Giles Andrews (Part 3) 043
Giles Andrews, CFO of Zopa, discusses the dis-intermediation of business.
Transcript:
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A. Are we off?
The music industry as being extraordinarily well disintermediated, to use a piece of horrible jargon. And Guy Hans must be sitting thinking what on earth did I buy and is it so far fetched to think that other industries will follow and what you have just described is actually a very similar business to ours.
Q. Music is getting totally... major labels --
A. Are bleeding -- which is also interesting from an artist's point of view. I mean I am not a musician and I don't know any budding popstars but I would imagine that it is uncomfortable times for all, so I would imagine it is slightly difficult to imagine how music will be valued. So it is a great thing if more bands can make more music more cheaply and get their music out there and it is a great thing if some of the those albums sell reasonably well but I suppose the record industry would say we have made megastars and our machine and juggernaut has created the Robbie Williamses of the world -- great if you are Robbie, is that good for the rest of us? I do not know.
Q. The thing is record labels have got it right five per cent of the time when they take on loads of bands and five...
A. So their A&R departments are very inefficient. Is what you have described as a user selected system... more efficient?
Q. There can... will this start to happen do you think in banking? You are the sort of the vanguard of that. I was looking at Adrian where he was selecting who he was going to lend to you know he looked very deeply into it. Is there... is there much further it can go?
A. I think there will always be a need or a requirement for a business such as ours to do some checking of people. So, unfortunately, we live in a world which has some dishonest people in it and some people who, while not dishonest, are just not able to repay loans that they take out in good faith. So I think there is a requirement for some degree of vetting of these people. Now we have two products one of which our members do more of the vetting and another where they do none of the vetting and we do it all and some of our users enjoy both -- some only one and then sort of fairly randomly distribute it but, even in the one where we encourage all our users, our members take more part in the decision making.
We still have quite high thresholds for the borrowers applying to get loans in that way and I think that is important so I do not believe that situation will evolve to the point where personal credit decisions are made by individuals. It would be lovely to think that would be possible but I just think we live in a world where it is not.
Q. What about microcredit or credit unions -- how do they do theirs?
A. Micro finance companies in the third world are interesting and have been around for a long time. The Grameen bank has won a Nobel Prize and my view on how they work is that they work on a sense of community and an sense of shame, if you like. So the stick in their world is the shame you would bring upon your community if you did not repay your loan. So it is not so much personal shame. Yes, there is personal shame involved but there is also a sense of community shame and that is not something that you can cynically create or exploit so those businesses actually are quite high cost to operate so they involve a lot of manual collection. So there will be a sort of village leader or a community leader who makes the decisions so not everyone in the world of micro finance who asks for a loan gets one. So if the community doesn't think they have a realistic chance of repaying it, they will not get a loan. And once they have had a loan then the community itself is responsible for collecting it and administering it, all of which is quite an expensive process but. But it is fascinating how successful it is and the level of default amongst people who banks would never lend money to is astonishingly low. I mean, my suspicion is -- I think most people's suspicion is -- that were banks to lend those same people money their defaults would not be the same. They would be much higher so, again, it is an complimentary business. It sits outside of what banks do. It is not obvious how banks would be able to get involved although interestingly some of the the ultimate capital lent out further down the chain is sourced from banks. So banks will lend into Micro finance businesses at a corporate level and then allow the money to filter down and end up in some village leaders gift to lend.
Q. I do not know if it is very different but there is still that level of community and of transparency very important, in that... participatory budgeting is similar I suppose; the council have £20,000 to spend on improving the community and the community get everyone invited together and everyone can pitch to the community.
A. Right.
Q. And everyone can vote on every single issue. The money gets dished out there and then.
A. What a great model for local government.
Q. Yes.
A. How stable do you think that is and how open to abuse is it by the political classes who might have an interest in abusing that system?
Q. Political classes would stand the least... like Saint John's Ambulance had quite a big turn out because they have lots of -- you know, everyone tries to bring their friends.
A. Right.
Q. But that is great.
A. That is called democracy isn't it?
Q. But what happens is everyone votes on everything and people actually make very good decisions they mark everything out of ten. You probably give your mate's one ten but also everyone else is marked fairly. It is difficult to highjack...
A. Yes and why have we not seen that model grow.
Q. We are seeing it, there are more plans to do it there is £5 million using it in one place, I think it is about to take off.
A. Right.
Q. But what I was going to ask you, I suppose, is do you see an shift in business thinking to do with transparency and everything you have described this community, community in business?
A. (8.58) No, I think we will see businesses become more transparent. I think hopefully we will see our politicians becoming more transparent and I mean that is partly because, cynically, they sort of need to because in the days of every misdemeanor appearing on YouTube ten minutes later and every statement being analysed, you know Hilary Clinton may have lost the White House nomination on account of saying something completely stupid and then compounding the error by belittling it and saying it was trying to, you know -- how to lose an election.
One day she will reflect on that and think that was kind of dumb, if she has not already, and I think there is a sort of ground swell of people realising- I am being filmed, I better watch what I say and it is always easier to be honest and tell the truth because it is easier to remember. So, yes, I can see some businesses choosing to be more transparent.
My hope is it is not a buzz word which people dip in and out of because actually they will look worse. So you know, if the tobacco companies -- pretty untransparent breed, or perceived as untransparent and some people buy shares in them and some people choose to work for them and they all do very well -- if they sort of became a bit transparent and said, 'You know what, there is some evidence that we agree with that smoking causes lung cancer' then that would sort of sound daft, would it not, and the ultimate conclusion is they should say, you know, what our product kills people so we should stop selling it. Well they are not going to do that, are they? So the Treasury would not thank them for doing it either. So what I am trying to say is I think it is a difficult thing to sort of do in part. So I think you will see a movement in businesses acting more transparently. Some of them will suffer for it because they will get caught out not being completely transparent all the time and others will benefit and if I were a stock market annalist, I think I would probably start looking for signs of that and I would probably seek to invest in companies I thought were being completely transparent and to me that would be an predictor of future success.
Q. Exactly I mean the companies that are going to be transparent are going to be the better companies?
A. As an truism, by and large yes.
Q. And that will then start to force the bigger companies, they are going to start losing out and be forced into it as well. So what sort of change are you predicting in the city?
A. That is very, I do not know -- I am afraid I do not really understand the city. I am afraid I do not really understand how it works, other than people seem to make colossal sums of money, so good luck to them. I do not know. I mean, will the city become transparent, err, it is kind of hard to imagine how it would. It will try very hard not to, I think. I do not know. I think what I am talking about really is more related to consumer industry. So I think the idea that business should be more transparent as across the board but I think the companies which interact with consumers will get a disproportionate benefit from it. I mean you may drink Innocent smoothies with your lunch and I think they have done an unbelievable job in, using a bit of jargon, something we call creating a category, you know, the category of expensively priced healthy drinks that costs five times as much as a can of fizzy sweet water did not exist and people said to them that they were mad trying to create it because consumers would not pay $2, more than a half pint of beer, for something in a bottle that might do them some good. They have created that category just by telling people what they do and being incredibly honest about what they do -- admittedly in an interesting and quirky way and they have an excellent product behind them as well. But I think the approach -- their communications approach -- has been very interesting and hugely part of their success. It is not just around the quality of their product, is what I am trying to say.
Q. But banking is a consumer industry, isn't it?
A. Yes banking is but, when you mention the city, I don't perceive the city to be a consumer industry but, yes, banking is a consumer industry, absolutely, but, yes -- it sort of forgot that a bit over the last few years. I suspect and many of the big banks profits have been disproportionately skewed to their wholesale activities, whatever that means. It is something we will not be seeing quite so much of and ultimately yes they are a consumer industry. It is kind of difficult, is it not. So if an bank came out tomorrow and said, 'You know what we are going to charge a sort of fair price for everything we do and we will explain the level of mark-up and, if everyone bought the the same amount of all those things as they did last year, we would make the same profits, we will price our services so they add up to the same ultimate profit figure, then I have no doubt that their sales would fall, so people would not buy some of the things that they -- which would suddenly look more expensive would have been artificial cost subsidised by things that consumers are not aware of. So as a strategy, in terms of maximisation of profits, they are pretty clever people. So I think I am sure they have worked out that they make more money doing what they do. So transparency would, if you follow my argument, would one assumes naturally be less economically efficient for them in the short term, you know, they would not make as much money. Whether or not it would mean if one of them did it, that would allow that player to grow disproportionately at the expense of others, I do not know. I suppose their fear is that, if one of them did it and they all did it, then they would all end up the same relative size as each other but disproportionately less profitable. I think that they will be amongst the last of the consumer-facing businesses to embrace the spirit of transparency.
Q. Could we have a look on your computer?
A. Yes.
Q. How well do you know your customers?
A. (17.10) I have not met very many of them face-to-face. I have met a few. We have a few get-togethers where a few people turn up but I know them by user name quite well and I can sort of predict what they are going to say from when I look at a thread and I see a name, err, I sort of can -- my heart misses a beat or raises a beat depending on who is contributing. So lets have a look and see if anything interesting has come up today. Your friend and mine Adelow(?) has been posting like a demon this morning -- so I think he has made 4 or 5.
Q. Could you describe him?
A. Of course. Well actually we have never met. He has been to this office but I was unfortunately in Japan when he came. So we have not met but we have spoken but I don't know what he looks like but he is someone who is comes across to me as an extremely considerate, thoughtful person about what he does. I don't mean considerate and thoughtful in the sense that, you know, on a empathetic basis. I mean his actions are very considered and thoughtful. He, for his own reasons, seems to identify quite strongly with what we do and likes what we do and he has chosen to spend a considerable amounts of his time and energy in helping other people on our web site. So he is one of our moderators, so he provides guidance and, by moderator, he actually performs some sort of censorial function in our community which thankfully is very minimal because we don't often have many reasons to moderate people's behaviour but he is one of those people who does choose to. So, for example, there is another moderator I have seen there is another moderator --
Q. Who you would you describe your relationship with him?
A. (19.33) Well it is a very positive relationship. It is very good for us. I do not think I could be presumptuous enough to describe his view of the relationship. My assumption is that, one, he enjoys interacting with Zopa and, two, thinks Zopa is a sort of good thing and, three, thinks it is, financially, it is a way that he can maximise his returns on the money he choses to lend at Zopa. So I think he has therefore three motivations for dealing with us. From our point of view, having him and people like him is fantastic and I just want to point you this is a forum, a thread run by the moderators, who ask each other how they should act on something or they ask us to do something so Deddington, who I have met, who is a great character whose sign off is 'Life is too short to drink cheap red wine', which I always enjoy, he has been a longterm lender in Zopa and he has just written to us saying I am not sure I agree with the tone of this post that someone has written -- the first ever post someone called CloudBreak who has written: 'hi there, I am not sure this is the right place to ask this question but I am running out of ideas and thought maybe here might have a solution. I do apologise if this is not the right place to post this but I could use some help: myself and my brother have been working building a business over the last five years.' This is the first time I have read this 'The first few... we are in a position where the money we owe, £75,000, is strangling us because we owe it in so many different places, so many different interest rates. We want to consolidate into one payment. Do you know if it ... We are not able to take an penny ourselves. Do you know if it is possible to borrow £75,000 unsecured from anywhere or whether anyone will consider this? Thanks in advance.'.
So Adelows has actually replied to his post and said 'Welcome to Zopa, you have misunderstood the situation Zopa make loans up to £15,000. Click here,' and he is doing a marketing job for us and then he has gone on to explain it to rather than writing one line saying no you can not have 75 grand you can have 15, he has gone on to explain what we do, why and then given him some advice as to how the best way would be is 'if you have any property with equity, to use that. Good luck.' To me that is amazing.
Q. It is amazing. Even him saying welcome to Zopa what does that indicate about the way he is feeling about it it?
A. Yes.
Q. I mean can you just describe that. He is acting as if he is part of the team.
A. Yes.
Q. Could you describe that?
A. (22.31) Yes, I mean, aren't we lucky to have people who do act as if they are members of our team and actually have greater credibility in the community for not being part of our team. So I don't think anyone in our community thinks a bit cynically -- I mean I do know many unscrupulous companies who post under false user names. So we don't do any of that, so there is not a single member of staff here who uses anything other than their real user name and declares themselves an employee of the company. And therefore in some ways their posts are read more authoritatively. If we actually explain something and it comes from us it is more authoritative but you know we don't actually rely on that kind of post and give advice like that. We are slightly nervous of being seen to give advice: but coming from a member of the public it is fantastic and I do not think anyone thinks the community -- I do not think anyone thinks these moderators are anything other than members of the public. No one thinks this is Giles pretending to be someone else so he can say more.
Q. It is amazing....I think it is a great advert for this way of working that you have got people doing, I know it is not cynical in that way...
A. (24.14) No I think it would be caught out incredibly quickly. I think it would last no time at all were it to be cynical.
Q. But what I am questioning is that... you are mobilising so many people to do your work and they are doing it for good reasons and they are taking a share in the profits, isn't that way of thinking, this efficiency you mentioned earlier, is a very viable, positive way of doing business?
A. (24.48) You are right, but I think there is a danger in saying that every business should do it because if you are in the business of selling widgets, you are not going to end up with a vibrant community enjoying interacting with themselves, discussing those widgets. So I think businesses have to be a little bit careful. It is a very dangerous view if every business were to create a sort of business unit to explore blogging. I mean blogging has become the new PR tool so, if you go and talk to a PR agency they will have a digital PR expert who will be charged with getting you in the right blogs. To me that is a load of rubbish. You are either in the right blogs because you have something interesting to say or you are not. The idea of trying to pretend is really dumb and actually makes you look worse, I think, than if you did not do it at all. So cynical attempts to create a sense of community are pretty fatal.
Q. But do you agree that this... I suppose to be a good company you have to be transparent...
A. Yes I think so and this is not the only -- just having people who write about you as third parties is not the only tool of success in life, I do not think. Horses for courses. So I think you could be a very transparent company that sold widgets, that sold fairly priced widgets, that did exactly what they said they did and said they were going to last a year, and they last a year, then that would be a potential strategy to be a better widget company but that does not necessarily imply creating a community.
Q. Could you just say one last thing now if you agree... just describe how viable this is as a business model and what we are doing works...
A. (27.23) I think what we are doing works because people understand it and relate to it and because we are a very low cost, lean operation and you have seen around you, you know, we don't have a flash, expensive office full of people. We can operate on very low margins and our consumers will judge whether or not enough of them think that those margins are fair and -- but ultimately what we are doing is providing financial benefit to both sides of the transaction that you and I do a lot of so both of us will be savers and borrowers at different times of our lives on a regular basis. So it is something we all do, whether we like it or not, and so there is no question about the sort of market opportunities -- the number of people who do that which we do -- and, because I think we do it better, the business will fundamentally work.
Q. And why are banks at all interested in what you are doing?
A. (28.30) Well banking has not changed too much beyond the sort of experiment they all made in the last ten years of wholesale funding, which is a great experiment that they all thoroughly enjoyed for a while and made enormous bonuses out of. Beyond that this was quite innovative, debt securitisation this great buzz word, which we hear less and less of -- beyond that innovation they have not done anything terribly new for a long time.
I will tell you a story I was at this awards dinner I was at last night. A certain bank I will not name, a very large American bank, won the award for the banking industry's best e-commerce strategy which I thought was fascinating because banks all have web sites and actually challenge for banks to have an effective web site is quite different so, to their credit, they have horribly old fashioned legacy systems and getting them to interact with clever whizzy web sites is really difficult and to get them to do it securely is also very difficulty and they have all sorts of threats that actually you and I are probably not aware of. They have nasty gangsters who effectively bombard their sites with traffic and threaten to to shut them down and that was -- we had a fascinating meeting with a new crime prevention division -- I nearly said part of the police but they were very keen to tell me they were not part of the police but part of the Home Office -- they investigate organised financial crime and they were telling me, they asked me if we had ever been -- I can not remember the technical term for it but there is a technical term for, when these gangsters took to operate out of Asia or Russia, they bombard your site with so much traffic that it shuts or falls over. So ten minutes before the Cup Final they will hit the online gambling companies and then ask for a reasonable sum of money in order to stop doing it. That happens quite a lot apparently. Not by way of introduction to some of the difficulties that big financial institutions have and thankfully we are not big enough to have been scammed in that way but maybe it is a measure of success when you get your first, you have your site shut down for the first time. Anyway, this long story -- I will try and make it shorter -- this large American financial institution, which won an award for e-commerce, happens to be the bank that we opened an account with when we launched in the US and the first thing we did after opening an account was we deposited quite a large sum of money there. So we raised some funds in the US and we deposited it and, because we had deposited quite a large sum of money, they were extremely attentive and very nice to us and I had lots of personal calls and they were very good and I said 'I don't live in the US and actually I want to do my banking remotely, I want to do it from here, from the UK. So I want you to set me up with an online banking service,' so my bank in England the Royal Bank of Scotland who have always looked after us extremely well and now have an online banking service where I make all my payments online -- I don't go to their branch, it is only an mile away but I don't go there very often. So I assumed I could do all this in America. They said no problem at all. They started what became a very, very, long process I did not mean tell you their name. You have to edit that out. I said bank -- promise me you will edit that out -- I started with a very long process by which I had to sort of register or set my computer up to provide on line banking and e-commerce as I would call it and I went through all that and it was quite laborious but it sort of worked and it ended up with me sitting up in the middle the night waiting to receive a text message I could input a code from, and that is my fault not theirs because I live in the wrong time zone and they were ringing from San Francisco so they didn't know it was the middle of the night -- but it ended up with me getting my online banking installed. So the first time I went into it I thought I have to pay this lawyer in the US and I will get going here, another web site, found the online banking thing and they told me it was all self-explanitory. If I have ever done online banking before, it would be really easy. So I went on to it and said it said create a payment and I went in and typed it all up and it was middle of the morning here and so I could not talk to anyone because they were all sleep so I typed in the name of the lawyer and then I thought I now need to type in his bank account where is the bank account bit. So I spent ages trying to find where the bank account details were on the online payment form. I could not find it anywhere. I think I must be being really stupid here. How can I make a make a on line payment just by giving the name of the lawyer? I must have the bank account. So I had to wait until the afternoon and they all woke up and I rang them up and I said I must be being really thick here but I can not find how to make this online payment and they said 'what do you mean' and I said I can not find where to put the bank account details and they said 'why do you need a bank account' and I said 'well I want to make a transfer to his bank account, so how can I do it without his bank account?' 'No no no you don't need a bank account, you just need his name and address.' I said, 'what use is his name and address?' 'No, we write a cheque out and send it to him in the post and I said 'You are joking' and they said 'No no no' so I said 'that your view of an on line payment is that you print a cheque and you post it to him?' 'Yes.' 'Right' I said, this is the bank that just won an award for innovative e-commerce site, maybe it is very innovative. Maybe we have all missed a trick. Maybe that is the innovative way to do online banking. I do not know.
But that is answer to your questions of why they should be worried -- well if that is the approach to innovation that is kind of scary.
Q. Your way is great for innovating, because you are not innovating.
A. (34.37) Yes, someone else will innovate better than us the next week, so, as we see by we don't want to be the next big thing that got superseded by the next big thing. Certainly not. So we have to innovate all the time.
Q. And you do that by?
A. We do that through technology and but more fundamentally than that I think the critical mass of having a community that talks to us, so ideas are not necessarily invented here, so I am delighted to innovate through other people's good ideas and hopefully that gives us some sort of competitive and sustainable advantage. So we have access to those ideas.
Q. Lastly I am sure I have asked you before but do you see now as an important time for the sort of ethos of business are there now merging ideas that can change the way that business works?
A. (35.40) Yes, I mean it is really dangerous to make these sweeping statements that come back and haunt you but, yes, I think without wanting to sound too much like a mad apostle I think we are living in an extremely interesting world where we are all much more cynical about all sorts of things. We are much more cynical about politics for example. We are much more cynical about the services we receive. We are more cynical about the health service. We are more cynical about the schools our kids go to school at and we are more cynical about business and our radar antennae are very finely tuned to corporate bullshit and that is a great thing, I think, and I think, therefore, businesses are going to have to get a lot smarter and interact with people in a better way because I just think consumers will not tolerate the crap they have been putting up with for many years.
Q. Thank you very much that was nice conversation and very interesting.
A. Thank you bad people out there.
Q. You don't have to take the big risk but you can slowly let it evolve in some ways and tell your community about this I am sure?
A. Yes and that is sort of what we do in our product call over listings where we allow our lenders to make more decisions and they really enjoy it and, touch wood, we have not had a bad day yet but we will from our Zopa listing and that will be an interesting day when we do because the lenders will get very upset and their first reaction will be to blame us and we will sort of go, hang on a minute, guys, you know you are all consenting adults sort of thing ...
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