Chapter Eight: Social Networks and Industry Disruptors in the Web 2.0 Environment
Online File W8.2 ZOPA, Prosper, and P2P Lending: Will They Disrupt Banking?
Any industry making a huge profit margin off its customers is a good candidate for disruption. Banking is a classic case— just think of the 19 percent interest you pay on credit cards and the 2 percent you earn on your savings account. In this section, we introduce two Web 2.0 companies that are trying to disrupt the banking industry—ZOPA in the United Kingdom and Prosper in the United States.
The Innovation: Person-to-Person Lending
Individuals who want to borrow money may be required to pay 10 to 20 percent interest if they use their revolving credit cards. At the same time, they receive 2 percent to 5.5 percent interest on their savings. The banks take the difference, but they also take the risk from the lenders. Now assume that an individual lender can negotiate directly with an individual borrower. It is likely that each can be better off than with the bank. Suppose they agree on an interest rate of 8 percent. The lender will get much more. The borrower will pay much less. The problem is how they find each other and negotiate
and secure loans. This is where innovative sites such as ZOPA enter the picture. The basic idea is that of person-to-person lending, meaning you lend money directly to a consumer rather than “selling” your money to the bank, and the banks then loaning their money to consumers.
person-to person lending
The Zone of Possible Agreements in Negotiation
Exhibit W8.2.1 illustrates a typical negotiation situation. Suppose you want to sell your used car. Usually, you have some range of expectation within which you are willing to settle. You know that you will never get more than $10,000 for your car, but in the worst case, you will accept $6,000 (these numbers may be changed with the time and the experience of offers). The buyer also has a settlement range, for example, $5,000 to $7,000.
Lending done between i n d i v i d u a l s , c i r c u m - venting the traditional role of banks in this process.
Notice that in such a case there is an overlap between the ranges, which means that a deal is possible. The seller will start with $10,000 and reduce the price slowly, and the buyer will start with $5,000 increasing it slowly. If the ranges do not overlap, there will be no deal. Otherwise, you will sell your car with a price in the overlapping zone. This overlapping range is called the “Zone of Possible Agreements” (ZOPA), and this is also the name of the pioneering company. Agreement in this zone must also be more beneficial to both sides than what they can get in the bank. Note that ZOPA has a lower limit, which signifies the seller’s walk-away position ($6,000 in our example). If an offer is less than $6,000, the seller will not entertain it. Similarly, the buyer’s walk-away point is $7,000; therefore, he or she will not consider any higher price.
The same idea applies to lending. However, this time you need intermediation, and this is where ZOPA and Prosper enter the picture. These (and similar companies) are using the Web to allow personal lending on a massive scale. ZOPA was the first company to introduce such peer-to-peer lending. What Skype did to telecoms and Amazon.com did to retailers is being done here to traditional banks, namely—disintermediation.
ZOPA (zopa.com) was founded in London in March 2005, and by January 2007 it had 40 employees and 105,000 registered member users (lenders and borrowers). ZOPA arranges for more than $100,000 loans every day.
ZOPA’s Zone of Possible Agreements
Seller’s settlement range
Seller’s walkaway point (lower limit)
Buyer’s settlement range
Buyer’s walkaway point (upper limit)