Zopa.com was launched in 2005 with the aim of providing an accessible, reliable, peer-to-peer lending service to those who are underserved by the traditional banking system. It is an online brokerage system matching up individuals who have the resources with those needing those resources. This case study allows students to think beyond the traditional banking system and how such innovation can serve the same purpose as the banks. It also gives students the opportunity to look into the possible recourse of the banks at the onset of new technologies tending to compete with the banking industry.
Jamie Anderson, Martin Kupp, Michael Raith
Harvard Business Review (ES1541-PDF-ENG)
August 15, 2014
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Case answers for Zopa.com: From a Hot Idea to an Established Market Player?
Introduction – Zopa.com
ZOPA.com has the value proposition to provide an accessible, reliable, peer-to-peer lending service to those who are underserved by the traditional banking system. They provide an online platform that connects lenders and borrowers allowing lenders to give money directly to the borrowers without the traditional intermediary role of the bank.
Their online platform allows people to easily register as either borrowers or lenders, with borrowers being assessed using their Equifax-based credit rating, the same one used by retail banks (p.5). ZOPA only provides services to those with A*-, A-, or B- ratings. Those who are assessed and have the appropriate credit rating are put into pools with others with the same rating and allows lenders to choose which pool of borrowers they would like to lend to (p.5).
ZOPA.com has a default rate of less than 1%, which is lower than any other UK lender, giving people confidence in the platform and a sense of security (p.5). Their platform also connects people by allowing borrowers and lenders to send messages to each other, having a user blog, borrower and lender profile pages, and chat rooms for members (p.8). Some members would even meet offline in their communities. This adds a social aspect to the platform, with a particular member even saying that “if [they] borrow from real people… [they’re] more likely to pay back than if [they] borrow from a faceless bank” (p.6).
In addition, ZOPA’s value is highly reliant on direct network effects. As a platform that connects lenders and borrowers, the more lenders there are, the better for borrowers as it gives them more opportunities to borrow, more rates to choose from, and the opportunity for bigger loans. The more borrowers there are the better for lenders because they have more choice as to who to lend to, what rates and the time frame they want, and they do not have to worry so much about their money sitting idly by with no one to lend to.
ZOPA.com is targeting free-formers, which they define as “self-employed, project-based or freelance workers who were not in standard full-time employment” (p.4). This type of lifestyle does not result in the stable income that banks value above all else, leading to them being underserved by the traditional high street bank. Their research indicated that there are about 6 million people in the UK with this kind of lifestyle, and they project that in 10-15 years most people will work this way (p.4-5).
Free-formers tend to have a more independent culture and lifestyles, which ZOPA caters to through its accessible online platform, no penalty for early repayment, and the freedom it provides users from traditional banking (p.5). However, some of ZOPA’s consumers are simply entrepreneurs who had the money and used it to diversify their portfolio and mitigate risk (p.8).
The competitive advantage of ZOPA.com comes from…