April 2, 2005 Disintermediation is a term you’ll no doubt have heard and will certainly be hearing a lot more in the future. It means “to remove the middle man”, and it’s something the internet is incredibly good at. With close to a billion people connecting to the internet in the last decade, and computer-mediated anything just a few minutes of Googling away, radical new ideas can promulgate very quickly. And here’s one you’re gonna love … think of it as P2P money. Zopa hooks up creditworthy people who want to borrow money with people who are happy to lend it to them. And because there's no middleman (e.g. bank), the borrower just pays a 1% exchange fee upfront. Without the greed and inefficiency of a financial institutuion, both borrower and lender get a better deal than they would otherwise.
For borrowers, the money is cheaper. For lenders, there are no fees, better returns and the facility to manage the risk and seek even higher returns.
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If there were a popularity poll for organizations, banks and most other financial institutions would rate towards the bottom of the list, somewhere between monopoly Telcos and the Royal Institute of Executioners – which is why we think Zopa’s new angle on democratising the lending of money makes so much sense and will garner such a favourable reaction from so many people.
When you lend money through Zopa, there are no charges – the only fee Zopa takes is 1% from the borrower. That means that as a lender, you’ll get a consistently higher interest rate than you could get elsewhere. You can also choose what level of risk you’re prepared to take, with an interest rate that reflects the risk.
Borrowers are assessed by Zopa into different markets based on their credit rating and lenders can choose which market they will lend into and what level of risk they’re prepared to accept and the rates are higher in the markets for borrowers with lesser credit ratings. Borrowing is not the harrowing task it is at a bank though – and apart from the 1% fee, there are no other fees whatsoever. There are no penalties for paying off a loan early and the entire scheme seems so very sensible, you’d think someone would have done it sooner.
Why didn’t someone think of this sooner?
They did! It’s the same principle as micro-lending schemes that have been operating in Africa, Asia and Latin America where families, neighbours and friends lend amongst themselves to the benefit of the community. Without the frictional losses caused by greed or inefficient institutions, and with trust as one of the key elements, these schemes work wonderfully well.
As Zopa puts it, “The growth of the internet, the advance of verification and credit scoring technology, and changing attitudes to corporate institutions have combined to mean this method of lending and borrowing is now viable for everyone.”
Why the weird name?
ZOPA stands for Zone of Possible Agreement, a business term for the area of fertile ground between negotiating parties – it’s the overlap between what negotiating parties will accept – for example, what one party is prepared to sell for and what the other party is prepared to pay.
As your MBA textbooks will tell you, if there’s no ZOPA, there’s no deal and accordingly, it’s a very clever name for this new service and it perfectly describes what it does – like the Zopa logo which incorporates two intersecting circles, ZOPA has created a broader, more succulent ZOPA for both parties.
Where does it operate?
Currently, you can only borrow from Zopa if you are a UK resident but the scheme seems to have caught the imagination of the UK populace and other countries are likely to follow. Zopa is a private company – you can’t buy shares.
The Zopa web site is well written and easy to follow … www.zopa.com
We particularly liked the thoughts of some of the world’s free thinkers about Zopa.