Ho John Lee’s Weblog

Corante has a podcast interview with the founders of Zopa. The idea is to build an eBay-style marketplace for individuals to participate in lending and borrowing, using eBay-style reputation scoring.

Some of this seems like a good idea, possibly in matching up people who want to provide funds to communities that don’t have a pool of loans available to them, but would otherwise be a reasonable credit risk. (Something like Grameen Bank’s microcredit program.)

For other situations, this seems likely to end up with many of the same reputation-gaming problems that turned up on eBay. From a risk-management viewpoint, it might be useful to find a way to build credit pools rather than individual loans. This is essentially what the banks do already, but the reputation scoring system might allow a better handle on the creditworthiness of the borrowers, and turn the individual loans into a portfolio, so a bad loan doesn’t become a disaster for the creditor.

There does seem to be a need for something in this space. The ongoing consolidation of banks in the US has generally eliminated local control of most banks, meaning that individual branches don’t usually know their customers well enough to know if they would be a good credit, other than looking at a credit score, and don’t usually have the discretion or interest in making a loan to someone that doesn’t exactly fit their loan profile. If you want to do something creative, you probably need to work with a private banker, or have wealthy friends.

This might also provide a mechanism to form relatively small pools of capital for niche markets. An eBay-style model implies a huge amount of effort on the part of the participants, compared with what consumer banks would typically do. This might make smaller loans more interesting. Otherwise, why not stick with writing super jumbo mortgages at $1 million each for the same amount of work.

This entry was posted on Tuesday, April 12th, 2005 at 6:23 pm and is filed under Finance/Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.