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January 27, 2007

A Tale of Two Lenders

 

Two startups with similar goals travel very different paths In 2004, while backpacking through Northern California's Desolation Wilderness, Chris Larsen told his buddy John Witchel about the concept of a hoi. Larsen, whose wife is Vietnamese, described how entrepreneurs in that country join cooperatives called hoi, then pool their resources to give one another informal loans. Not long after, the topic came up again as Larsen and Witchel hashed out business ideas at Larsen's dining room table in San Francisco's tony Russian Hill. At the time Larsen, 45, was the founder and chairman of online lender E-Loan, but he was ready for a new challenge. The competitive Witchel, 39, was hungry for another go at the dream: He had watched the software company he had founded, Red Gorilla, disappear when it ran out of money in 2000. What if, they wondered, they started a company that let people bypass banks and get small loans from one another?

Source: A Tale of Two Lenders

Around the same time, across the city in a modest Noe Valley flat, Matthew Flannery, a 27-year-old product developer at TiVo, was receiving long e-mails from his new wife, Jessica. She was a consultant in Kenya and Uganda with Village Enterprise Fund, a San Carlos (Calif.) microfinance organization. The 26-year-old described how she drove from village to village, evaluating the living conditions of business owners who had received $100 loans from the fund. "A little bit of money does so much,'' she wrote. What if, Matthew thought, he started a company that would let Americans lend money to struggling entrepreneurs in Uganda, enabling those entrepeneurs to bypass banks and loan sharks?

In March, 2005, Flannery mocked up a Web site, Kiva.org, which, loosely translated from Swahili, means "agreement.'' A month earlier, Larsen and Witchel had launched Prosper.com, a site that helps individuals loan each other small amounts. Both businesses are pioneers in microlending, a field born in the 1970s that is gaining prominence. Muhammad Yunus, who founded microlender Grameen Bank in 1976, won the 2006 Nobel peace prize for developing the idea of making small loans to entrepreneurs who otherwise might not be able to raise money. Entrepreneurs and philanthropists including Bill Gates and eBay founder Pierre Omidyar increasingly consider microlending an important strategy for lifting people out of poverty.

Kiva and Prosper share more than the goal of increasing access to capital. Both strive to keep operations lean, and both wrestle with a complicated regulatory environment. But Prosper is a dot-com, and Kiva is a dot-org. Prosper is a classic Silicon Valley baby, nourished by $20 million in venture capital and heavy-hitting backers including Accel Partners, Benchmark Capital, Fidelity Ventures, and the Omidyar Network. As a nonprofit, Kiva relies on donations and grants, which so far total $250,000.

The different models affect not only the superficial -- guess which company has slicker offices -- but also the fundamental. One key question: How will the benefits and challenges of each model affect its results? The issue is increasingly relevant for entrepreneurs whose businesses have an explicit social mission, be it protecting the environment or helping the disadvantaged. "Choosing between for-profit and nonprofit is becoming more of a common dilemma for entrepreneurs,'' says Alan Abramson, director of the nonprofit sector and philanthropy program at the Aspen Institute. "This is becoming an uncomfortable choice to make because they're trying to do both.''

Soon after their dining table epiphany, Prosper's Larsen and Witchel each kicked in $10,000 and hired a lawyer to see if their idea would fly with the U.S. Securities & Exchange Commission. In early 2005, they started offering programmers contract work and the promise of equity, and soon they had six employees. "They weren't doing it for charity,'' says the sandy-haired, soft-spoken Larsen. "There was no question we were going to get funded because of our track record.'' In April, Prosper raised $7.5 million from Benchmark and Accel. Prosper moved into a 2,500-square-foot office with furniture left over from a dot-com that went bust. Larsen brought his computer and office chair from home.

Larsen and his colleagues developed a site where those in need of cash can set up an account and list the amount they want to borrow and the maximum interest they will pay. Prosper's analytic tools assign each borrower a rating based on his or her credit record. Other Prosper users then offer a portion of the capital and bid on the interest rate. Those with the lowest bids become lenders. Last February, Fidelity and Omidyar Network invested $12.5 million in Prosper. "We didn't need the money,'' says Larsen, "but we wanted the brainpower.''

At Kiva, Flannery also worked his connections, albeit far less moneyed ones. He asked Moses Onyango, a pastor Jessica had met in Uganda, to gather $3,100 in loan requests from seven businesses, including a vegetable stand and a fishmonger. "The idea was that we would divide the loans into shares and sell them to the friends and family from our wedding invitation list,'' says Flannery. The loans wouldn't collect interest, but the shares sold in three days. Flannery collected the money through PayPal and wired it to Onyango, who then distributed the money to the entrepreneurs. Each succeeded in repaying the loan within the year.

Encouraged, the Flannerys organized a second round; this time, they invited the public to make loans. "I had this idea about sponsoring a business,'' he remembers. "That word was running through my head because I grew up sponsoring children.'' (His family donated to World Vision in the 1980s.) Jessica worked with Onyango to collect loan requests from 50 Ugandan entrepreneurs. Matt built a tool to create MySpace.com-like profiles for each one and sent out a press release. In November, 2005, two high-traffic blogs, Daily Kos and Boing Boing, featured the site. Within three days, 50 loans had been made for a total of $25,000. After talking with his mentor, Bob King at Peninsula Capital, and his brother-in-law, venture capitalist Peter Cochran, with Vulcan Capital, Flannery decided to take the nonprofit route. "What we were doing was highly experimental,'' he says. "I thought that as a nonprofit I could get early support I probably couldn't get from a VC.''

Unlike Prosper, Kiva works only with entrepreneurs, which it finds with the help of microfinance institutions in developing countries. Those partners bring their clients to Kiva instead of to a local bank. Kiva posts pictures of the borrowers on its site and shows how each would use a loan. When a loan is made, Kiva transfers the funds to its partners. Lenders, who are usually repaid within a year, can read blog updates from entrepreneurs they've sponsored.

Last July, Kiva's six employees moved into an airy, 1,300-square-foot office in a Mission District warehouse with exposed brick and an assortment of secondhand furniture. Kiva also inherited its best talent from other places. Chief Operating Officer Olana Hirsch Khan came to Kiva in May after six years in sales at Google, and Premal Shah, who made his fortune as one of eBay's first employees, became Kiva's president last year. Shah and Flannery now earn about $3,300 a month, and Jessica volunteers while she finishes at Stanford Graduate School of Business. Says Flannery: "In the future, we'd like to scale this to the point where people are paid the salaries that will give them incentive to do the work.''

Since July, Prosper's 25 employees have inhabited 111 Sutter, a 9,000-square-foot space with a majestic wood-paneled conference room and a showstopping view of San Francisco Bay. The rent is more than seven times Kiva's. Prosper's employees could do quite a bit better as well: As part of competitive pay packages, they receive options that vest in four years.

In all but four states, Prosper has secured a lending license by meeting the terms of the Fair Credit Reporting Act. So far, Larsen says, default rates roughly mirror those at major lending institutions. Prosper receives 1% of the loan amount; lenders pay an annual servicing fee of 0.5% of the amount they lend. That money leaves Larsen, who is CEO, and Witchel, who is chief technology officer, free to concentrate on building the business and to add new features to the site.

That's freedom Flannery would like to have. He spends three-quarters of his time raising funds. He can't replicate Prosper's model in the U.S. because the legal expenses would be too much. Instead, Kiva plans to expand by introducing low interest rates to attract more lenders.

It is not surprising that Prosper's reach is so much broader than Kiva's. In its first seven months, Prosper's 100,000 registered users have made $22 million in loans, averaging about $5,000. Kiva's 15,000 lenders have made $1.2 million in loans, with an average loan size of $500. That translates into success for both companies, whose founders agree that there is room in the wide-open field for both models. Says Kiva's Shah: "Right now there are so few people doing this and it's so experimental, we need to help each other. If either model has a significant flaw, it could destroy the credibility for everyone."

January 27, 2007 at 05:21 PM in Financial Services | Permalink | Top of page | Blog Home

January 21, 2007

Tech Start-Ups Have Money to Burn, But Choose Thrift - WSJ.com

 

By PUI-WING TAM and REBECCA BUCKMAN January 18, 2007; Page B1 When Silicon Valley entrepreneur Bill Nguyen launched two technology companies in the late 1990s dot-com boom -- Seven Networks and Onebox -- they each went through about $2 million a month. The start-ups hired hundreds of people and spent heavily on marketing and sales. That's not how Mr. Nguyen is using cash at his newest start-up, music Web site Lala.com. Since getting $9 million in venture-capital funding in mid-2005, Lala Media Inc. has stashed 60% of that money in the bank. Mr. Nguyen has hired just 20 people for Lala, most of whom are engineers. The Palo Alto, Calif., company has spent little on marketing and sales. Its staff built some of the desks they use in the office and sometimes plays janitor in order to scrimp. Lala is currently burning through about $200,000 a month, says Mr. Nguyen.

Source: Tech Start-Ups Have Money to Burn, But Choose Thrift - WSJ.com

"When you got venture-capital money previously, many people thought you immediately needed to spend it by hiring 40 or 50 people," says Mr. Nguyen. "Now we view the money as just an asset and not an immediate license to spend."

Stories like Mr. Nguyen's have become a defining element of a new tech boom that has some echoes of the dot-com bubble. While start-ups in Silicon Valley and other entrepreneurial enclaves are once again proliferating, they have a distinctly different approach to spending their cash.

Past excesses were exemplified by start-ups such as online pet store Pets.com Inc., which burned through $110 million in 1999 and 2000 -- including spending an estimated $25 million on advertising in venues like the Super Bowl. Those dot-coms typically staffed up quickly with dozens of new recruits, and were known for lavish launch parties and other expensive marketing.

Today's start-ups, by contrast, often hire just one or two new staffers a month, hoard their cash and find inexpensive ways to attract attention such as limited Internet advertising and more reliance on word of mouth through Web users. The result: Start-ups' "burn rates" -- Silicon Valley parlance for how much cash a young company with little revenues and no profits is going through each month -- are noticeably lower than in the past.

Indeed, while tech start-ups are raising less funding these days -- an average of $8 million each time, down from $11 million in 2000 -- they are making the money last longer. According to research firm VentureOne, tech start-ups in Silicon Valley now survive an average of 17 months on a single round of funding before needing to raise more money, up from just 10 months in 2000. (VentureOne is a unit of Dow Jones & Co., publisher of this newspaper.)

All of this suggests that the current tech boom may play out differently than the dot-com frenzy, which ultimately ended in a swift and paralyzing crash in 2000. While many start-ups will still fail, those that have more money saved up are lasting longer than their dot-com predecessors. Many of these companies may endure long enough to become profitable small businesses, even if they never reach the stratospheric heights of a Google Inc. or YouTube. So when a bust hits, unlike the dot-com crash, it could shape up to be a more gentle decline with the impact more dispersed over time.

"Any crash this time won't be as precipitous as in 2000," says Roelof Botha, a venture capitalist at Sequoia Capital and the former chief financial officer of electronic-payments company PayPal Inc. "Because start-ups aren't going through cash at such a blistering pace, that gives companies more time to figure out what works in their business."

Mr. Botha notes that the spending habits at his former company, PayPal, are no longer emulated today. PayPal, founded in 1998 and now owned by eBay Inc., was burning through about $10 million a month in mid-2000 to maintain a staff of 200. In total, PayPal spent $150 million before it finally broke even. "Tech companies now take far less money to get to profitability," says Mr. Botha.

Aiding today's trend of start-up parsimony are factors such as cheaper technology. While start-ups once spent millions of dollars on expensive computers and software, many new companies can now instead exploit inexpensive server systems, open-source programs (modifiable software that comes in free or inexpensive versions) or Web-based services to build and launch their products. What's more, more start-ups are now using cheaper labor overseas, such as in India, which lowers continuing operational costs.

Dot-coms also previously shelled out millions of dollars to sign up registered users to their Web sites, spending an average of $35 on advertising, sales and other promotions to get just one user, say venture capitalists. But with access to the Internet now far more mainstream than in the late 1990s, start-ups don't need to spend wildly to get attention from consumers.

"We can start super-cheap these days," says Seth Sternberg, a co-founder and chief executive of Meebo Inc., a Web-based instant-messaging start-up in Palo Alto. When Meebo launched in late 2005, Mr. Sternberg recalls it took just a shoestring budget, with four people who worked out of their homes. "You just don't really need too many people anymore."

Now Meebo, which raised $3.5 million in venture funding in December 2005, is spending about $160,000 a month on its business and 12 employees, says Mr. Sternberg. More than half of the firm's money remains in the bank, he adds. When the company held a party to celebrate its one-year anniversary in September, the shindig was held in an office parking lot to save money. Only tortilla chips, water and soda were served. Meebo plans to announce a second round of funding of $9 million today.

Many venture capitalists right now are flush with cash to invest, so some are giving bigger-than-needed chunks to start-ups. They also like to give more so start-ups have enough socked away in case of an emergency.

[Cash Hoard]

The start-ups that save are also finding their cash cushion gives them more time to tweak their products and business model. Munjal Shah, CEO of start-up Riya Inc., raised $19.5 million in venture capital in 2005 and 2006 to nurture what was then a digital photo Web site. But while 10 million photos were uploaded onto Riya's site from users, "we just couldn't figure out how to make money" from the idea, says Mr. Shah.

So Mr. Shah has since put the photo site on the backburner to focus on Riya's new business, a visual shopping search engine called Like.com that launched in November. Like.com makes a commission each time it sends an Internet shopper to an e-commerce Web site and each time that site completes a sale based on that lead. Because Mr. Shah has kept most of Riya's money in the bank, he says that affords him time to shift gears and overhaul his business plan.

"In the past, many people raised enough money to just launch a product, but I've raised enough so that we can go through three iterations," he says. He adds that Riya, San Mateo, Calif., has enough cash to last till 2009, even if it doesn't generate any revenue.

Meanwhile, Gibu Thomas, CEO of software start-up Sharpcast Inc., recently capped his company's work force at around 45 people, down from the original 60 he planned to have. That's because adding more hires would bump the company's burn rate up to $1 million a month from $500,000 a month now. While Sharpcast, Palo Alto, has raised $16.5 million in venture funding and still has $12 million in the bank, Mr. Thomas isn't ready to take any chances.

"Cash is queen these days," says Mr. Thomas, who estimates Sharpcast can last another two years even if it doesn't produce any revenue. "Fiscal discipline is harder to teach later in the life of a company, and we want to be the last guy standing."

Write to Pui-Wing Tam at pui-wing.tam@wsj.com and Rebecca Buckman at rebecca.buckman@wsj.com

January 21, 2007 at 06:13 PM in eCommerce | Permalink | Top of page | Blog Home

January 20, 2007

Peer-to-peer loans working out kinks - Orlando Sentinel : Business

 

Prosper Marketplace, an online lending site, sees a jump in business. Richard Burnett | Sentinel Staff Writer Posted January 17, 2007

Source: Peer-to-peer loans working out kinks - Orlando Sentinel : Business

 

"We believe that the whole idea of reputation and personal connectedness is working in this context," Larsen said. "We're convinced that it is a crucial part of the overall equation."
Experts say it is not surprising to see something like Prosper gain a following outside conventional banks.
"We're talking here about generally smaller loan amounts, and that has always been a market banks just haven't served very well," said Greg McBride, a senior financial analyst for Bankrate Inc., a research firm based in North Palm Beach. "This person-to-person lending approach seeks to fill that void."
Interest rates can be attractive for borrowers and the rates of return good for small-time lenders, while the streamlined paperwork appeals to both groups, experts say.
"What we're seeing is a democratizing of access to both credit and lending, bypassing the traditional financial institutions," said Paul Leonard, director of the California office of the Center for Responsible Lending, a consumer research and advocacy group.
But there are caveats for those who would lend or borrow through Prosper. First, do your homework. Check all the performance data the site provides on different borrowers, lenders and affinity groups. Read the group bulletin boards. Be aware of complaints. Be wary of questionable promises, unrealistic pitches and offers that "sound too good to be true."
More generally, you should play it smart, play it safe and limit your risk, said Lisa Piecora, the Orlando woman who has invested $8,250 in Prosper loans -- still a small part of her overall investment portfolio. After eight of her many small loans defaulted last year, she changed course, and by year's end her gains outweighed her losses.
"I didn't feel I had any real big losses, but I still needed to sit down and find a better way to do this," she said.
"The big lesson learned is I only lend to people with 'B' credit or better. I've spread out the money to about 100 loans and limited myself to $50 to $60 a loan. It was just a matter of diversifying and creating some damage control."

January 20, 2007 at 03:12 PM in | Permalink | Top of page | Blog Home

January 06, 2007

Current software apps - my web lifestyle

Hardware:

email & Calendar

To do

Software - general

Blogging

Total cost:

 Monthly

Altogether, pretty reasonable given the quality of these superb services.

 

Technorati tags:

January 6, 2007 at 09:24 PM in @ My Views @ | Permalink | Top of page | Blog Home

January 02, 2007

Top 2007 tech trends – the experts weigh in

Article

By: Nestor E. Arellano
ITWorldCanada.com (01 Jan 2007)

COMMENT ON THIS ARTICLE

What kinds of security attacks should you worry about in 2007? Will companies that adopt environmentally friendly processes find greener pastures? Will enterprises look overseas for people to manage their IT assets? How will deregulation affect the Canadian telecom industry?

IT World Canada asked several industry experts for their take on these and other issues. And here’s what they had to say.

Right on target

The closing year saw a remarkable slow down in worm attacks and widespread malware assaults, according to Internet and mobile security services provider F-Secure Corp. based in Helsinki, Finland.

The firm says in 2007 we’re likely to witness an increase in targeted attacks against organizations, with backdoors, booby trapped documents and rootkits.

A 'backdoor" is a method of bypassing normal authentication, or of securing remote access to a computer, while attempting to remain hidden from casual inspection. The backdoor may take the form of an installed program, or could be a modification to a legitimate program.

"Instead of transmitting millions of e-mails with infected attachments, attackers are sending as few as five infected e-mails to a single target," said Mikko Hypponen, chief research officer at F-Secure.

In this scenario, he said, hackers use a cloaking device such as a rootkit to conceal a backdoor and extract valuable information from the target company. The forged e-mails may include booby-trapped Microsoft Office documents, or Excel spreadsheet files that appear to come from a legitimate source or even the company itself.

Hypponen also warns of an increase in phishing scams and the use of bogus domain names.

"Obviously phishing works since the attacks continue to build in force and complexity," he said.

Crafty social engineering schemes and counterfeit but well-constructed Web sites or phishing e-mails will separate the unwary from their money or private information, according to industry observers. Scam artistes, increasingly, are deploying sites with a lifespan of just an hour, to entice users and then disappear.

PayPal and EBay continue to be the most targeted outfits by phishers, but some German banks are also becoming popular targets, said F-Secure.

Some sites deploy bogus login boxes that ask users to type in valid PayPal user names, passwords and credit card numbers.

Despite the growing threat, a recent survey found a large number of Canadian companies have limited or no security training for their employees.

Power shift

Our apologies to Kermit the Frog, but IT insiders say vendors are increasingly finding out that being green can help them remain in the black.

This awareness has triggered a growing concern about the cost of maintaining IT assets such as data centres, with a power efficiency as low as 70 per cent, according to Mike Thompson, director, business practices management at research firm Butler Group in London.

Anything affecting the bottom line is a matter of concern and that goes for power consumption by IT resources, according to George Bulat, director of data driven products at IDC Canada Ltd. in Toronto.

He said companies are devising various strategies to lower power cost to cut overall energy bills. These include adoption of energy efficient processes that benefit the environment and conserve valuable resources.

Bulat predicts more companies will be employing server-based computing and virtualization to save energy by shifting power consumption from the office to the machine room these computing models lower the cost of managing IT services and reduce energy bills. "Blade servers and virtualization reduce the number of physical machines that consume energy."

More vendors will be touting manufacturing and recycling processes that are kinder to Mother Earth.

For one, the Restriction on Hazardous Substances (RoHS) directive took effect earlier this year in Europe. The directive bans companies from selling on the EU market electronic equipment containing more than agreed levels of several toxic substances such as lead and mercury. Several U.S. states and Canadian provinces have either set up or are at work on their own RoHS flavours. "This is the start of a new way of manufacturing," says Joe Cala, director of operations for global RoHS compliance at Celestica Inc. in Toronto.

Some companies such as Hewlett-Packard Inc. (HP) intend to reduce toxic emissions from their facilities, as well as used products sent to landfills, said Frances Edmonds, director, environmental programs at HP Canada. She said HP has a program to reduce plant emissions by 15 per cent by 2010, and aims to recycle as much as 1 billion lbs. of hardware and supplies in 2007.

"One of the strongest drivers for greening IT is customer demand and enterprise savings," said Edmonds.

Researchers recently discovered a novel way of saving energy – the "off button"! The province of British Columbia, for instance, can save as much as $30 million a year in electricity costs if business and home users turned off their computers when not in use, according to David Rogers, technology and project management specialist with BC Hydro.

We are the world

Collaboration will stake its claim as a business production application in 2007. "Workers are finding a lot of reasons not only to share information but also to work together on certain applications," said Carmi Levy, senior research analyst, Info-Tech Research Group Inc. in London, Ont.

Among collaborative apps, Microsoft's SharePoint continues to be a leader but there are other notable players such as IBM's WebSphere and Groove Network Inc's. Groove.

Meanwhile expect to see start-ups such as ConceptShare tackle more intriguing applications around the notion of collaboration. The Subdury, Ont-based company recently unveiled a product that helps the likes of designers, artists, marketing executives and clients share and work on complex materials such as posters and other art materials. "In 2007 we will see greater adoption of collaborative tools and their eventual evolution into built-in features of end-user products," said Levy.

Computing without borders

In 2007 organizations will continue to resort to outsourcing but expect more companies to allocate projects to multiple vendors rather than a single supplier.

"As existing deals reach their renewal stage, companies will gravitate towards agreements of shorter duration with a greater number of outsourcing suppliers," said Alan Rodgers, research analyst, Butler Group. He said the key advantages of this strategy are flexibility, speed in implementing changes and risk avoidance. "By splitting work among numerous suppliers, companies can reduce the risk in case something goes wrong with one outsourcer."

Rodger also sees enterprises cutting spiraling data centre costs by using remote infrastructure management strategies. He said companies will increasingly transfer tasks such as network management, application development and maintenance, and business processes development to offshore locations.

India will continue to be among the bigger players in the outsourcing market as it maintains a hold of over 50 per cent of outsourced assignments, but other countries in South America, Africa and Asia are carving out their own territory, according to Rodger.

Compliance and BI

Analysts foresee compliance becoming a strong driver for the development of business intelligence (BI) tools that provide greater transparency and reporting.

"We will see the emergence of pre-packaged applications for monitoring corporate performance as measured against industry directives such as the Market in Financial Industry Directive that will take effect in the European Union in 2007," said Sarah Burnett, senior research analyst, Butler Group.

Companies will look to extend that visibility to operations they have outsourced, said Tom Eid, research vice-president at Gartner Inc. in Stamford, Conn.

When it comes to big ticket IT expenditures, large enterprises will be putting service-oriented architecture (SOA) adoption at the top of their to-do list, according to industry analysts.

"SOA vendors will have a strong year in 2007," according to Josh Greenbaum, principal of Enterprise Application Consulting in Berkley, Calif. Greenbaum did not provide any numbers but said he foresees a growing trend towards SOA deployment driven by "low implementation costs and high return of investment (ROI)."

He agrees with Burnett that compliance-driven specific reporting tools with be in demand in the coming year. "Customers will be looking for applications that monitor performance against specific industry requirements."

"Leaders in this space will be IBM, SAP, Microsoft and Oracle," said Greenbaum.

Large companies are also planning to purchase new BI software and upgrade existing enterprise resource planning (ERP) software, according to Forrester Research Inc. in Cambridge, Mass. A Forrester survey of 1,078 IT decision makers found as many as 13 per cent plan to purchase new BI software.

"ERP will remain the top upgrade, while messaging, e-mail and collaboration software will lead the pack in minor upgrades," according to Forrester.

Virtualization brings real benefits

Virtualization will continue to gain momentum in 2007 but the trend leans towards products that enable the management of virtual machines, says John Sloan, analyst for Info-Tech Research Group.

"Vendors will be pushing virtualization as part of a service package and the real differentiator will be the ability to manage virtual machines," Sloan said.

He said VMWare Inc. will continue to have a strong presence in the market but Microsoft might attain a higher level of exposure once the company introduces it Hypervision for Longhorn in 2008.

Sloan will be watching out for more development in the application of virtualization on desktop computers. "This strategy provides excellent flexibility, cost savings as it reduces the need for purchasing physical PCs and lowers the cost of software maintenance."

Pros and cons of deregulation

We'll get more features and cheaper services, or possibly not.

Experts are still debating the potential impact of the recent announcement of intent by Maxime Bernier, Canadian Minister of Industry, to deregulate the telecommunications industry.

"There will be an acceleration in the bundling of IP (Internet Protocol), video, music and other features, while IP-based telephony will become more available," says Carmi Levy of Info-Tech Research.

He said loosening of restrictions will result in carriers offering a greater range of enticing service bundles at cheaper rates.

This will occur along with another trend - new developments in telecommunication devices that Phil Edholm, chief technologist and vice-president of networks with Nortel Networks Inc. talks about.

In the carrier world, bandwidth will be more pervasive, Edholm said. Increased capacity will make it possible to offer converged media to consumers "wherever they may be."

He said “on demand video” will become more commonplace "and not only available at home, but on your mobile phone as well."

However, Philippa Lawson, executive director and lead counsel at the Canadian Policy and Public Interest Clinic (CIPPIC) in Ottawa warns consumers might be in for a surprise.

"Deregulation does not always mean better and cheaper services. There have been cases where the opposite has happened after regulations were removed," Lawson said.

In Bernier's announcement, she noted the absence of rules to protect consumers.

"There is the flipside. Carriers who serviced isolated areas by virtue of artificially set prices might leave those customers once regulations are taken away," said Levy.

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January 2, 2007 at 07:20 PM in Consumer trends | Permalink | Top of page | Blog Home

January 01, 2007

We can all be bankers now

Telegraph | Money | We can all be bankers now

Last Updated: 12:30am BST 23/08/2006

Zopa, the internet business that introduces borrowers to private lenders, is now 18 months old. Pamela Atherton tracks its progress

You might think that not too many people would be willing to lend money to strangers, but thousands of people are, according to Zopa, the internet company. Zopa is the financial equivalent of eBay, the auction website: it puts borrowers and lenders directly in touch with one another.

It was launched in March 2005 to offer competitive borrowing and lending rates to people by cutting out traditional lenders who make money on the deal. Zopa (which stands for Zone of Possible Agreement) attempts to match small lenders with borrowers - finding the point at which what someone might pay for a loan matches the interest rate another person is willing to lend the money at. In a little over a year more than 88,000 people have become Zopa members.

Sixty-three per cent are borrowers and 37 per cent lenders, with about 50 per cent of active lenders having already added to their original lending outlay.

Zopa is coy about providing specific lending figures but insists that millions of pounds have been transacted since the launch, involving thousands of lenders and borrowers, and that more than 5,000 new members are being signed up each month.

The average gross return for lenders since launch has been 6.83 per cent (including Zopa's 0.5 per cent fee, but excluding tax). Lenders bear the risk of defaults directly, although bad debts to date have affected only 0.05 per cent of the loans made.

What is more, the risk of defaults is diluted by the spreading of any loan across a number of borrowers. In addition, Zopa carries out full credit checks on all borrowers. The appeal for lenders is not only the prospect of higher rates of return than those provided by banks and building societies but also the transparency of the costs and the control that direct lending gives them over their money.

The benefits for borrowers are that interest rates can be lower than those charged by traditional lenders and that there are no early repayment penalties. This has made Zopa particularly attractive to the self-employed and others who, because they have fluctuating earnings, may find it difficult to borrow from the banks and may also wish to repay loans early. Both lenders and borrowers pay Zopa a fee of 0.5 per cent of the loan. For example, if a deal is struck for £5,000 Zopa receives a total of £500.

It also receives commission (which it refuses to disclose) on the sale of optional payment protection insurance. It seems to work. Zopa is currently topping the best-buy tables on websites such as www.uswitch.com and www.moneysupermarket.com and estimates that its loans are about 30 per cent cheaper on average than those that a bank would offer to a prime borrower. The average gross interest rate paid by borrowers to date (on an average loan term of 2.5 years) has been 6.8 per cent (7.1 per cent APR including fees).

A good option for the creditworthy borrower
advertisement

Lenders who visit the website are asked how much they are willing to lend, to whom and over what period.

They are then asked to choose the price at which they are willing to lend. Borrowers trawl the Zopa website to see the terms on which lenders are willing to lend and apply accordingly.

Borrowers - who undergo a stringent vetting process - are rated "A''' or "B'' according to their creditworthiness. For example, on Tuesday last week an "A''-rated borrower could obtain a loan of £5,000 over 36 months at 5.34 per cent, whereas a "B''-rated borrower would have to pay 7.1 per cent for the same loan.

These rates include the 0.5 per cent Zopa fee, but not the cost of optional payment protection insurance. When a borrower finds an acceptable rate of interest he or she can apply for the loan. Once the application is accepted, Zopa arranges for the interest to be paid directly to the lender's bank account.

Lenders can make loans of between £10 and £25,000, while borrowers can apply for loans of between £1,000 and £15,000. Zopa boasts a bad-debt record of only 0.05 per cent in the first 18 months of its existence. It attributes its low default rate to its credit-scoring methods for assessing borrowers. These are carried out in addition to the normal checks via the electoral roll and credit reference agencies such as Experian, Equifax and CallCredit.

But it is still early days and whether its credit check system is more effective than that implemented by the banks will not be known for a couple of years.

Martin Lewis, editor of moneysavingexpert.com, says: "Zopa has a low default rate because it only lends to people with very good credit histories and who earn at least £25,000. You can't compare Zopa's default rate with the banks' because they have to lend to a far wider customer base.''

One senior official at a high street bank says: "Typically, we tend to see defaults halfway through the term of a loan, so with a five-year loan they start to emerge after two-and-a-half years. Depending on what Zopa's average loan term is, it seems a little early to be boasting of a low default rate.''

All lenders and borrowers enter into a legally binding contract with their respective borrowers and lenders, while Zopa manages the collection of monthly repayments via direct debit. Borrowers' non-payments are chased in the same way they would be by a bank: they are referred to a debt collection agency and any money collected is returned to lenders.

After 120 days of default, the agency sells the debt on to another financial institution, at which point the lender is offered a final payment and the outstanding debt is written off. Zopa is not a bank, so loans are not protected in the same way as bank and building society deposits. Instead, it holds consumer credit licences from the Office of Fair Trading and is authorised and regulated by the Financial Services Authority, but only for the sale of payment protection insurance.

Lewis says: "Zopa is a reasonable option for someone with a very good credit record to check out what someone on Zopa is willing to lend them. But for anyone with a poor credit history, I would never recommend that they apply to Zopa as it will simply leave an unwanted footprint on their credit reference files that they have applied for credit and been rejected.''

January 1, 2007 at 05:53 PM in Financial Services | Permalink | Top of page | Blog Home

In the future, everyone will be a loan officer

In the future, everyone will be a loan officer | Straight.com Vancouver

Truly brilliant and unique Internet business ideas are rare. Most, like Amazon, are merely a translation or expansion of real-world stores into the on-line realm. Really smart concepts like eBay could only exist in cyberspace and are peer-to-peer based, which means they offer an environment in which individuals can participate in business in a way that was never possible before on such a large scale.

The latest of these great ideas is so far only available to citizens of the U.S. and the U.K., where Prosper (www.prosper.com/) and Zopa (www.zopa.co.uk/), respectively, operate the first peer-to-peer money-lending networks. There are some differences between the two companies, but basically a prospective borrower asks for the loan of a sum of money, and people interested in lending money supply it. Naturally, all the standard rules of credit are in effect, from loan qualification to penalties for defaulting, but the process sidesteps the traditional banking hierarchy. The companies collect a small amount of the loan value as their piece of the pie.

In the October 2006 issue of Esquire, financial columnist Ken Kurson explains that Prosper was started by E-Loan cofounder (with Janina Pawlowski) Chris Larsen. E-Loan, which Kurson extolled as an investment opportunity a couple of years earlier, operates like a mortgage broker service (although for a wider variety of loans). It shops your application around to established lending houses, which either pass on it or make an offer of X dollars at Y-percent interest. What Prosper and Zopa do is more akin to the concept of microlending pioneered in developing countries. (That model just netted innovator Muhammad Yunus a Nobel Peace Prize.) People are graded for their credit scores and interest rates, and post applications. At Zopa, they are further grouped by the proposed length of the loan (one to five years), while Prosper operates with a fixed three-year term. With both companies, however, there are no penalties for early repayment.

On the funding side are people who wish to accept a little risk in order to make more money than a bank deposit provides, just folks with a few bucks to loan out—few being the operative word. Potential bankers with sums in the low two digits are not turned away. Furthermore, you aren't required to lend to a single individual. At Zopa, if you kick in £500 or more, it will automatically be split among at least 50 borrowers. In effect, Zopa is a quasi-traditional lending institution funded by individuals who've contributed at least £10.

Over at Prosper, things are considerably more free-market. People post requests for sums between US$1,000 and US$25,000 and the interest rate they desire, and lenders can browse the requests. Lenders can thus specialize in certain areas (such as helping aspiring audiophiles who “just want to buy some really bitchin' speakers”) or devote their funds to specific user groups like firefighters or teachers. They can agree to take on all of a person's loan request or just throw in a couple of hundred at a specific interest rate. Or you micromanage a little less and just select your desired risk level and/or user group and have the loans made automatically.

Another interesting feature of Prosper is that if a loan becomes fully subscribed and lending offers start coming in at lower rates (i.e., there's competition among lenders or somebody new joins the pool who has a soft spot for firefighters who are aspiring audiophiles) the original people who offered, say, US$500 at 14 percent are sent e-mails telling them they'll have to cut their rate to 13.75 percent if they want to stay in.

Unlike eBay, where the on-line meeting ground serves as an introduction service for a transaction that's completed via personal e-mails and the postal system, with Prosper and Zopa both parties' identities remain confidential. You're not putting up the money for Bob Smith; you're financing a loan request based on credit risk, interest rate, and—maybe—a personal fondness for a specific type of request (car loans for single mothers, golf clubs for retirees). Similarly, Bob Smith will never know if his loan came from one generous benefactor who liked his proposal or 200 smaller ones who liked his credit grade.

It seems to me that there are probably a few bucks to be made underwriting loans—the banks seem to believe it's possible. Kurson says that he favours making high-risk loans (higher interest rates, but with a certain percentage of defaults expected), and has kicked in some cash on 230 requests, pulling in almost a 20-percent return, with 10 loans going more than 30 days overdue and being referred to a collection agency.

I must admit that when I read Kurson's Esquire article, the first thing I did was rush to Prosper's Web site to see how I could become a lender. Unfortunately, you have to be a U.S. resident with a Social Security card. Still, maybe this concept will migrate to Canada in the near future—it's so gleamingly brilliant that it could go viral pretty quickly. (Both of these companies are less than two years old.) Of course, I'd expect the chartered banks to fight against it pretty strenuously, but there might not be much they could do in the present regulatory environment, where even grocery-store chains can spawn financial institutions. So all you bored venture capitalists, here's a great idea just lying there waiting to be picked up. Ladies and gentlemen, start your lawyers.

January 1, 2007 at 05:52 PM in Financial Services | Permalink | Top of page | Blog Home