On Wednesday, December 7th Lending Times in partnership with Zopa organized a panel on the differences and similarities of the industry in the two geographies.
I believe two things stood out in particular which I would like to report here.
P2P vs Marketplace
One of the first questions to the panel was why is the US more focused on the marketplace with institutional capital while the UK more focused on p2p. And the answer was very surprising: it is mostly due to historical choices, which had as indirect consequences these sources of capital.
Apparently when Zopa started they were focused on super prime borrowers with a 6-7% interest, 1% default and a net yield of 5%. Despite their efforts, institutions will not lend for such a low yield unless they saw a 7 or 8 years track record. So they had no choice but to focus on retail capital. And please see below about how they acquire p2p lenders, as it is certainly un-expected.
On the other side of the Atlantic, Prosper, when it started, was mostly focused on APRs of 30 to 40% for sub prime borrowers. So despite the high default, the high resulting yields, at least on paper, were attractive enough for them to attract institutional capital quite easily.
And this is why the business models in the US and the UK are so different. Zopa at this time relies on about 1/3 of institutional capital. And Prosper and Lending Club closer to about 2/3 institutional capital.
The question now becomes can a company be profitable in a pure p2p lending model ? The panel has explained that Zopa was profitable in 2011 and 2012, mostly because it had no choice and starting November 2016 it is once again profitable despite a large overhead and thanks to a much larger origination volume.
But how can a p2p lender be profitable given the apparent cost of lender acquisition in a p2p model ?
$0 cost of lender acquisition
A simple calculation will show that if one lender needs $1bil in lending capital in the p2p model , with an average of $10,000 per lender, the company needs 100,000 lenders. And what would the cost of lender acquisition be per lender ?
The panel present at the event pointed out that Zopa is not spending a single GBP on acquiring retail lenders on the platform. In other words, their cost of lender acquisition is $0. The panel explained that at first Zopa had tried a lot of different ways to acquire lenders but none of them turned out to be cost effective. And they are now, 12 years later, only relying on word of mouth recommendations.
The other side of the coin, and given their experience that marketing to lenders doesn’t work, is that in the panel’s eyes companies who spend money on acquiring p2p lenders will waste a lot of money and will not acquire any.
But there is one small trick that aspiring p2p lenders have to keep in mind: the retail lender, will first want to test the waters with a very small amount. An amount that is not threatening at all. And it has been strongly suggested that the amount should be around $100 or 100GBP. So if you have a p2p lender program, please keep that in mind.