Part 4: Other EC Models and Applications
Online File W8.2 (continued)
Securing the Loans ZOPA tries to check the background of the borrowers in the following ways:
Conducting a credit rating investigation at Experion, Equifax, or a similar company
Checking people’s eBay rating (if available)
Checking the borrower’s profile (if available online)
Only one account is permitted for each borrower
Checking the possibility of identity theft by a borrower by asking questions about past borrowing, demographics, etc.
In addition, ZOPA advises lenders to spread out the risk by lending from one individual to several borrowers. In addition, if you like to sleep better, you can get insurance (for a fee) on the amount you lend. The risk, however, is not large; the actual bad debt rate is less than 0.05 percent. A possible explanation of the low default rate is that borrowers are more likely to pay back real people than a faceless bank. The unlucky lenders can use a collection agency as in any other unpaid debt.
Finally, ZOPA covers any damage from fraud done to your ZOPA account by intruders provided you have kept your per- sonal account details secure.
The Revenue Model
ZOPA takes 0.5 percent of the loan amount from both the lender and the borrower. There are no hidden fees, and the only other (optional) cost to the lender is the insurance (plus the fees that ZOPA takes for arranging the insurance). At the moment there is no advertisement on the site. But it is likely that in the future vendors will try to sell related products or services to either the lenders or the buyers.
The Lending Process
Step 1. Let’s say that a lender has $20,000. She transferred it to her ZOPA account stating her willingness to get a 7.5 percent interest rate from borrowers of top credit rating, for 2 years. Step 2. ZOPA organizes a pool of, for example, 40 borrowers with a similar credit worthiness of top rating, one that meets the lender’s requirement. Each will get $20,000 divided by 40, or $500. Step 3. The lender can read the profile of the prospective borrowers and the intended use of the money. The borrowers can read the lender’s profile as well. This fosters a personal relationship between borrowers and lenders and helps in reducing default(s). Step 4. ZOPA arranges the contracts. Step 5. ZOPA collects interest payments and mails the lender a monthly check. Step 6. ZOPA arranges repayment of the loan after 2 years.
Prosper (prospe .com) is the first U.S. P2P lender. Started in February 2006, it was created to make consumer lending more financially and socially rewarding for everybody. In January 2007, Prosper reported 130,000 members and outstanding loans of $30 million. It operates somewhat similar to ZOPA, but its revenue model is different. Prosper collects a 1-to 2-percent fee of the funded loan from the borrowers. In addition, lenders pay .5 percent annual loan servicing fees. Because of the higher fees, the company can assume more risk. Thus, they check only credit scores and borrowers’ group affiliation.
The way Prosper works is intuitive to people who have used eBay. However, instead of listing (by sellers) and bidding (by buyers) on items, here lenders bid and borrowers list needs using Prosper’s online auction platform. For details see Steiner (2007). Here are the major steps of the process:
Borrowers create a loan listing on Prosper, specifying amount needed, the purpose of the loan, and the interest rate they are willing to pay.
Prosper displays borrower credit grade (from AA to higher risk).
Borrowers provide photos of themselves, their children, and even of their pets. They also provide the purpose of the required money and how they plan to pay it back.
Lenders review loan listings and bid to fund only the ones they choose using a bidding process.
Group leaders manage borrower groups and use their reputation to get great rates for borrowers.
When a match is found, Prosper arranges for the money transfer and then manages the loan.