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What makes a P2P company successful ?
You may be surprised to read that there are no less than eleven peer-to-peer or peer-to-business companies currently or previously operating in the UK. Of these, how many could you name ? Zopa is by far the biggest and probably best well known company. Funding Circle and RateSetter together with Zopa make up the big three (who are also members of the P2P Finance Association) that have accounted for over 98% of all P2P loans in the UK. The notable addition is ThinCats who have made over 1.5% of all P2P loans in the UK, but have a much smaller lender base.
So how did Zopa, Funding Circle, RateSetter and ThinCats become successful and what can some of the other companies learn from them ? I believe this is down to four simple factors - innovative products, targeted marketing, promotions and keeping the trust of lenders and borrowers.
In the early days when Zopa started I remember reading about it in an article on one of the specialist money websites that I used to read. Zopa offered fee free lending and various promotions including cashback and wine. Zopa's innovative market model allowed lenders like myself to come up with different schemes in order to try to maximise their rate. They also introduced a forum where lenders and borrowers could ask questions and discuss Zopa and anything else. They built an online community, which was innovative in itself. Success !
YES-secure launched 5 years after Zopa, but Zopa has grown to 300 times the size of YES-secure by arranged loans, while YES-secure have been overtaken by later entrants. YES-secure unfortunately experienced significant bad debts in its first year of more than 15 times its own estimates. The company recently rebranded itself as Encash and while its marketing is punching above its weight, it hasn't attracted new lenders. Recent changes to the business model have frustrated existing lenders, and several have publically stated they are withdrawing funds. YES-secure's response was to state they are considering closing their forum. Neither success or failure.
Funding Circle wasn't the first P2P company to offer loans to businesses (that was BigCarrots), but it is probably the one that will be the first that people think of. This is because they marketed the site to lenders and borrowers very successfully. They carefully juggled supply and demand and to date I believe only one borrowing request has gone unfunded. Funding Circle have offered a number of incentives to lenders, such as gift vouchers, cashback and experience vouchers. Success !
Quakle launched with a different P2P lending model, without the credit checks that were being performed by the rest of the market, and that proved their downfall as their bad debt spiralled and nothing could be done to rectify the situation. Failure.
RateSetter launched at a similar time to Quakle, but RateSetter brought an innovative solution to the bad debt problem that lenders were experiencing and this has proved to very successful. RateSetter also offered a short term loan that offered a good deal for borrowers and lenders. RateSetter have also simplified the lending model to appeal to a wider group of lenders. Success !
ThinCats is a more recent addition, but they have taken a different approach by targeted high net worth individuals, instead of the "mass market" that the other three are competing for, and ThinCats haven't yet needed the level of incentives that the other three have introduced. ThinCats have been very successful in fulfilling borrowing requests and have recently made the largest ever P2P loan of £500,000 to one company. Success !
If there was one thing that the other P2P companies can learn is to have effective targeted marketing. A company cannot build its customer base if nobody knows it exists.
'relative advantage', '(lack of) complexity' and 'compatibility (with other successful providers and with user needs and wants)' to the mix.
Zopa and Ratesetter perform very well in my additional criteria. Yes-Secure/Encash doesn't seem to have a clue, and there is no sign that the management want to learn. Sadly, when Yes-Secure ceases trading - as it almost certainly will - it's going to have a significant negative impact on this young sector.