Reflections from Across the Pond

I'm intrigued by Zopa and applaud their ambitions, but I have a slightly more cautionary message about how to think about their service.

The CU Experience
I believe Zopa is truly innovating by making the existing traditional CU saving/lending process more transparent to the end member/user and by leveraging the low-cost Internet channel, but I'm not convinced the overarching competitive value proposition is different from what is supposed to be happening in the background at a credit union - pooling member savings to lend out at favorable rates and increase savings rates. Admittedly, however, the execution of this has typically not been as successful or efficient as possible for many credit unions. Likely this is a result of a desire or need to provide other non-vanilla offerings & services that increase operational expenses and reduce the 'rate' return received by the members.

Or, in the worst case, simply poor management or lack of bottom-line focus on the member at some organizations (see Callahan's Return to the Member scoring).

Does Zopa execute the cooperative model more effectively? Possibly...we'll see. Technology developments in the last 10-20 years have certainly created new efficiencies and the credit union industry is also adopting to make the cooperative model even more compelling...I'll be the first to agree that the evolution and embrace could be faster. But rate competitiveness alone comes at a cost.

Vanilla vs. Double Scoop Peanut Butter Chocolate (w/sprinkles)
Zopa or industry darling ING Direct can compete on rates because they are embracing a plain vanilla approach -- no expensive to administer high transaction service offerings (like checking accounts), no expensive brick and mortar presence, and very few selective product offerings within any given product category. For example, ING only offers three Mortgage options (all ARMs). For the rate shoppers among us (admittedly I am one) we may be willing to make this trade off for some products. Others, possibly the majority of the population (?), may be willing to take slightly less competitive rates for more complete service offerings, local branch access, and security. This is particularly true among people who are not as financially independent or accustomed to self-service banking (note: probably not the typical reader of this blog).

P2P lending lends itself (no pun intended) to those financially savvy individuals who are at least partly familiar with the banking business process of saving and lending. This is not the same as a familiarity with saving or borrowing with a financial institution. This could inherently limit the pool of people who may choose to participate in P2P lending. You have to respect the plain-vanilla, self-service, internet-only model for Zopa and the recent success it has had for ING Direct, but this approach will not cater to everyone, and credit unions should be careful in in how they emulate this or they risk alienating a large segment base of existing loyal full-service members. On the other hand, we clearly need an effective response to plain vanilla or risk losing another key segment of members.

Progressive credit unions are already adapting to the ING rate advantages with potentially greater impact on rate performance -- demonstrating the strength of the P2P cooperative model with not-for-profit advantages. I was inspired when I learned about Sunmark FCU's ($419M, NY) new 'RateEdge' division as a response to members who are willing to make some sacrifices for a superior rate (4.5% savings rate according to their website). As time goes on, I will be surprised if ING or anyone else can maintain their competitiveness purely on rate.

Risk
Perhaps the thing that troubles me most is the apparent positioning of P2P lending by Zopa as a comparable product to insured savings accounts. For example, the website marketing pitch states: "Lenders are, on average, getting better rates than savings accounts and with more predictable returns than shares." and includes a comparison to a specific insured savings product "typically 30% higher than going with ING Direct." Unless I'm missing something this is not an apples-to-apples comparison.

The best I can make out: participating in P2P lending in this format is significantly closer to an unsecured open-market fund investment. We know that savings or CD deposits are backed by government or institution guarantee. The motivations and risk tolerance for a saver are not the same as a market investor. While Zopa's statements are technically true, I feel this is awfully close to deceptive marketing designed to attract the uninformed saver who will naturally be interested in a better looking savings (ie. not investment) deal.

In the end, this is a new market with a real learning curve for those uninitiated with banking processes (eg. credit scoring, etc). Even if someone is familiar with stocks/bonds, but not banking processes and risk, they may still be in for an uncomfortable learning period.

No Middle Man?
Zopa claims: "Zopa cuts out the middleman" but I'd argue that a 1% 'exchange fee' on the process is not exactly a process without a third party extracting profits. Am I missing something here? I perfectly respect that any organization (for profit or non-profit) needs revenue to provide these services but this still makes Zopa an intermediary player taking a slice of the action. The 1% probably isn't going back to Zopa's 'members.' Another opportunity for some progressive credit unions to 'one-up' Zopa's take on the P2P lending model?

Crossing the Pond
Apparently Zopa plans to make a big U.S. splash in the early part of this year. I'm sure the press will pick up on this and run. They are likely to attract quite an audience and I feel confidant they will have at least some initial success.

However, I'm unsure about the long term impact on the financial services industry as a whole. What will your credit union's response be? Do we need an industry response? Are there additional lessons to be learned from Zopa's model that can help us improve our own?

Overall, I think this should be a wake up call for CUs to leverage their advantages from the banking and for-profit models more effectively. Credit unions have the ability to offer superior rates and service. Who will execute?