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Can you beat the banks?

Posted on 18 Jun 2009 at 16:31

A new breed of "social lending" sites promise better deals for both lenders and borrowers. But are they really a safe and more ethical alternative to the banks? Kim Gilmour investigates.

It's September 2007, and word emerges of an impending catastrophe. Mortgage lender Northern Rock urgently needs a bailout. Thousands of customers that entrusted their life savings to the Rock join queues outside branches that stretch around the block. Despite assurances that savings will be guaranteed by the Government, £2 billion is withdrawn within 48 hours. Customers don't trust Northern Rock to look after their money: they're sick of banks and their empty promises.

Fast-forward 18 months and people's confidence in banks is even lower, as scandal after scandal emerges. And, with the low base rate, savers might as well be stuffing money under their mattresses. According to the GfK NOP's monthly Consumer Confidence survey, the "Now Is A Good Time To Save" index stood at a dismal minus 23 in March 2009; 48 points lower than the same time last year. Borrowing money, meanwhile, is like extracting blood from a particularly stubborn stone.

Faced with the credit crunch and consumer cynicism, the question becomes: are there genuine alternatives to using a bank for borrowing and saving money? A nascent breed of British internet start-ups think so. They're using the internet to help people lend and borrow money from one another, or offer quick access to cash that isn't readily available from banks any more.

Zopa - a "social lending" marketplace where people borrow from and lend money to each other, bypassing banks, offers better terms than you'll find on the high street, and is cleverly tapping into the current wave of resentment. "Rather than make the fat cats fatter, you pay interest to real people," it states on its homepage.

Wonga lets you apply online, 24/7 (no humans involved), for an instant loan of up to £200 if you ever need emergency funds, and you can decide when to pay it back - as long as it's within 30 days. It isn't cheap, but it's certainly less than the daily interest a bank would charge should you plunge into your overdraft.

But how do these sites work? What are the risks? And are they really the future face of banking? Here, we investigate the big bank alternatives and take a closer look at what they're offering.

Social lending

If ploughing money into a bank seems like dealing with the devil in the current climate, Zopa is painting itself as the more palatable alternative. There are two ways in which people can borrow and lend money on the site: Zopa Markets and Zopa Listings.

Zopa Markets accounts for more than 90% of the business, and lets borrowers apply online for a loan of up to £15,000 over three or five years. Individuals who wish to lend to these applicants decide how much they want to provide, and at what rate.

Effectively, this money is an investment, and the interest the borrower pays will be their return (minus Zopa's 1% commission).

To help guard against fraud, borrowers are categorised into one of five different markets depending on their likely credit risk: A*, A, B, C or Young (aged 20-25). Borrowers with a low grade, such as C, are more likely to default on their loans, although Zopa claims that only 0.18% of the money lent over the past four years has turned into bad debt. "We put most people in a market we call 'no', so the majority of applicants are rejected," said chief executive Giles Andrews.