p.p1 Semester 2017 Mandatory Assignment Case: Zopa.com Date:

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p3 {margin: 0.0px 0.0px 0.0px 0.0px; font: 11.0px Arial}span.s1 {font: 12.0px Arial} Strategic and Tactical Tools for E-Business MSc Business Administration and E-Business, Fall Semester 2017 Mandatory Assignment Case: Zopa.

com Date: 01-12-2017 Pages: 8 Characters: 16670 Authors: Axel Aarstad (axaa17ab) Andras Pal Danyi (anda17ab) Bara Sandor (basa17ab) Victor Lund Storgaard (vist14ab) Course Instructors: Rony Medaglia Qiqi Jiang 1 Q1: What is Zopa’s value proposition? How does it differ from traditional and online banks? The value proposition is a frequently used part of the “Business model canvas”, which highlights why customers would choose one company over the other. In other words, it either solves a customer problem or satisfies a customer need (Osterwalder, Pigneur; 2013). Zopa’s value proposition should be analysed from both the borrowers and lenders’ perspective to give a sufficient understanding of the platform’s value. Kupp et al. (2014) summarize Zopa’s main benefit for borrowers to be the access to relatively low cost, short term, small loans.

This statement identifies key points to value: cost, loan term and loan amount. According to Kupp et al (2014), Zopa’s average interest rates were around 6.6 percent in 2012, which can be contrasted to traditional banks’ interest rates of around 19 percent at the time. Here, the benefit of “low cost” can be identified easily.

Furthermore, Zopa allowed and encouraged short term loans, and loan amounts could be considered small as well. As of November 2017, the Zopa.com (2017) website offers loans as little as £1,000, which can be paid back in 1-5 years time. The benefit for lenders can be summarized as a high-return, safe investment. According to Kupp et al (2014), the average return on bank saving accounts was less than half of the average return made on Zopa, which was around 2.

5 and 5.4 percent, respectively. The source of security comes from the way lended money is distributed. As an example, if a lender offers £500, this amount will be divided into £10 chunks and lended to 50 different borrowers, ensuring that if a borrower defaults, the lender still only loses a minimized amount (Zopa.com, 2017). Furthermore, Zopa.com’s default rates were the lowest out of all UK lenders in 2012. Another, more general, part of the value proposition of the firm is its transparency.

All users see who their money is going to (if they are lenders), or who their money is coming from (if they are borrowers). The lenders and borrowers can even message each other, and see basic information about the other person. This injection of a social aspect contributes to the low default rates, according to CEO Giles Andrews (Kupp et al, 2014). 2 Comparing this value proposition to traditional and online banks Banks in general focus on a whole spectrum of activities. They make payments possible through different systems (online, in stores through credit and debit cards etc.

), secure client money, provide wealth management services, help with retirement planning etc. (Investopedia, 2017). Somewhere on this spectrum, the activity of lending and borrowing can also be found, but unlike Zopa.com, this isn’t usually their main focus.

For example, Citi bank considers their value proposition to be “providing financial services that enable growth and economic progress” (Citigroup.com, 2017). Later, they mention that they help to keep people’s money secure and help with investments and so on. Online banks usually aim to provide similar services to their clients, however find ways to minimize costs, therefore in theory they can provide these services at lower costs. Business Insider made an interview with expert Richard Barrington who also contrasted the differences and similarities of both bank types (Durisin, 2013). Barrington also emphasized the superiority of online banks in terms of interest rates, a similarity between security of data and storage, and an inferiority of online banks when looking at customer service, compared to traditional banks.

Once again, the focus of online banks is different from Zopa.com, allowing Zopa.com to excel and specialize in the area of lending. Q2: What are Zopa.com’s competitive advantages and how sustainable are they? We have identified three main competitive advantages for Zopa, which we first will describe and thereafter proceed to evaluate the sustainability of each competitive advantage based on Michael Porter’s theory of sustainable competitive advantages (Porter, 1985).

 What is a competitive advantage? A competitive advantage is something that gives a business advantage over its competitors and allows a company to generate profits above the industry average. When is a competitive advantage sustainable? A competitive advantage is sustainable when it is both long term, and it is hard for competitors to imitate. We rate the sustainability on a three-step scale going from low, to medium to high.

3 Competitive advantage 1: Slim and agile organization Since Zopa.com is an online business, it allows for having a slim organization with almost no physical assets like brick and mortar affiliates with prominent addresses like the traditional high street banks do (Kupp et al, 2014). Zopa.com also saves employees, as their customer service is also online. This structure allows for Zopa.

com to keep costs at a minimum and react fast to changes in their business environment as opposed to larger banks. Sustainability: high. We believe that it is a highly sustainable competitive advantage because even if the business grows, Zopa.com will still be able to keep their organization slim relative to its competitors the high-street banks and the online banks.

Low costs allows for Zopa.com to pursue a cost-leader strategy which is reflected in their low interest rates and high investor returns. Competitive advantage 2: The Zopa.com P2P based lending model Zopa.com is not financially liable or impacted when customers default their loans. Having all their customers in an online database, gives Zopa.

com access to valuable data that can be used to form data driven business decisions. Another strength in the way Zopa.com have designed their lending platform is the sense of community the platform creates. The lenders can actually see a brief profile description of who they are lending their money to and what they are helping funding. The customers can even write messages to each other to elaborate on what the money has helped them realize and thank each other.

This is a significant difference in consumer experience when compared to loaning from the “faceless” high-street banks, and might motivate customers not to default their loans (Kupp et al, 2014). The lending platform demands low capital requirements from Zopa.com compared to their competitors who are liable for their own loans. 4 Sustainability: medium.

 We believe it is medium sustainable because the lending model can be utilized long term, but it is somewhat easy for competitors with large amounts of resources to develop a similar platform if they wanted to. Allowing the customers to interact with each other, allows Zopa.com to pursue a differentiation strategy in terms of Porter’s (1985) generic competitive strategies. At the same time, the fact that Zopa.com is not impacted financially contributes to a cost-leader strategy mentioned in competitive advantage 1. Competitive advantage 3: Their brand and image Zopa.

com have been enjoying free and positive publicity through the media (Kupp et al, 2014). Public third party endorsements are valuable to a company and helps build trust and attract customers. Zopa.com have received multiple trust-based awards for their lending platform and score “Excellent” on the recognized rating site for companies, Trustpilot. As was the case with media publicity, independent third party endorsements of the business is the most valuable marketing material a company can get.

 Sustainability: high. We believe that their image is sustainable because Zopa.com have already maintained its good name for 10 years. They have been getting good publicity since the company was founded, and that have not changed. A good image is something that takes a lot of time and effort to build up, and it requires a lot of work to gain the trust of the average consumer. Therefore, the competitive advantage is not easy to imitate for competitors.

5 Question 3: “What are the strategic options for the traditional high-street banks (such as Royal Bank of Scotland) and online banks, respectively, in responding to Zopa?” With the platform economy today, it’s hard to predict the future outcome of the p2p businesses sustainability. We have come up with three different ways the Peer-To-Peer lending market can go. The first one is a situation where exponential growth in peer-to-peer lending appears. For this to happen the market would either need and investment boom in p2p companies or a greater demand from consumers for small loans. The second one is seeing the market stagnating, where you have a lack of loaners. From an Financial Times Article: “platforms are showing few signs of needing funding.

Zopa wrote to its customers this month saying it would not be accepting new money from lenders because of falling demand from borrowers.” (Dunkley, 2016). Last, we have the third opportunity and today’s market status, steady growth in peer-to-peer lending. Where the cut is very little of the total small loans market. Options for traditional banks 1. Come up with a way to give Zopa a reason for collaboration or buying the platform. Give Zopa the chance to let them use banking services through the bank, connect the service of lending through the platform to a bank.

They can also attempt to buy out the patented software and implement it. This makes only economic sense if they financially lose out on small loans to p2p competitors. “Banks are concerned about the competition, but they have the architecture and credit and risk-management processes to leverage P2P principles within or alongside their own systems.” (Long, 2016). 2. Create their own p2p subsidiary from scratch and introduce it to their current customers, a new solution through their online services. Crowdfunding, crowd-lending and peer-to-peer will be a part of the toolkit traditional banks. Deloitte study: the study does expect that banks could see the benefit from copying some products from P2P sites, for instance by adopting the smooth and efficient technology which assesses creditworthiness rapidly to offer a loan quickly.

(Wallace 2016) 3. Create a solution within their current business model that can directly compete with Zopa. This means that they end up with implementing an element that hits themselves financially as well. The negative impact will be that this new solution “eats” up the income and demand of 6 their existing products. This is something to consider if companies like Zopa shows exponential growth in the future. 4.

Wait and see if more obvious opportunities or ways to solve this threat appears by stagnation in the number of investors or personal lenders. 5. Cut transaction costs and create a more frictionless business model, modernize in terms of flexibility and ease of use for customers and lower costs of loaning. They can make it easier to alternatively take loans through an online platform if you match certain criteria.

 We also considered if Zopa was maybe operating in an illegal matter, but it turns out the UK government have invested into British businesses via peer to peer lenders. The intention was to bypass the high street banks, which were reluctant to lend to smaller companies (Wikipedia peer to peer, 2107). Options for online banks 1. Try to facilitate a partnership/collaboration, especially if Zopa cannot get a license. Online banks already have a platform Zopa might need for getting more lenders and loaners to their platform. 2. Online banks- be an online bank with the functionality of Zopa, Adapt this business model. Online banks have existing customers, and they have already cut out transaction costs that traditional banks might have.

 3. Ignore it, limit to how much Zopa can lend out today and see it as a trend. The company is financially not a big threat yet. Financial Times writes in an article criticizing p2p: “Their moves into mainstream banking have raised questions over whether the peer-to-peer model is viable for the long term, or if it will ultimately mirror the industry it is trying to upend.

” “There is not enough demand for credit to grow it enough and, so they have to act like banks.”. We also read that it turns out that the majority p2p loans are bought or funded by financial institutions like hedge funds and family offices, not by individual investors (Kekre, I 2017). 7 Question 4. Which of these options should these two types of banks pursue? Why? Traditional and online banks should employ different strategic options when dealing peer-to-peer lending platforms such as Zopa. The former is engaged in many other services (e.g.

wealth management, insurance, business loans, debit & credit card issuing, mortgages etc.) that are non-competing with Zopa´s offering, thus they are not strict competitors with Zopa. On the other hand, Online banks will become strict competitors of Zopa, if their banking license is approved. Zopa aims to offer a wider range of services within lending and borrowing, complementing their existing peer-to-peer model (Sutter, 2017). In the following paragraph the strategic option for Traditional banks will be discussed and lastly the option for online banks. 4.

1 Traditional Banks` strategic option As of 2016 the size of the peer-to-peer lending market is about 3.2 billion pounds (BondMason, 2016) , not even 1% of the total unsecured credit market in the UK (Allan and Treanor, 2017). 60% of the market unsecured credit market is still owned by UK`s largest banks. Although data shows that peer-to-peer lending has seen a steady growth in the last few years and will continue to do so, companies operating these platforms are of a lesser threat to traditional banks.

One of the reasons for the small market share of marketplace lenders (further abbreviated as MPL), is the average UK retails customer´s willingness to engage with their products. According to Deloitte’s survey more than half of retail customers know about peer-to-peer lending platforms, on the other hand only 1 in 25 retail customers has borrowed from one (Foottit, Doyle and Turan, 2016). The reason for low customer conversion rate is unknown, however it could be attributed to a wide variety of factors such new technology, lack of reputation and consequently thrust or security concerns. Thus, traditional banks have an edge on MPLs in terms of customer attraction and retention. The strategic option for traditional banks is to wait and monitor till the market matures. As mentioned above retail customers still prefer to choose traditional banks over MPLs when it comes to unsecured lending, meaning that only a miniscule part of traditional banks´ customer base was taken.

An early adoption of a peer-to-peer platform carries a high risk for banks, mainly through “cannibalization”. Banks would create a competing platform to their already existing unsecured lending services, thus driving down interest rate and negatively affecting their bottom line. Waiting and monitoring would be the least risky option thereby the correct 8 strategic option given the circumstances.

In this scenario, banks would only intervene (by means of either new platform creation or acquisition), if the peer-to-peer lending model will become the future of lending and customers will be more acquainted with such an online service. 4.2 Online Banks` strategic option Online banks on the other hand have a more pressing problem. These banks hold advantage over other competitors (i.e. traditional banks) through unsecured lending at higher amounts, convenience and ease of use through their website. If Zopa is given a banking license, they effectively can become the same as other online banks but with lower interest rates and the higher borrower gains.

Thus, nullifying online banks` competitive advantages. To compete with a Zopa that has a banking license, they have to enter the peer-to-peer lending market through either acquisition or new platform creation sooner rather than later. In this scenario, online banks would hold no advantages but could compete with Zopa on three of their differentiation factors, being easy application process, convenience of online platform and competitive rates (Foottit, Doyle and Turan, 2016). Customer-driven mentality and UX are some of the driving sources behind Zopa´s success and only banks have a similar profile (largely digitalized processes, less paperwork needed to get a loan).

Thereby the strategic option for Online banks would be entering the peer-to-peer market and compete on the above-mentioned differentiation factors. Additional mean of differentiation would be aimed at deposit holders being able to take more risk and more yield (rather than differentiated proposition for borrowers). 9 Bibliography: Allen, K.

and Treanor, J. (2017). Unsecured consumer credit tops £200bn for first time since 2008. online the Guardian.

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2017. BondMason. (2017). UK P2P Lending market: a review of 2016 (and 3 predictions for 2017).

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citigroup.com/citi/about/mission-and-value-proposition.html Accessed 27 Nov. 2017. Dunkley, E. (2016): About Zopa and Funding Financial Times. Available at: https://www.

ft.com/content/16a572d6-c39f-11e6-81c2-f57d90f6741a Durisin, M. (2017).

Here’s Why Online Banks Are Better Than Traditional Banks. online Business Insider. Available at: http://www.businessinsider.com/online-bank-vs-traditional-banks-2013-5?r=US=T=T Accessed 27 Nov. 2017. Foottit, I., Doyle, M.

and Turan, C. (2016). A temporary Phenomenon? Marketplace lending – An analysis of the UK market. online Deloitte LLP, pp.14-15, 23, 28.

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(2017). Retail Banking. online Available at: https://www.investopedia.com/terms/r/retailbanking.asp Accessed 27 Nov. 2017.

Kekre, I (2017): About: Difference between peer-to-peer lending and lending from a bank https://www.quora.com/What-is-the-main-difference-advantage-of-peer-to-peer-lending-than-lending-from-a-bank-or-micro-lender Kupp, M.

, Anderson, J. and Raith, M. (2014). Zopa.com: From a hot idea to an established market player?. Long, K 2016: Euromoney.com Available at: 10 https://www.euromoney.

com/article/b12kpntgmmgd31/bank-collaboration-with-p2p-platforms-rising?copyrightInfo=true Osterwalder, A. and Pigneur, Y. (2013). Business model generation.

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Peer-to-peer giant Zopa to launch digital bank. online The Telegraph. Available at: http://www.telegraph.co.uk/personal-banking/savings/peer-to-peer-giant-zopa-to-launch-digital-bank/ Accessed 23 Nov. 2017 Wallace T (2016) Telegraph.

co.uk: http://www.telegraph.co.

uk/business/2016/05/23/peer-to-peer-lenders-will-never-challenge-the-banks-says-deloitt/ Wikipedia Peer to peer, (2017): https://en.wikipedia.org/wiki/Peer-to-peer_lending Zopa.com. (2017).

Simple loans & smart investments | Zopa.com. online Available at: https://www.zopa.com/ Accessed 27 Nov. 2017.

 

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