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It has just dawned on me that one of the places I have deposited part of my modest savings, the lending site Zopa, doesn't have a government-backed guarantee - unlike high street banks and credit unions. Yet the curious thing is that, despite all that and the global credit crunch, Zopa is enjoying a boom. In the third quarter new borrowers soared by nearly 50% to 3,700 compared with the previous quarter. Why is this happening - and is it safe?
I joined Zopa, a UK startup, almost exactly three years ago because it was different, providing an online alternative to banks and their dreaded call centres. I was puzzled by the fact that while the whole internet seemed to be about removing or replacing the middlemen (eBay, Amazon etc), it hadn't happened with banks - which were the biggest, and most profitable, intermediaries of all. Could Zopa, or something similar, pull it off?
The answer is "No" so far because Zopa is still a minnow (around £27m in total loans), but its model is a breath of fresh air compared with the banks. It could have a big future if it survives the economic downturn untarnished. Instead of securitisation, credit default swaps and all the monkey tricks the banks have got up to - with and without any beneficial consequences for us, even when it was deemed to be working well - Zopa has a clean, inclusive alternative.
It lends directly to real people, bypassing the banks. I can see them on my computer screen as I write. My money was divided into parcels of £50 to spread the risk. I can see the names, or pen names, of borrowers and when they paid back interest and capital. There were two late payments in 2006. I click on one who was in arrears for £11.68 and find he or she lives in Gloucester and had borrowed £7,000 to consolidate existing debts. There is an actual person at the end of my loan! Unlike the banks, Zopa is flexible about late payments. It claims no actual defaults and says if all its arrears were counted as defaults they would be only 0.1% of total loans, far lower than the banks.
Zopa lends mainly for new car purchases, home improvements and debt consolidation. Lenders and borrowers set their own terms for the interest rate they require and wait to see if there are takers. Higher risks entail higher rates. The latest entry on my screen is someone wanting £1,600 over three years for home improvements at 12.1%. There have been 38 offers at an average rate of around 8%. Small wonder people facing usurious interest rates of up to 30% are tempted to refinance. Lenders, according to Zopa, get an average return of 8.9%. This is after a 1% annual deduction fee which, together with a one-off charge of £94.25 for each loan, is how Zopa makes its money. There is a limit of £15,000, so it avoids bigger loans where most defaults happen.
What's the catch? Critically, you have to pass Zopa's rigorous credit checks. It only lends to people it is confident can repay. This is a source of strength in a recession, but not an option for many sub-prime borrowers. When asked what happens if unemployment reaches 10%, Zopa would say that means 90% are still working and subject to its stringent credit checks. It could run out of its seed capital, but the company claims it still has plenty in the bank.
At first the procedure was far too complex. It is a lot better now, though could be improved further. I am impressed enough to consider putting more of my own money in. To be attracting money when it has no government guarantees ought to make it a role model. If it survives the recession in a fit state, and there is no reason to suppose it won't, then it, or something similar, could take off in a big way and become a serious rival to the likes of Lloyds and Barclays (though technically Zopa isn't a bank). With the banks in the state they are, it couldn't happen too soon.
vic.keegan@guardian.co.uk
- Internet
- Credit crunch
- UK banking sector
- Savings
- Personal loans
- Banks and building societies
- Consumer affairs
- Borrowing & debt
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