February’s profits warning by HSBC – the first in its history – sent shockwaves throughout Europe’s largest bank, and throughout key financial markets all across the world.
Rising exposure to bad debts in the US led to the exits of the head of HSBC’s North American arm, and the boss of its American retail business, as well as piling the pressure on chairman Stephen Green and chief executive Michael Geoghegan. But outside the financial services industry, few would have called this a crisis – HSBC still went on to post record annual profits of US$22.1bn, up 5% from 2005.
What many see as obscene profiteering by their high street banks, however, has led a small group of consumers to fight back through an internet start-up, based not far from HSBC’s 44-storey London HQ.
Zopa.com, standing for Zone of Possible Agreement, aims to cut banks out of one of their most lucrative markets – lending to consumers. As an ‘eBay for cash’, it acts as a matchmaker between individual borrowers and lenders that are prepared to accept the same rates of interest. Over 100,000 people now use it in the UK, and the company is set to start expanding abroad. If it hits the Middle East, it could cause shockwaves for established regional banks, many of whom rely on lending for the vast majority of both profits and revenues.
James Alexander, its CTO and co-founder, says the site could cause the same problem for banks as those facing many other companies in traditional industries – it will force them to rethink how they serve their customers.
“We don’t have shiny big towers in the city and branches all over the world,” he says. “But by creating this community, we remove the banks’ connection with customers, because that’s what they are not very good at. What banks are good at is keeping your money safe and managing payments and processes. What they are rubbish at is helping the customer.”
Just like ‘asks’ and ‘bids’ on the stock market, Zopa’s members log onto the site and say how much they are looking to borrow or lend, and at what rate of interest. Both pay a 0.5% fee on the amount of transactions. Zopa isn’t licenced as a bank, because it says it just acts as a middleman – although it does perform credit checks on borrowers to help provide a more secure environment for lending.
Before launching the site, Alexander and his co-founders looked at the huge success of online marketplaces like eBay, and how bond markets where big companies can trade debt could be adapted for individual consumers.
“We looked into why people were unhappy with the way banks were dealing with their money,” he adds. “People were saying that investing felt a bit like gambling, that they didn’t feel connected with their money or understand what it was being used for, and that banks didn’t really understand their lifestyles.”
For borrowers, Zopa offers an opportunity to obtain money at lower rates than those they can secure from traditional sources.
Borrowers can get loans of between US$2000 and US$50,000, while lenders can put up between US$1000 and US$50,000. A three-year loan of US$5000 has a typical APR of 6.3%, cheaper than most high street banks in the UK.
Alexander adds that there is more flexibility for people borrowing cash. “You can pay your money back at any point and not have to pay for it,” he says. “One of the things that really upsets borrowers is that you get charged by the bank if you pay your loan back early. Many people think that’s ridiculous.”
For lenders, the site also offers an attractive alternative to traditional products.
According to Zopa, the average return for lenders is 7% gross, although you can earn a lot more depending if you are prepared to take on more risk. The site is also positioning itself as a means to provide balance in an investment portfolio.
“The more sophisticated people are looking at Zopa as just another asset class,” says Alexander. “It isn’t better or worse than property, cash, equities or anything else – it’s just different. And for the first time, consumers are able to invest in the most profitable part of the banking industry. Banks make a lot of their profits on consumer lending, but Zopa allows lenders to access that market directly.”
Michael Moyles, one Zopa user that started lending through the site shortly after its launch, says he tends to set his rates lower, to make sure he starts earning money more quickly.
“Zopa is suitable for anyone who has money in a building society and doesn’t require immediate access to it,” he says. “I read about it a couple of years ago and thought it was a great idea that could potentially become very popular. I see it as a safe place to make money, and I think there should be an alternative to the main banks, which don’t always give you a good deal. Zopa has access to a lot of credit data and can quickly deduce whether people are sound to lend to.”
He adds: “I’ve had no problems with bad debt. The only problems I’ve had with the site is that I sometimes forget my passwords, but if you phone through to Zopa they are always very helpful.”
Although social lending is new and there is little research into consumer habits, Alexander says borrowers may be less willing to fall behind with repayments as they know that would affect individuals rather than banks.
The community model also helps provide security in a more tangible sense. On Zopa, loans are split into chunks, so a borrower cannot receive more than US$400 from any one lender. Those seeking money are also divided into four categories according to their credit rating, and lenders can choose which to target – depending on whether they want greater security or to charge higher interest.
“We do everything a bank would do to check out borrowers,” says Alexander. “We work with all three of the UK’s credit bureaux and do all the checks and balances. We turn away an awful lot of borrowers who we think wouldn’t be able to repay or would become over-indebted if they did borrow.”
He adds: “The best number I can give you is that we’ve been going for two years and the total amount of non-payment by borrowers has been less than 0.05%.” Currently, Zopa only has agreements with credit data providers to serve it with information on UK consumers, but Alexander says it is possible for non-UK citizens to lend or borrow significant amounts of money on the exchange on a case-by-case basis.
This is to enable the site to comply with financial regulations, including those concerning money laundering. It is also about to launch a bid for more international customers, with plans to enter the US and “another market in Europe” in the next few weeks.
According to Alexander, the company will also offer a Sharia-compliant version that would provide more information for lenders on where their money is heading: “We are certainly thinking about that,” he says. “We have no stated intent to do it, but it is something we have thought about and we are aware that Zopa fits with Sharia law very well. We can’t name a date but we will do it. As we expand internationally, there will increasingly be a case for us to do that.”
What is clear is that the future will see the online marketplace model being extended into other areas of banking and personal finance.
Moyles, for one, thinks a similar service should be launched for small businesses – many of which face the same challenges as consumers when they walk through the doors of their bank.
Alexander adds that Zopa is looking at other ways to expand. “There’s no reason this can’t be applied to mortgages or credit cards, for example,” he says. “Also, why wouldn’t someone do Zopa for insurance – especially with the current model for syndicating risk?”
He adds: “Consumers are increasingly looking for more community, transparency and ethicality in all aspects of their lives, and we are providing an alternative to a bank that values these things much more highly.”
So do Middle East banks have a lot to fear? Most rely heavily on loans for their profits, but with the banking system in the region yet to be centralised, so far borrowers are able to move between banks, getting better deals and more loans.
As one expert says: “The irony for the Middle East is that as it tightens up its banking system to protect itself from people borrowing money they can’t afford to pay back, more and more people are likely to cut them out of the equation altogether and go down the internet road. If that happens, a lot of their profits will disappear.”
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