Original URL: http://www.theregister.co.uk/2005/07/29/zopa_p2p_banking/

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

Giving banks the peer-to-peer treatment

By Ben King

Posted in Financial News, 29th July 2005 10:41 GMT

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.

Zopa offers some advantages, such as greater flexibility – if you wanted to pay that Giraffe Loan off early, you'd still have to pay all the interest you'd pay if you were sticking to the normal schedule. With Zopa, you pay it off as soon as you can and pay no more interest. It will also lend to some people who the banks would penalise, or turn away.

For all Zopa's open-minded approach to lending, it's backed up with some serious credit assessment work to make sure that lenders are a worthy risk, with a heavyweight lending team led by former Abbey and Alliance and Leicester credit expert Karen Why.

If anything, they're more thorough than banks and building societies, drawing on data from three credit reference agencies, as well as data about what other assets you have, and listening to customers' own views about why they should be lent money.

"We go to extraordinary lengths to find out about you and we are very interested in your ability to pay but we don't have a fixed view about what is a good or bad risk," says Duvall.

Zopa attracted a certain amount of critical coverage when it launched. Citizen's Advice told The Observer that "It is unclear how lenders and borrowers would be better off than if they were to use a bank. Higher interest rates usually go hand-in-hand with high-risk lending and we would urge people to think twice before investing their savings into this."

Don't be evil

Looking at the deals available on Zopa, they're right – they're competitive but not exceptional, and it doesn't seem to be as risky as they thought. But for Duvall, comparing it to a bank is missing the point - It's for people who just don't like banks at all.

"80 per cent feel that they are paying back to real people, not a bank, not contributing to their excess profits," says Duvall.

"Our lenders like lending to other people because they can see where it is going. That is a major part."

The whole business is soaked in Googlesque post-corporate groovyness, from the ultra-friendly emails to users which start "Hello there, Ben", to the CFO who spends one day a week working at a charity.

Its target market is people who dislike oppressive, greedy banks, and people who banks dislike for their freeform, suit-dodging, self-employed ways.

Duvall says that he and his colleagues are not necessarily looking to be bigger than eBay by tomorrow. "Obviously we have business plans, but we are not targeted on size," he says.

His backers may feel differently. One of the first to put money into Zopa is Benchmark Capital, the VC firm that backed Betfair and eBay. They will be looking to make something pretty big out of it.

Duvall says he has had over 50 offers to take Zopa to other countries, of which the US is likely to be the first.

It's also received a positive response from the punters. Five months from launch, Zopa has 25,000 registered users, offering over £3m in loans.

Zopa doesn't seem likely to eat HSBC's lunch just yet. It might just nibble the corner off its amuse-bouche, though, and that would still make for some very tasty business.®

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