Lending exchange bypasses high street banks

An online service designed to allow borrowers and lenders to bypass the big high street banks has garnered strong interest in its first four months of operation.

From a 300-member beginning, Zopa - short for zone of possible agreement - now has more than 26,000 members, according to James Alexander, a co-founder and chief financial officer.

About 35 per cent are lenders, who between them have £3m of capital waiting to be handed out. Mr Alexander will not say how much has been lent, but average loans have been between £2,000 and £5,000; Zopa is hoping that will creep more towards £8,000 in coming months.

The idea for the business, which describes itself as a "lending and borrowing exchange", came from market research that came up with the notion that there was a market of "freeformers" to be tapped.

They might be self-employed or do work that is project-based or freelance, Mr Alexander says. "They're people who are not understood by banks, which value stability in people's lives and income over everything else."

Most importantly, he adds, while their incomes and lifestyles may be irregular, they can still be assessed as credit worthy. The exchange matches people who want to borrow with people who want to lend, although each lenders' money is parcelled out between at least 50 borrowers. Zopa earns its money by charging borrowers 1 per cent of their loan as a fee, and from commission on any repayment protection insurance.

Mr Alexander and his colleagues, David Nicholson and Richard Duvall, who is Zopa's chief executive, all cut their teeth at Egg, with Mr Duvall creating the online bank for Prudential in 1998.

Mr Alexander had been strategy director at Egg after joining in 2000, and previously had written the business plan for Smile, another online bank.

The Zopa idea was intriguing enough to win funding from two private equity groups, Munich-based Wellington Partners and Benchmark Capital of the US. It was helped by the well-publicised success of other so-called peer-to-peer internet services such as Betfair, the gambling website, and eBay, the auction site.

Mike Naylor of Which?, the consumer watchdog, thinks Zopa is an interesting development. "It's certainly not going to replace the banking system, but for a certain type of person it could provide real benefits."

Mr Alexander says both lenders and borrowers may be united by a desire to distance themselves from conventional institutions.

"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," Mr Alexander says.

But he says there are also hardcore entrepreneurs - people who have the cash, understand portfolio diversification and risk and are lending on Zopa alongside other investments.

Lenders are so far seeing average returns of 7.6 per cent, Mr Alexander says. There have yet to be any defaults, however. Borrowers who fail to pay will be pursued through the usual channels and 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.

Borrowers, meanwhile, can find rates as low as 5.9 per cent.

"People are seeing that they can borrow cheaply over shorter periods," Mr Alexander says. "This is the reverse of banks, where if you borrow more and for longer it gets cheaper."

Zopa says it has 20 countries where people want to set up franchises. The most important though is the US, where Zopa has had a team working on finding a route through the regulatory hurdles since late last year.

Banks do not generally see Zopa as a threat to their high street business. One analyst called it "one of these things that could catch on but probably won't".

The challenge for Zopa, which has been relying mainly on word of mouth and online marketing, is to make people aware of its services and to attract credit-worthy borrowers.

And in a climate of high indebtedness and slowing consumer spending, that may be the biggest challenge of all.