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Zopa – the bank that likes to say 'Hello There!'

Giving banks the peer-to-peer treatment

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Designing a Defense for Mobile Applications

A new financial services company is taking on the banks which like to say 'No'. So will Zopa succeed in giving banks the peer-to-peer treatment?

Zopa's launch, in March, generated quite a flurry of press interest, and now the founders are even considering a US launch.

The idea is pretty simple – instead of one set of customers borrowing from banks, and another set lending to banks, it allows them to lend directly to each other.

The idea didn't stem from a plan to set up the next eBay, says Zopa founder Richard Duvall. He was a senior member of the Prudential team which hatched Egg back in 1997.

"A group of people left Egg. We set up a market research company and we got very interested in a group of people called 'freeformers'. They're more likely to be freelance, more likely to be self-employed, and pulling away from the institutions of society."

One of the institutions they were particularly keen to pull away from was banks.

"Someone at one of the focus groups talked about the headmasters' study. You fill in a form, they take it away, if they won't give you a loan they won't tell you why.

"Because they didn't have a salary they felt they didn't get the best deal available. They felt slightly discriminated against."

How it works

So, if they don't like banks, why not set up a system which allows freeformers with spare cash to lend it to the ones who are feeling a bit boracic?

Without banks and their massive profits to sustain, both sides should be able to get a better deal. Zopa's cut is only a one-off fee of one per cent of the borrowed sum.

People are allocated to different markets according to their credit history, and within each market lenders set their own rates. Users can loan from £500 to £25,000, with different rates of maturity. Zopa stands for 'zone of possible agreement' - the overlap between the rates lenders and borrowers will accept.

A loan is automatically spread out between a minimum of 50 people, so if someone buys a one-way ticket to Rio and is never heard of again, the lender isn't completely wiped out.

Of course, Zopa has access to all the same debt recovery tools as a normal financial institution, so defaulting won't be easy. But even if the odd debt goes bad, lenders should still be in the money. "We ask our lenders to expect some bad debts, but no Zopa borrower has so far missed a payment," says Duvall.

"The average lenders are getting 7.5 per cent before any bad debts," says Duvall, and even after bad debts lenders can expect "30 per cent better return than they would get from putting your money in a deposit account."

Moneyfacts.co.uk isn't showing any current accounts with more than 5 per cent interest, but Zopa is a riskier product, so you'd expect better rates. Unlike a deposit account, it's not covered by any compensation schemes.

For borrowers, the rates alone won't swing it. You can borrow £5,000 at 6.2 per cent APR from Zopa, whereas Giraffe Loans is offering an unsecured loan for the same amount at 5.7 per cent.

The smart choice: opportunity from uncertainty

Next page: Don't be evil

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