Led Zopalin — Inside P2P Digital Lender Zopa

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P2P lender Zopa has decided that with the leaves falling all around (here in New England, at least), it was time it was on its way. According to Zopa’s site:

While our model is doing very well in current market conditions, the US has been adversely affected in a way that just couldn’t have been predicted when we launched. So, sadly, our US colleagues have decided to withdraw from the US marketplace.”

When I read the words that it told me it made me sad, sad, sad. But on the Forum Solutions site (run by Forum CU, one of Zopa’s US partners), Doug True quotes Sarah Mason from Affinity Plus CU as saying:

As one of the credit unions who were partnered with Zopa, I would like to clarify that we have no credit availability issues and have changed none of our lending practices. This decision was made by Zopa.”

Hmmm. These would appear to be contradictory statements — but you know sometimes words have two meanings.

My take: I have to admit to being a littled dazed and confused. The “current market condition” — i.e., credit crunch — means traditional sources of funding (FI2P, or financial institution to person) is drying up. So, borrowers should be turning to alternatives sources of funds like P2P sites, no?

And with the steep drop in the stock market, investors/lenders are looking for places to put their money that will generate decent returns. So they should be turning to alternatives like P2P sites too, no? And feel even more secure about Zopa, since it’s (or was) backed by solid financial institutions, right?

In the battle for [evermore] customers, increased demand for alternative sources of funds + increased supply of funds available for alternative lending sounds like a stairway to heaven to me.

But apparently not. So what happened? I’m guessing it was a combination of:

1. The market not being ready. According to Forrester Research, consumers show “little interest [in P2P lending], mainly because they are skeptical of the benefits, are concerned about the risks, and are almost completely in the dark about firms that offer these services.”

2. The marketing not being sufficient. The flip side of factor #1 is that Zopa and its partners didn’t put enough marketing horsepower into their efforts. I remember a conversation I had in 2000 with Doug Lebda, founder of LendingTree. Although he believed that having “banks compete over you” was a better value proposition than the prevailing business model, he recognized that what he was asking consumers to change the way they went about getting a loan. And as such, he knew had to commit a lot of marketing dollars in educating consumers about this new approach and to create a new consumer brand.

3. The management team(s) not being able to focus. Management can’t disperse its attention to too many competing initiatives. So Zopa may be making a smart decision to narrow its attention and resources to the markets — namely, the UK and Italy — that promise to be the most profitable in the short term, and help fund its long term growth plans. CU contemplating starting new CUSOs should keep this in mind, too.

Bottom line: I wrote back in May that I thought Zopa had the winning business model in the P2P space. I think the key to P2P success is not through the disintermediation of financial institutions, but leveraging their risk management capabilities. I don’t think Zopa’s departure from the US is a sign that its business model was wrong.

But this should be a wake-up call to the existing players in the P2P market that their “better mousetrap” is no guarantee of success. Some marketing pundits love to say that all the rules of marketing have changed. They’re wrong. Social networks, word-of-mouth marketing, viral videos, etc. are just new ways of creating awareness, interest, and consideration among consumers. The need to manage the customer life cycle (awareness, interest, consideration, purchase) hasn’t changed — and never will.

Many dreams come true — and some have silver linings — but if P2P sites are going to gain any market share, they’ll need to spend a pocketful of gold on marketing.

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