When Zopa opened its doors in 2005 it was the beginning of not just a business but of the new industry of p2p lending. Before there was Prosper and Lending Club there was Zopa in the UK. They are still going strong today and are one of the few (maybe only) p2p lenders that made a profit in 2011.
I know many investors have mentioned Zopa on this blog in the last couple of months. While you have to be a UK resident to invest I think there is a lot we can all learn from this industry pioneer. So, last week I chatted with CEO and co-founder of Zopa, Giles Andrews, to find out a bit more about what makes this company tick.
SLN: How did you come up with the idea for Zopa?
Giles Andrews: There were two catalysts that seem unrelated: the bond market and eBay. For a long time I had thought that the bond market did a good job of providing financing for companies – investors could find out information about the companies and make an informed decision about whether to invest or not. But that kind of information was not available in the consumer market. Back in 2004 when we were getting started with Zopa the world’s largest marketplace was eBay which was all about collaboration and social connection. We wanted to bring those two ideas together and create a marketplace for consumer loans.
SLN: What are the loan terms for borrowers and who is a typical borrower?
Giles Andrews: The interest rates range from a low of 5.9% to a high of around 12% and we offer 36-month and 60-month loans of up to £15,000. Unlike the U.S. we do very little debt consolidation loans at all. A typical borrower is someone who wants to buy a car or do a kitchen remodeling project.
SLN: What about returns for investors?
Giles Andrews: The average return for investors today is 6.2%, that is after fees but before bad debts.
SLN: Ok, so let’s talk about bad debts. What is your annual default rate?
Giles Andrews: Our official annual default rate is 0.7% but that number is misleading. It includes many loans that are new and have not had a chance to default yet. For our lowest risk loans we expect a 0.5% annual default rate and for our highest risk we expect a 3.4% default rate. So far defaults have been coming in lower than expected.
SLN: How have you been able to keep default rates so low?
Giles Andrews: First and foremost we have been extremely conservative when approving borrowers on to the platform. We know investors hate defaults and even if it is just a 1% loss this will often lead to a negative emotional response from the investor. When we started we had no history obviously so we were even more cautious than we are today. We are in the fifth or sixth iteration of our credit scorecard because now we have many years of our own loan history. One other point I should note is that we have found the majority of defaults on 36-month loans occur between months 18-27, so we are very careful about giving much emphasis to early returns on loans.
SLN: What kind of loan volumes are you doing?
Giles Andrews: January was a record month and we did £8.3 million. February was £8 million. Last year we were averaging around £5 million a month so we have seen a substantial uptick in growth recently.
SLN: What is your split between institutional and retail investors?
Giles Andrews: We are 100% retail investors – we have no institutional investors whatsoever.
SLN: Why is that?
Giles Andrews: The way our platform works makes it hard to put large amounts of money to work quickly. We are comfortable with that – we really want to have a business that is focused on the retail investor.
SLN: Is Zopa profitable yet?
Giles Andrews: Last year was a turning point for us, we turned a profit for the first time in 2011. This has allowed us to invest more in our business and in the last few months we have brought on some senior executives, so we now have an experienced management team.
SLN: I have seen numbers that say you are now 1-2% of the personal loan market in the UK. What exactly is the criteria for measuring that?
Giles Andrews: This is based on new loan originations of what are called signature loans. The market for these loans runs somewhere between £8 billion and £20 billion annually depending on who you talk to. This number excludes credit cards and the car and home finance market – it is for unsecured personal loans.
SLN: I know you tried to start operations in the U.S. a few years back. Would you ever consider reentering the U.S. market?
Giles Andrews: Most definitely. If the U.S. laws allowed us to run with some common sense regulatory overhead we would certainly consider it. But we would be playing catch up with Lending Club and Prosper who have a major head start on every other competitor.
SLN: I know you were instrumental in founding the UK P2P Finance Association last year. How has that organization been doing?
Giles Andrews: There were several reasons that we founded this umbrella organization. It was to give the consumer some comfort – that there are some standards here. Another goal was to achieve better lobbying and that has been successful. We have not had any legislative changes yet but we have provided the government with a blueprint for regulation which has been received positively.
SLN: Any parting thoughts?
Giles Andrews: One thing I want to stress to your readers is that we are first and foremost a consumer credit business and we have been very deliberate and conservative in our approach. We are in this for the long haul and we have now created a solid foundation for the growth of our business in coming years and decades.
SLN: Thanks so much Giles. I appreciate your time today.
Giles Andrews: You’re welcome.