Taking the Bank Out of Banking

By Jeremy Caplan

Middleman-free microlending has long been associated with developing countries. Why not bring the model online elsewhere, circumventing the traditional banking industry? That's the idea behind zopa.com a Web-based lending and borrowing exchange that connects those who want to lend with creditworthy people looking to borrow. Zopa serves as the platform, like eBay. The borrower simply pays a 1% fee to Zopa up front. Members have to be at least 18, have a credit rating and, for now, live in Britain. Zopa plans to open in the U.S. in 2006 and has had offers to take the service into more than 20 other countries. Over 30,000 members have signed up since Zopa's March debut.

"We found that a lot of people are very dissatisfied with banks," says Zopa founder and CEO Richard Duvall, who previously was a co-founder of Egg, Britain's biggest online bank. "They find banks impersonal." At Zopa, lenders' funds are pooled and distributed to borrowers who can send thank-you notes to the lending group to let them know how they are using the money. One borrower fixed up his garden; others are consolidating debts, buying cars or starting businesses. Lenders so far are getting an average rate of return of 7.6%, while borrowers have got cash for as little as 5% (vs. a market average of 11.6% for a bank loan), depending on their credit score, the amount borrowed and the term. Initially, there was either too much available credit or too many borrowers. But now the site has reached a balance, with the average loan at $9,500. Duvall says Zopa may soon up its maximum loan of about $44,000. "People like having control of their money and knowing where it goes," he says.