Reference no: EM132675461

Lenda's New Business Model

Context

It might be thought that innovation in business models was left behind in the dot-com era, but still fledgling businesses are launching new online services. Lenda is an interesting example launched in April 2005.

Lenda is an online service which enables borrowers and lenders to bypass the big high street banks. It is an example of a consumer-to-consumer exchange intermediary. It illustrates the challenges and opportunities of launching a new business online, especially a business with a new business model.

The Business Model

The exchange provides a matching facility between people who want to borrow and people who want to lend. Significantly, each lender's money is parcelled out between at least 50 borrowers. Lenda revenue is based on charging borrowers 1 per cent of their loan as a fee, and from commission on any repayment protection insurance that the borrower selects. At the time of launch, Lenda estimated it needed to gain just a 0.2 per cent share of the UK loan market to break even, which it could achieve within 18 months of launch.

In 2007, listings were launched where loans can be requested by individuals in a similar way to eBay listings.

The main benefit for borrowers is that they can borrow relatively cheaply over shorter periods for small amounts. This is the reverse of banks, where if you borrow more and for longer it gets cheaper. The service will also appeal to borrowers who have difficulty gaining credit ratings from traditional financial services providers.

For lenders, higher returns are possible than through traditional savings accounts if there are no bad debts. These are in the range of 20 to 30% higher than putting money in a deposit account, but of course, there is the risk of bad debt. Lenders choose the minimum interest rate that they are prepared to accept after bad debt has been taken into account for different markets within Lenda. Borrowers are placed in different risk categories with different interest rates according to their credit histories (using the same credit ratings as used by the banks) and lenders can decide which balance of risk against return they require.

Borrowers who fail to pay are pursued through the same mechanism as banks use and also get a black mark against their credit histories. But for the lender, their investment is not protected by any compensation scheme, unless they have been defrauded.

The Financial Times reported that banks don't currently see Lenda as a threat to their high street business. One financial analyst said Lenda was 'one of these things that could catch on but probably won't'.

Lenda does not have a contact centre. According to its web site, enquiries to Lenda are restricted to e-mail in order to keep its costs down. However, there is a service promise of answering e-mails within 3 hours during working hours.

Although the service was launched initially in the UK in 2005, Financial Times (2005) reported that Lenda has 20 countries where people want to set up franchises. These include the US, where Lenda has a team trying to develop the business through the regulatory hurdles. Other countries include China, New Zealand, India and South American countries.

The peer to peer lending marketplace now has several providers. For example, the social lending site Keda allows lenders to give to a specific entrepreneur in a poor or developing world country.

Target market

The idea for the business was developed from market research that showed there was a potential market of 'freeformers' to be tapped.

Freeformers are typically not in standard employment, rather they are self-employed or complete work that is project-based or freelance. Examples include consultants and entrepreneurs. Consequently, their incomes and lifestyles may be irregular, although they may still be assessed as creditworthy. They're people who are not understood by banks, which value stability in people's lives and income over everything else. The Institute of Directors (IOD) (2005) reported that the research showed that freeformers had 'much less of a spending model of money and much more of an asset model'.

Surprisingly, the research indicated a large number of freeformers. New Media Age reported estimating that in the UK there may be around 6 million freeformers (of a population of around 60 million). Duvall, one of the founders of Lenda, is quoted as saying: 'it's a group that's growing really quickly. I think that in 10- or 15-years' time most people will work this way. It's happening right across the developing world. We've been doing some research in the US and we think there are some 30 or 40 million people there with these attitudes and behaviours'.

Some of the directors see themselves as freeformers, they have multiple interests and do not only work for Lenda; James Alexander, one of the founders of Lenda works for one day a week in a charity and Sarah Matthews another founder works just 3 days a week for Lenda.

From reviewing the customer base, lenders and borrowers are often united by a desire to distance themselves from conventional institutions. James Alexander says: 'I spend a lot of time talking to members and have found enormous goodwill towards the idea, which is really like lending to family members or within a community'. But he also says that some of the lenders are simply entrepreneurs who have the funds, understand portfolio diversification and risk and are lending on Lenda alongside other investments.

Business status

The Financial Times (2005) reported that Lenda had just 300 members at launch, but within 4 months it had 26,000 members. According to James Alexander, around 35 per cent are lenders, who between them have £3m of capital waiting to be distributed. The company has not, to date, revealed how much has been lent, but average loans have been between £2,000 and £5,000. Moneyfacts.co.uk isn't showing any current accounts with more than 5 per cent interest, but Lenda is a riskier product, so you'd expect better rates. Unlike a deposit account, it's not covered by any compensation schemes.

Marketing communications

The launch of Lenda has been quite different other dot-coms at the turn of the millennium. Many companies at that time invested large amounts in offline media such as TV and print to rapidly grow awareness and to explain their proposition to customers.

Instead Lenda has followed a different communications strategy, which has relied on word-of-mouth and PR with some online marketing activities where the cost of customer acquisition can be controlled. The launch of such a model and the history of its founders, makes it relatively easy to have major pieces about the item in relevant newspapers and magazines such as the Guardian, the Financial Times, the Economist and the Institute of Directors house magazine, which its target audience may read. Around launch, IOD (2005) reports that Duvall's (one of the founders) PR agency, Sputnik, achieved 200 million opportunities for the new company to be read about. Of course, not all coverage is favourable, many of the articles explored the risk of lending and the viability of the start-up. However, others have pointed out that the rates for the best-rated 'A category' borrowers are better than any commercial loan offered by a bank and for lenders, rates are better than any savings account. The main online marketing activities that Lenda uses are search engine marketing and affiliate marketing.

Funding

Lenda initially received funding from two private equity groups, Munich-based Wellington Partners and Benchmark Capital of the US. Although the model was unique within financial services, its appeal was increased by the well-publicised success of other peer-to-peer Internet services such as Betfair, the gambling web site, and eBay, the auction site.

Question 1:

Imagine you are a member of the team at the investors reviewing viability of Lenda's Business. On which criteria would you assess the future potential of the business and the returns on your investment based on Lenda's position in the marketplace and its internal capabilities?

Question 2:

Identify and describe the main online marketing activities used by Lenda.