The UK pioneer of peer-to-peer (P2P) lending, Zopa, has revamped its savings options for potential lenders like us.

These changes are another step away from how the company originally positioned its business – and from the Zopa I began sporadically covering way back in 2008.

In those early days Zopa was almost an eBay for individuals. Instead of depositing your money with a faceless and feckless High Street bank in return for a meager interest rate, why not lend it to somebody you didn’t know for a much higher return?

Heck, it worked for backstreet moneylenders for millennia…

Well, one reason to be hesitant might be because that somebody could be as faceless and feckless as any bank.

Which was where Zopa stepped in.

Conscious capitalism

First, Zopa put a face on your borrower.

No longer were you sticking your money into the Hali-BC-land Banking Group’s “Ultra Gold Premium High Interest Account” in exchange for a pathetic interest rate.

With P2p, you were lending to Barry who wanted a motorbike, to Tracy who wanted to top-up her tan in Ibiza, and to a seemingly endless stream of people who said they wanted to consolidate their loans.

And – in those juicy days before the wider interest rate crash that began in 2009 – you were earning 7-10% or more for your kindness.

Zopa borrowers even wrote little biographies, as if touting themselves on eHarmony. Charming.

Of course Barry or Tracey could be feckless too, and so Zopa did some credit checking for you.

It argued its robust procedures meant the higher interest rate you got with it compared to a bank was mostly due to the efficiency of its Internet-enabled P2P business model, rather than because you were taking huge risks.

And bar a wobble early in the credit crisis1, I would say Zopa has performed admirably on the credit quality front.

Zopa has been running since 2005, its reputation was enhanced by its performance in the recession, and there’s been no deluge of bad debt that pessimists predicted at the outset.

But note that back then lenders also took some responsibility for what level of risk they were assuming, and hence for those potential bad debts.

As a lender you would set the minimum interest rate you were prepared to accept. Zopa’s credit checking divvied up its borrowers into buckets of increasing dodginess – but it was up to you to decide what interest rate you’d demand for each (or whether you’d bother with some bands at all).

Set too high a minimum interest rate for a particular cohort of motorbike-buyers and your money would never be lent out.

Finally, being a banker can be a lonely business, and so Zopa also offered community features. These ranged from the ability to see who else had chipped in on a particular loan to a thriving discussion forum.

Zigzagging Zopa

Throw in some portfolio analysis tools and whatnot and, in a nutshell, that was Zopa 1.0. It enabled you to Be Your Own Bank.

But Zopa has changed a lot since then – culminating in the most recent overhaul I mentioned.

I don’t propose to go through all the previous incremental changes, blow-by-blow. Others have been more much invested in Zopa than me, and I’m not an expert on the sector.

I’ve followed P2P out of curiosity and as an interesting sideshow to my true love – equities – whereas some early Zopa lenders seemed to be almost revolutionary in their hatred of the banks and their joy at having found a way to get hands-on with their savings.

Suffice to say, Zopa is now almost unrecognisable from the platform that won their hearts. I’m not saying it’s better or worse, but it is very different.

While progress over the years has followed the two steps forward and one or two back model, eventually Zopa scrapped the ability to see much about your borrowers, ditched an experiment to lend directly to individuals in size (a sort of Kickstarter for P2P), killed the community features, and in my view made it harder to look into your loan book.

Most dramatically, it removed the ability to set your own acceptable interest rates against the range of rates being offered by your peers – the very feature that gave Zopa its name (Zopa stands for Zone Of Possible Agreement).

Like some fusion chef on a budget, Zopa also merged and blended its various markets and the term length of loans it offered, further narrowing the options for lenders.

On a more positive note – in the eyes of most people – it introduced a greater measure of protection against bad debts, too.

Its so-called Safeguard fund is basically a stash of money set aside to repay soured loans, tithed from borrowers’ interest payments. The Safeguard fund had the affect of smoothing returns for all lenders in the applicable markets, rather than some unlucky lenders getting a string of bad debts while other savers were smugly blessed with an unblemished portfolio of outperforming loans.

The Safeguard protection was surely inspired by the similar provision fund at Ratesetter. Indeed evolution throughout the sector seems to be being driven by the plethora of competition that has sprung up to challenge Zopa and the other early pioneers.

This might indicate these so-called Fintech companies see abundant opportunities to revolutionize our personal finances.

On the other hand, it might imply that even older companies like Zopa have failed to erect many barriers to entry over the years, and also that it’s pretty easy to fund and launch a loss-making Fintech company.

I am not sure which as yet.

On the subject of losses, I should stress at this point the obligatory peer-to-peer warning – that your money with Zopa is NOT protected by the Financial Services Compensation Scheme, and thus even when lending under the auspices of Safeguard or Ratesetter’s Provision Fund, you could still lose some or all your money if bad debts eventually mount to outweigh the ability of these platforms to give you and your fellow lenders back all of your money.

So far with the big platforms Zopa and Ratesetter, this has been a theoretical concern rather than a reality. I had the odd bad loan with Zopa before the Safeguard came in, for instance, but the resultant losses were totally swamped by the higher interest payments I earned.

The risks are there though, and bad loans tend to snowball in a crisis, so we would expect to see a calm before any storm.

For this reason, P2P for me still occupies a different place in my portfolio to cash and corporate and government bonds. The interest rates are not 100% comparable to those mainstream alternatives.

You are taking on more risk with P2P, with no promise of State compensation if it goes wrong. This at least partly explains those higher expected returns.

Zopa three ways

At last we get to the news! (Which is in reality somewhat old, and which I’ve buried 941 words into this article. Ho hum, my style has always been more the rhomboid than the inverted pyramid!)

Sign up with Zopa today as a lender and you’ll be confronted by three options:

This is a far simpler menu than old Zopa at its most complicated. As such I think it’s designed to win more mass-market money to the platform. There’s a small nod to the diehards with the Plus option, but I don’t know if it will be enough to win them back.

The choices are fairly self-explanatory.

For all three options your money is as usual divvied up and spread out as micro-loans across various new Zopa borrowers – with a larger minimum lump sum demanded to enter the Zopa Plus market, on account of the greater risk. And you no longer lend money for a term you specify, regardless of which option(s) you go for.

You can withdraw borrower repayments for free with all options. In my experience a fairly high portion of borrowers actually repay their entire loan early2, which has up to now meant that over a period of a few months you can get a fair chunk out if you want to.

The key differences between Access, Classic, and Plus are:

• Zopa Access and Zopa Classic money is backed by the Safeguard fund3 whereas Zopa Plus is not. Which partly explains the higher predicted interest rate for Plus.

• Zopa Access and Zopa Classic money is lent to better-rated borrowers than Zopa Plus, which takes on riskier customers. This explains the rest of the higher interest rate for Plus, compared to Classic.

• You can sell your entire loan portfolio with Zopa Access for no charge. That makes it more liquid (but see below).

• For Zopa Classic and Zopa Plus a 1% fee is charged on loan sales, should you decide to withdraw your money before your loans have been repaid.

Note that the fee you’re charged to sell your loans may not be the only financial hit you have to take, should you choose to cash out early.

This is not made super clear in my opinion, but anyway you will only be able to sell your loans at the best price you can get for them at that time.

Ideally, a fellow lender would just take over your portfolio. But if interest rates at Zopa Access rise to 6%, say, then a portfolio that you accumulated when rates were below 4% will not be very attractive to potential buyers, who could lend into the new customer market instead and get a higher rate.

This means you would probably have to take a haircut to find buyers for your portfolio.

(In contrast, if you sat on your loans and waited until they all matured then you would expect to get all your principle back, with interest).

This is definitely something to be aware of, especially if and when interest rates start to rise.

What makes a market?

Boil it down, and Zopa Access is for P2P dilettantes, Classic is for people who want to keep money compounding with Zopa for many years to come, and Plus is for risk-seeking daredevils who trust the platform’s credit checking and resent seeing the Safeguard fund eating into their returns.

Plus then looks like a gesture towards those who were comfortable with the original P2P Zopa model. There’s no ability to set your rates or decide who to lend to though, so to be honest it’s sort of a disinterested Royal wave of a gesture, as opposed to a bear hug and a goosing.

At this point we could spend all day debating how these options compare to rivals like Ratesetter and the other platforms out there, and perhaps we will in the comments.

But what I’m more interested in is what it says about the state of P2P lending today.

For starters, should we even still call it peer-to-peer lending?

The term “marketplace lending” has been gaining ground for a while, and when you look at the Zopa revamp you can see why.

Yes, you’re still lending to individuals with Zopa, but you don’t really know who they are anymore. True, that was fairly useless knowledge in the past to be honest, but it did at least highlight the P2P difference.

Your cash stashed with the Halifax is also funding someone’s mortgage. Zopa may be more granular and may be more efficient but is it really that different now you’re just taking the prevailing rate you’re given, and you similarly don’t really know where it’s going?4

This same-difference seems even more the case when you consider the institutional money that has entered the P2P sector, whether through investment trusts such as P2P Global and GLI Alternative Finance, or via hedge funds and the like, particularly in the US.

I don’t have any figures for Zopa – and from what I can tell it still remains largely focused on individual savers – but you can see the appeal of institutional money for these platforms.

All the platforms need to scale fast to stay ahead of the competition, improve margins, and ultimately generate decent profits.

But scaling fast is always risky and especially so in finance, and it’s easier and perhaps safer to do it by finding a few hundred institutional investors with £5 million to spare as opposed to attracting and servicing another 50,000 finickity retail customers.

Yet however you do it, growing quickly can lead to problems. For example, the US platform Lending Club has been rocked by issues involving incorrectly classified loans, as well as by its admission that any lack of access to further institutional money could ultimately be bad for its shareholders.

The debacle is uncomfortably redolent of the subprime mortgage crisis in the US, and the still-emerging P2P / marketplace lending industry now needs to work twice as hard to win the wider public’s trust.

Only the loan-ly

As Zopa and the other P2p pioneers – and the host of new entrants – search for the perfect mix that maximizes growth without stashing timebombs throughout their operations, they will continue to evolve.

Already I think we can see that to take substantial market share from the global banking industry, the marketplace approach may have the edge over the fiddly and fine-grained pure P2P model.

This isn’t to say that there’s not room for multiple approaches – but even sector granddaddy Zopa has only facilitated £1.5bn in loans since its launch in 2005.

Compared to the £700 billion held in savings accounts, that’s not so much a drop in the ocean as a healthy bonus in some rarefied corners of the finance industry.

Hence the revamped approach from Zopa, which I believe is a bid to parlay the trust it has rightly won for itself and its longer track record into a simpler proposition for both lenders and borrowers.

Forget all that stuff about knowing your borrower’s favourite brand of biscuit. Just give Zopa the money, trust in its algorithms, and earn most of any differential that Zopa can eek out versus a traditional bank savings account.

Meanwhile the platform aims for scale, and tries to lock-in its first-mover advantage. True P2P enthusiasts can go take their chances with the upstarts.

Zopa then is not really looking to cut out the middlemen – the banks – with a radical new model.

Rather it’s now trying to replace those middlemen with itself as a middleman, with something that feels altogether more familiar.

As of last September, Zopa was not yet profitable however, which as with Ratesetter’s £100 sign-up bonus does make you wonder if it’s all too good to be true.

Z is for zeitgeist

Can Zopa achieve the scale it requires to make money?

Will banks acquire the best players before they do so if P2P does go truly mainstream – as happened with the Internet banking pioneers like Egg and Cahoot, which were acquired and then left to go cobwebby when online banking became everyday banking?

Hargreaves Lansdown is now working on its own in-house P2P platform. Hardly a plucky band of brothers seeking to upend the status quo – Hargreaves already has over 800,000 customers and more than £60 billion in assets under management.

Time will tell, but for me the shifting business models are yet another reason not to put all your eggs in one basket, both in terms of spreading your money between P2p platforms but also not putting all (or even most) of your cash-like assets – let alone all of your portfolio – into peer-to-peer lending, which I do see some people doing online.

Personally less than 4% of my total wealth is in P2P, I use both Zopa and Ratesetter, I have owned one of the investment trusts I mentioned above on and off, and I will probably try some of the newer platforms eventually – especially if and when the delayed Innovative Finance ISA options are rolled out more widely.

To quote Francis Bacon who was writing in 1625: Money is like muck, no good except it be spread around.

1. That I was scoffed at for highlighting, but that was later recognised by at least some Zopa-heads as a short-term systemic glitch rather than just bad luck on my part. [↩]
2. Beware this may be due to falling interest rates over the period Zopa has been active. [↩]
3. For so long as there is money in the fund. This backing is not guaranteed. [↩]
4. You can download your loan book as a spreadsheet which has a username attached to each of your micro-loans, but this is hardly a Who’s Who? of your customer base. [↩]