Keep it Small on Zopa
Over the last few months, I’ve been trying to reduce the size of the individual loans I make on Zopa. I now have a limit of forty pounds and the average loan is just above that figure for the over a thousand contracts I have. When I started I had a limit of two hundred pounds and a couple of those loans went into default, which meant I had some bad debts. There was also the problem then of liquidity in that there wasn’t the same number of Zopa borrowers and it was sometimes difficult to lend the money out. Now, if I put say a thousand pounds into the market, it gets lent out within a couple of days. Note that my low limits on each individual loan, do not give Zopa any extra costs, as they only check the borrower once and the other is just data processing.
There also appears to be a big difference in how Zopa checks borrowers. They have said that their checks are more stringent, but they also appear to be much faster. Perhaps, this is because they are now bigger and have more staff, but they must have better systems too!
This leads to an interesting theory. As Zopa and others like them get bigger, then the markets will get much more fluid and responsive. Money will get lent out quickly in loans split into hundreds of small ones. This will mean that larger lenders like me, will have thousands of loans which will spread their risk and thus, they will get a good return.
Do I have any evidence to back this up?
Possibly!
My rate of return over the last year is 5.39% before tax and taking it since October 2008, it is 5.55%. These are not bad returns in these troubled times.
But if I look at my returns over the last six months, the figure is 5.85%. It would appear that my policy of restricting the amount I lend to individual borrowers is having an effect, as I started this policy in the summer of last year.
When looking at loans in arrears, I have less outstanding now than I did a year ago. Partly, this is due to the smaller amounts lend, but mainly this is due to Zopa‘s better systems.
But I am not a hundred percent optimistic. We have an election coming up and who knows what that will bring.
But I certainly feel that if you want a better return on your money, that Zopa and their ilk are a better proposition than something like an Icelandic bank.
Do I have any regrets about Zopa?
Not really! But one of my borrowers died. It just goes to show how that in this world there are much more important things than money. My heart goes out to their family and friends.
Banking Security
I don’t like internet banking. Well to be truthful, I like the concept, but some of the implementations of it are rather poor.
Take my bank. I need to enter my account reference, a password and then three numbers from a key code. I can remember these in most cases, but if I access the account from someone else’s computer, I need to have the account reference written down. But I do write it down in a way that no-one could ascertain.
Although it is a system that works, it is not the best. It is typical of many systems used to login to on-line banking.
I am a mentor on The Horse’s Mouth, which is a web site where people put ideas and others pass comments. It is an interesting concept and from what I read in the press, it is highly regarded.
In the last few days, the web site has put me in touch with a company called SafeTok.
It looks like it could be a solution to better Internet security.
But then I am not an expert in this field. But then I’m a consumer who knows what I don’t like.
Zesty Zopa
This appeared in the Daily Mail under the heading Zesty Zopa.
Who says there is no room for a new kind of banking?
The internet banking site Zopa, where lenders and borrowers decide among themselves at what rate they do business, is gathering momentum and had agreed 12,813 loans worth £63m as of January 1 this year.
It may sound like toy-town banking but it demonstrates how consumers, even bankers themselves, are determined to find ways of circumventing high street lenders.
This is typical of what newspapers, write about Zopa.
Just search Google News for Zopa and see what is written.
A Year of Zopa
I have now had a Zopa account since October 2008.
But it is now over a year since I started taking proper statistics of the lending, so that I can now put together proper results for the first time.
Overall Figures
As of the eighth of January 2010, I how have £39,473.90 invested in just nine hundred and fifteen separate contracts. This means that the average contract size is just over £43.
It should be noted that I generally lend in the two top Zopa markets, A and A*. This is because these markets have the lesser risks as people have a better credit rating. There are also two lower markets, B and C, that I ignore. I also lend a small amount in the youth or Y markets. All money is lent over three years.
Bad Debt
Bad debts are just two contracts, which total £278.13 or about 0.7% of the total. In terms of numbers is about 0.2% of the loans. Note that one contract is a Y and the other is an A.
So is that a figure that is in line with Zopa‘s predictions?
They predicted that debt for the type of lending I do, defaults would be of the order of two percent. There are two provisos to this.
- Loans between one and two years old are showing about a four to five percent level of default. Most of this was probably down to the credit crunch.
- Those issued recently are now checked to much tighter criteria and are showing lower predicted and actual levels of bad debt.
But both these levels are higher than I have encountered.
Let’s put it down to good luck.
Or did I just join Zopa at the right time with the worst of the bad lending bulge being just about in the past?
Arrears
Arrears are different to bad debt, in that they tend to be accounts that limp on. Sometimes they consistently pay a few days late and one or two I think will probably end up in bad debt.
The numbers of accounts in arrears vary between about two and seven. Interestingly the number grow at the beginning of the month and then decline until about the twenty-fifth. Some even if they do go bad will not be a problem, as I’ve only lent these people ten or twenty pounds or so. But others are more serious.
I have five in arrears at the moment.
- Y – £10 with just the last payment missing – 4 out of 5
- Y – £20 that just limps on a bit that has missed four payments, but they’ve all come in late – 3 out of 5
- Y – £100 that is a real limper but always manages the payment about ten days late – 3 out of 5
- A* – £120 with just the last payment missing – 4 out of 5
- A* – £30 that has limped and now appears to be going terminal – 1 out of 5
In total there is £211.34 in total outstanding on these loans, with total arrears of £12.06. So it would be unlikely that all this money will eventually be lost.
I suspect that the numbers will reduce as the month goes on. But I also expect others to be in arrears.
Returns
Working out a Zopa return is not easy, as money is going round and round, up and down and I have been adding about a thousand pounds a month to my lending.
According to my accountant the only fair measure is to take the amount of money earned a year ago and subtract it from today’s figure to get the yearly earnings. Dividing this by the average amount of money in the account over the year, should give a sensible answer.
This method also takes into account any monies in the holding account, bad debts and charges from Zopa.
As of today this yearly percentage is 5.44%. If I assume that all of the current arrears go bad, then this figure drops to 4.77%.
Is that a good rate of return in the current circumstances, where banks offer a lot less?
Strategy
When I started using Zopa, I didn’t have a strategy.
This was very wrong.
On the other hand, I had enough money to be able to afford any losses.
It is interesting that the two bad debts I have are one in A lending for £200 and another in Y lending for £100. Now, my limits are much lower.
As I said in this post, Zopa as a Lender, I started with the money from the sale of my late wife’s Porsche. But after testing Zopa for a few weeks, I started to be too aggressive in my lending, by allowing people to borrow too much. In some cases because two lending offers overlapped, I lent as much as £400 to some people.
Now, I have just two offers, one for A and A* borrowers and one for Y, with limits of £50 and £20 respectively. My average loan size is just over £40 now. I am not sure of the statistics but I believe that this makes it less likely I will suffer a major hit. Although, there are still some individuals with impeccable payment records, who owe me more than in an ideal world I would like.
So the strategy I now use is lend little and often and don’t be too aggressive in getting your money into the marketplace.
It also is essential that you check Zopa as often as possible, to make sure that your interest rates are up to date. I keep these at the highest level, that still gives a High rate of lending.
Marks and Spencer’s Financial Services Leaflets
They have just started a series of leaflets advertising their financial services, where they compare them to food.
The one for foreign currency says ‘Gluten-free. GM-free. Now try commission-free.’
I would never get my foreign currency from M & S, as I usually use a cash point abroad for convenience, but I find that now gluten-free is rather heartening.
The sooner gluten-free food becomes mainstream the better!
The RBS Dilemma
The Royal Bank of Scotland is now 70% owned by the taxpayer. Note the word taxpayer and that means you and me. Well, I suppose it might not mean you, as you might be in New York, New South Wales, New Zealand or New Caledonia.
But the dilemma will hit us all in the next few years as we struggle to get the economy under control.
In the red corner you have the public and the government, who for all sorts of reasons find million pound bonuses obscene. And in the blue corner you have the Banks, who say that they need to pay these bonuses to attract the best talent, so that they make higher profits in complex and difficult to understand markets.
This excellent article in The Times sums it all up well. The government wants to veto the bonuses and if they do, then the board of RBS will resign.
The Treasury signalled last night that it was prepared to veto a £1.5 billion bonus pool at Royal Bank of Scotland in a move that could trigger the resignation of the bank’s board.
RBS directors have been advised by the bank’s lawyers to resign if a Treasury bonus veto means they are unable to run the bank commercially and in the best interests of all shareholders.
People close to the Treasury signalled last night that Alistair Darling would throw out any bonus plan at RBS that was much higher than last year’s £1 billion. “We would not expect to see any significant increases in bonus payments. I think most people would see 50 per cent as a major increase,” one Treasury insider said.
RBS is expected to make £6 billion in profits this year from investment banking, implying a bonus pool 50 per cent higher than last year.
Is this blackmail? Yes! But is it sound business? Yes!
It’s actually more complex than you think.
Take total tax. Corporation tax on companies is lower than that for individuals. So am I right in thinking that high bonuses might actually return more money to the government? But that is a practical not an emotional response.
How true is RBS’s assertion that they need to pay the bonuses to get the right people to manage their investments? In my business life, I have often found that you have a lot more talent in a company than you think you have, but those in charge like to keep the minions down, as they see them as a threat. So perhaps, a little bit of intelligent management might improve matters. I don’t know! But I have worked with people at the highest level in a clearing bank and know that there is a lot of nonsense there. I suspect there still is!
Now let’s suppose that to get round the bonuses, RBS got some other company to manage their investments. I don’t know whether this is possible, but I suspect that it would probably cost them an arm and a leg to make the same six billion pounds. Probably one and a half billions of arms and legs. And most of that would probably never see a British tax authority again, so we, the tax payers, would lose.
So it’s difficult!
What we actually need is a change of culture.
Banks, no matter what we think, are a short-term business. For instance, a main board director of a major clearing bank, once told me that a third of their profits came from overnight money and the interest on money that had not been cleared. That’s why banks don’t transfer money instantly!
So how can we make things better?
Economists have talked of a transaction tax on banks, to move them away from short-term thinking, but that would only move the business to somewhere that doesn’t charge. So as with anything we need global standards and a level playing field.
So it will be a difficult and long uphill struggle to make the banks appear ethical in everybody’s eyes.
For my personal banking, I don’t use a bank, but a building society through the Internet and Zopa, the peer-to-peer lender. The former transfers my money efficiently and manages my credit cards. And the latter pays me around five percent on savings, with the ability to withdraw the money gradually if I need it. To get the same rate with a bank, I’d have to lock the money in for ever.
This is a model that many others will follow, leaving the global fruit machine to the so-called professionals. Unfortunately, banks will probably do their utmost to strangle innovative competitors like Zopa.
So we must educate everybody in the Internet and personal finance, so that they can make reasonable decisions for themselves. Many web sites do this very successfully.
But to return to the original dilemma.
Should the government limit bonuses for banks in which we have the major shareholding?
In my view they should not!
Why?
It will heap more bad publicity on the banks and hopefully push most of us to look for better and more ethical ways of handling our money.
A New Bank
Years ago, I worked as a consultant for a major bank writing a software system to calculate the cost of the various operations of the bank. What was interesting, is that a significant part of the cost of transactions such as clearing cheques, standing orders, direct debits etc., was the cost of the buildings and premises. In fact, when a new branch opened, because of the premises cost, it was a long time before that branch’s costs were down to the average level.
So the suggestion of one of the callers on Radio 5, that banks open branches in areas that are poorly served, although admirable will never happen. Or only after intense pressure and inducements.
But!
We live in a technological age, with nearly everyone having a mobile phone. Also about 50% of the population bank on-line and about 70% or more of the population have access to the Internet.
So any new bank must maximise this technology to provide a service to everyone.
Banks too, need to introduce more personal service and if customers can’t get to see the bank manager, then the managers should go to the customer. How many people have ever had a visit from a bank manager? I rarely have and I’ve dealt in seven figures sums with banks for many years.
Returning to my costings of a major bank. Small sub branches were an interesting way of providing service in areas away from the main branch. They have now been replaced by cash machines, but why do we not see such branches in places like supermarkets, hospitals and garages?
Whatever happens, a new bank must innovate and draw on the experience of the past; good and bad.
Fair Treatment of Widows by the Banks
I didn’t have a particularly bad time when my wife died from the banks. But many others do!
I’ve just listened to the influential MP, John McFall, complaining that many widows have difficulty accessing money that will come to them. I didn’t, but the endless sending of death certificates to get information just makes the bereavement process worse.
It’s not just the banks but part of a much larger and very important area.
It is now over nearly two years since my wife died and I can now think rationally about what has happened since. And especially about some of the nauseous paperwork that has arisen! I should also say that I’ve not had it difficult, compared to some stories I have heard.
I was prompted to write to The Times about this and they published my letter on April the sixteenth, 2008, albeit with a few modifications.
Sir, I was widowed last year, and it is only now that I’m starting to get my life together. The response of the various government and local authority departments in handling all the paperwork involved has been very patchy.
Registrars: excellent, very sympathetic and efficient; Work and Pensions: bereavement allowance came through with a few hiccups, but not too difficult; Premium Bonds: system worked but could have been better; council tax: this was reduced automatically on signing a form by St Edmundsbury — totally painless; DVLA: its online systems worked well; winter fuel payment: found difficult to claim and missed it for last year.
The private sector wasn’t that much better, with some companies having people whose sole job appeared to be to deal with bereavement faring much better than those that didn’t. Some wanted death certificates, some accepted faxed copies and others took my word.
We need a lot more joined-up thinking in this important area, as, with nearly a million deaths in the UK every year, it would surely help the bereavement process for those left behind if every company, organisation, government department and authority were automatically notified. After all, if St Edmundsbury can do it here in supposedly sleepy Suffolk, then surely everyone else can.
They left out the piece where I praised The Carphone Warehouse, but severely criticised a large British company, who find it impossible to take my wife off their mailing list. The former showed how it should be done and the latter are a disgrace.
As I said in my letter, my local council met the Gold Standard and the Registrar effectively started the process of adjusting the Council Tax.
In tracing my wife’s credit cards, I ended up talking to a Fraud Manager at a well-known bank. We felt that it should be possible to have an automated system that would flag the cards of those that had died. Apparently, these cards are an area that is aggressively targeted by criminals.
He’d also had problems with some shares that had been held by his late mother. This is a common problem and was noted in some of the replies to my letter in The Times. Luckily, my wife didn’t hold any shares except for a few in a now-floated Building Society.
But I’ve since met several people, whose husbands or wives have died abroad and they’ve had problems with getting bodies home and others where the Death Certificate has been delayed because there was an inquest. If you haven’t got the Death Certificate, then the Banks won’t give you access to the bank accounts!
So I had it easy. But I know now, how I can make things even easier.
A New Variety of Dead Parrot Sketch
I liked this comment from The Times on Thursday.
“I wish to register a complaint.” Britain’s financial services industry heard this refrain nine million times over the past three years, according to new figures from the Financial Services Authority.
This sounds like an awful lot of unhappiness. Dissatisfied customers are now returning their dead parrots at the rate of more than 8,000 a day.
This is the first two paragraphs and it continues in the same vein.
But doing simple maths says that we complain about 3,000,000 times a year about the financial services industry. That probably means it’s about one complaint for every six or seven houses in the UK. As probably only half the houses do anything governed by the FSA, that’s one hell of a level of complaints. So it’s nearer one-in-three!
I could add my complaints too. About excessive paperwork for a start. It seems that every time you move or breathe anywhere near any financial company they need everything in triplicate down to your inside leg measurement. You need certificates for this, documents for that. Surely, the fact that I pay my taxes and I only bank with reputable UK banks should be enough and they should guarantee my probity.
Job done!
How many complaints are of this nature?
But just imagine this level of complaints on cars. No-one would ever buy one. So perhaps this is why people don’t buy pensions.
After all if you want to make a small fortune, give a large one to a financial adviser.
The Australian Diamond Dealer
This is a tale that I am pretty sure is true. But on the other hand it might just be one of those tales that passes down from teller to teller gathering more and more embellishments as time goes on.
In the 1970s, I used to work as a consultant to a clearing bank. I’m not going to say which, but it probably can be ascertained by those who know me. In that case, you’re wrong, as either it’s another bank or the tale was about another.
On the computing side banks went through a lot of changes at that time. Remember that D-day when we went from £sd to £p was the 15th February 1971 and also computers were starting to replace manual systems. So there was a large scope for mistakes and possible fraud.
This Australian, who claimed he was a diamond dealer turned up at a Central London branch, saying that he’d like to open an account. He had a reference from an Australian bank and backed it with a substantial cash deposit. He said that he was spending a few months in “the old country” and when he returned, he would take all the money out of his account in cash to purchase diamonds to take back.
It all sounded feasible and over the months, nothing raised any suspicion in the bank. Money came into the account and just as quickly came out in cash to buy diamonds. But never at any time did the account go into the red.
Then, the Australian announced that he was going back to Oz and on a particular day he would draw the money out of his account in cash and close it. He left a forwarding account for any charges or extra payments that might accrue.
It was only noticed later that the date he would leave was a few days after the branch was computersied. And someone went in and changed the paying-in slips in the branch for ones where the account number had helpfully already been filled in.
You’ve guessed it, but it was the Australian’s account.
I heard this tale twice and let’s say that a very nice six figure sum disappeared.
In one version, he wasn’t even Australian!
The Anonymous Widower 