of Zopa

According to Easier Finance (thanks to PaymentsNews for the link):

• Zopa has 135,000 members
• Zopa lenders have received on average 6.75% before-tax annual return after fees and defaults
• Zopa borrowers have obtained loans at rates as low as 4.2% APR
• The current default rate is only 20 basis points, 0.2%

Zopa continues to create a considerable buzz in the UK. The company's homepage links to 42 articles from a diverse range of publications, most recently The Sunday Times and The Daily Mirror. And my favorite, an awesome piece from the UK's public-service Channel 4, that is unlike anything I've ever seen on U.S. news (click the play button below). 

The YouTube replay of the 4-minute feature was posted to Zopa's blog March 1 along with TV clips from CNBC and Fresno, CA news. The Channel 4 piece covers the topic of "social lending" in general and primarily covers Zopa, but near the end, another UK alternative lender is interviewed, Fair Finance <fairfinance.co.uk> is interviewed. We'll look at Fair Finance in a separate post.

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.

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

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. 

Person-to-person lender, Prosper, announced its first annual user meeting next February in San Francisco. Registration is a refundable $25 and includes an all-day session with dinner on Monday, Feb. 12, and a half-day on Tuesday, Feb. 13.

The agenda has not been published. Online signup is here.

The October newsletter (see End Notes for screenshot) also announced the arrival of the group ratings, an important milestone for the nine-month-old service. Group ratings promise to help lenders locate borrowers with better-than-expected likelihood of repayment. If it works, Prosper could become a major force in consumer lending. If it doesn't, the company will have to find another way to beat the loan default odds. 

For more information:

• For prior coverage of Prosper and its U.K. rival Zopa, look here.
• For detailed analysis of the market, see Online Banking Report #127 published in March

End Notes (click on the link below to see Prosper's Oct. newsletters)

Banner advertising at About.com's banking blog <bank.about.com>

Landing page for direct navigation to <bankofamerica.com/nofeemortgage>

Landing page from bank's Google ad on "bank of america mortgage no fee"

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).

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 NB Sep 7). 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.   

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.

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 NetBanker 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

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 NB 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

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, is built around the idea of creating “communities” of people with similar interests 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.

Continue reading "Prosper.com Re-launches Chris Larsen of e-Loan Fame" »

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 (NetBanker 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

UK-based person-to-person lender Zopa <zopa.com> is the fourth and final company to win an OBR Best of the Web designation from Online Banking Report in 2005. Also winning this year were:

• Billeo for its toolbar-based bill pay system (see NetBanker 5 April 2005)
• PassMark/Bank of America for its 2 x 2 authentication system (see NetBanker 26 May 2005)
• Citibank for its security features for email and funds transfers (see NetBanker 30 May 2005)

The company's innovative lending model is highlighted in Online Banking Report's annual, Top 10 Achievements in Online Financial Services. The report will be published next week (OBR #125).

--JB

The new UK-based person-to-person loan marketplace Zopa <zopa.com>, first discussed here Aug. 3, is offering a 2% bonus to lenders who make money available prior to 30 November 2005 (click on screenshot left). In order to earn the bonus, would-be lenders must offer competitive rates.

The website cites an example of the potential return of a 4.9% rate on a 36-month installment loan:

  4.9% interest paid by borrower
+2.0% Zopa bonus
(1.3)% expected loss rate
----------------------------------
5.6% return to investor

Analysis
Zopa claims to have attracted 32,000 users, including 16,000 lenders in the eight months it's been online. So far, it has not lost any money to loan defaults, but that would not be unusual for a lender in its first few months.

The 2% bonus to lenders is not sustainable since the company only books a 1% loan fee, plus commissions, if any, when borrowers elect to take credit insurance. Evidently the company has more buyers (borrowers) than sellers (lenders). With such a novel concept, it's no surprise that the number of people willing to take money is higher than those willing to give it out.  As the concept becomes better known, and assuming that interest rates are allowed to float, the supply of money should reach equilibrium with demand.

--JB

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