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Can you beat the banks?

Posted on 18 Jun 2009 at 16:31

Lisa is attracted to the site's ethos. "We've gone through a period where we've lost our confidence in institutions we should trust. If we no longer have an opportunity to go to our local branches and speak to people, we should develop a relationship with individuals, rather than banks."

For lenders, there isn't only the moral satisfaction of sidestepping the banks and helping people like Lisa, there's a financial upside too. They may see returns of 9% or more, if they're lucky, depending on the competition and whether or not borrowers default on the loans. Rates may fall slightly if there are more lenders competing for borrowers, "but I don't think that's a bad thing with the alternative being 1% [interest on bank savings]", said Andrews.

Diminishing returns

Independent tests of the Zopa lending scheme suggest it isn't quite a land of milk and honey for lenders, however. Consumer group Which? is conducting a long-term analysis of returns from the site. After a year, it earned £5.26 from a £100 investment; equivalent to 5.26%. "But we could have earned as much as 6.5% from the Which? Best Buy savings accounts at the time," senior researcher of Which? Money magazine, Cathy Neal, told PC Pro. "We have now been hit with a bad debt of £9.21, so almost two years later we have only £1.62 more than we started with."

Neal admitted that Which? chose to lend this small amount of money across all markets, rather than the less risky credit categories. Nevertheless, Which? still classes Zopa as a "high-risk investment product". Although it welcomes alternatives to banks, its policy team reiterates that investors aren't covered by the Financial Services Compensation Scheme (FSCS) as they are effectively lenders, not savers. Which?'s principal policy advisor, Vera Cottrell, said Zopa "is only suitable for consumers who are willing to take a high risk with their savings, and certainly not suitable for investors who want to protect their capital or have guaranteed returns".

We're very clear that Zopa lenders don't benefit from the FSCS, but nor should they because they're not depositing their money in an institution

Other experts agree, including Dan Plant, web editor of the financial advice site MoneySavingExpert. "Lending money through Zopa can net you a significantly higher return than savings at present - in excess of 7% or 8% - following the relentless base rate cuts of recent months," he said. "However, the protection of your money isn't as simple as in a standard savings account. In normal savings accounts, you get £50,000 protection per person, per institution. With Zopa, providing you save over £500, the money you lend is split between at least 50 borrowers, which spreads your risk. However, that still makes it closer to a risk-based investment product, [rather] than a boring but safe savings account."

Zopa's Andrews said the site doesn't pretend to be an ordinary bank. "We try to warn people of the risk," he said. "We're very clear that Zopa lenders don't benefit from the FSCS, but nor should they because they're not depositing their money in an institution."

So what would happen if Zopa went out of business? Which? says that while the contract between the lender and the borrower will continue to exist, the consumer "would have to go to court to enforce the contract, which is time-consuming and expensive". Zopa claims in this "unlikely" event, any money transferred to Zopa is held in a segregated bank account and its debt-collection agency will manage collections for the lifetime of outstanding loans.