The 3-6-3 philosophy of bankers has not changed all that much in centuries: take deposits at 3 per cent, lend the money out at 6 per cent, and be on the golf course by 3pm. The first two numbers may go up and down, but the principle remains the same. Price a decent margin into your calculations and watch the money roll in.
Now a group of business people is launching a service to cut out the bankers. They have set up a website, Zopa, which aims to match individuals who want to lend to creditworthy individuals who want to borrow. By cutting out the middleman, both sides gain in theory. The hope (though not the promise) is that borrowers will pay about 20 per cent less in interest, and that lenders will make perhaps 30 per cent more than they would in a savings account.
Individuals lending directly to individuals is nothing new. It remains commonplace in the Asian business community, within families and even among MPs, as Peter Mandelson and Geoffrey Robinson can testify.
But now the internet can put thousands of would-be lenders in touch with thousands of borrowers. And the credit-scoring agencies, which monitor all but the most transient of households, can help reduce the risk of default.
Zopa "mirrors the principles behind other forms of social lending such as co-operatives, community banks and micro-lending schemes", we are told. But this is a commercial proposition, run by experienced business people and backed by hard-nosed venture capitalists. The founders are Richard Duvall and James Alexander, who helped create the Prudential's online credit card business, Egg. Backers include the Californian venture capitalists Benchmark Capital, which backed both eBay, the hugely successful online auction site, and Betfair, the online betting service. Cutting out the middleman, doing away with the need for shops, bookies or banks, is common to all three businesses.
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In Zopa's case, lenders have their risk spread by having their cash divvied up and lent to at least 50 different borrowers. The maximum exposure to any one borrower is just [pounds sterling]200. The interest rate is set at the lowest level that will find a lender and give sufficient diversification. Defaulters are pursued and their debts eventually passed to debt-collection agencies. There are some safeguards against fraud.
Lenders are given the first name and rough locality of borrowers, and vice versa. This makes the service appear more personal, but it is mostly an illusion. Zopa doesn't want angry lenders turning up with baseball bats on welshers' doorsteps.
Zopa, which already employs 24 people, will take a one-off fee of 1 per cent of the loan amount and sell borrowers optional loan protection insurance provided by Pinnacle, a company owned by BNP Paribas (yes, there had to be a bank in there somewhere).
By Tuesday afternoon--after a day and a half of trading--3,500 members had signed up and the first loans had already been agreed. Borrowers with the best credit rating were borrowing at an average of 6.7 per cent. Those with only a good rating were paying 8.1 per cent.
Zopa reckons it needs to sign up only about 20,000 borrowers in the first year to break even. Unsecured credit is a [pounds sterling]200bn market in the UK, so all it needs is a very small share of the cake. But it has a mountain to climb in explaining a revolutionary idea to people, and in building the lenders' trust. Unlike with a bank savings account, there are no guarantees they will get their money back. Will they be prepared to shoulder the extra risk for may be only a couple of percentage points in extra interest?
The banks' advertising muddies the waters and makes Zopa's value harder to see. Savings accounts--with serious restrictions and penalty clauses--are advertised with headline interest rates as high as 8 per cent. The cost of unsecured loans is plunging for those with good credit histories: the AA offers 5.8 per cent.
One uplifting aspect of eBay is how many users discover--sometimes to their great surprise--that the vast majority of the strangers they deal with are honest and reliable. Sellers describe their wares accurately. Buyers pay up. Goods are sent promptly. Let us hope Zopa's customers are similarly surprised.
Patrick Hosking is investment editor of the Times
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