Zopa Bows Out - Peer To Peer Lending Didn't Work Then
0Zopa and peer to peer lending Zopa just withdrew from the peer to peer lending market, the book will be sold to its inhouse bank, all the lenders will be paid off at par. Effectively, the decision is that there is no peer to peer lending. This follows others' retreat from the same business model, RateSetter and Funding Circle (the second still has some retail lenders but is mostly institutional money) and while there are myriad small players in the penumbra as a large scale innovation peer to peer lending seems to have failed. Not that there's anything wrong with an idea failing. Unless we try it how will we know? But the thing is we need to take the right lesson from a failure. Here I think it's that there is in fact no grand problem with banking as it currently exists. We should thus be wary of those promising to solve the grand problem that we've just had proof does not exist. Peer to peer lending itself The idea has its attractions. The great force of the internet is that it disintermediates around current market gatekeepers. Those who were able to collect a fee or toll just from their relationship with either buyer of seller find themselves staring down the barrels of a search engine or price comparator site. Insurance brokers, real estate agents, even retail stores and used car lots, all have suffered at least some pain. The people who have survived such attentions are those who are not just collecting a fee for being there, Or who add value in other ways. The idea that the banks were just there making out like bandits was common. Why not have a site where folks lent direct? The interest rates to borrowers could be the same, lenders make out well. Or perhaps the margin gets split. But why be paying that whacking great spread to the bank? That's fair enough too. Although banks do provide something, which is the security. Lend direct and you take any capital losses from default. The bank's equity sits in the middle if you go through them - and a useful definition of a bank is someone who guarantees against credit risk in that manner. The lower rates on loans, of higher on deposits, well, an internet bank might be able to manage that. And rate spreads have closed. But that's not all peer to peer was built upon. There was also an insistence that there's some great unbanked market out there. The existence of some large army of creditworthy - at least worth lending to even if not classified as such - people or loans out there that banking just wouldn't service. Peer to peer margins would be kept up by servicing this unmet demand rather than going toehold to toehold with extant banks for the usual business. That's the bit that turned out to be wrong. Actually lending peer to peer By the way, I'm not arguing against lending peer to peer. If that's something you're doing or wish to, then why not? This is an argument about something slightly different. Those telling us that their company, their platform, their idea, is going to change matters substantially. Those who argue that there is some massive untapped market out there that can be assuaged or profited from if only there were new money to lend. The big problem Note, again, that I'm not arguing that new methods or techniques of lending don't or might not work. So, say, Klarna, which is one of those pioneering credit for paying for things online. That's fine, might work, might not. But it's not all that different from the catalogue shopping of old, or even standard credit cards and such. That the financing fee often comes out of the retailers' margin not directly from the pocketbook of the consumer doesn't make much economic difference. But this is a new way of dealing with an old thing and an old market. My point is about those who might say that there's some massively underserved market which this new scheme might be able to deal with. When it comes to credit we seem to have tried that. One of those peer to peer lending claims was that there was a viable credit market currently unserved which would provide the base for this new method. That's the bit that has been shown to be untrue. Or, as bankers have been saying for centuries, it's not that there's a shortage of money to lend, it's that there's a shortage of people worth lending money to. My view I take it that we should learn the lessons of the varied experiments that go on around us. Here with peer to peer lending it was an entirely reasonable idea that seems not to have worked out in the end. The varied platforms - in the UK at least - are moving to a much more traditional banking model. The large market that was seemingly underserved seems not to exist. OK, great, so, what can we learn from this? The investor view You'll note that I'm not picking any particular stocks here. My main named company, Zopa, isn't listed and that's intentional. Because the point is about a sector, about a claim about a sector. If there is no large and unlent marke