Peer-to-peer networks bridge the lending gap 

Bypassing conventional routes, groups of online investors are reaping lucrative returns by lending via peer-to-peer networks. Borrowers, too, are feeling the benefits, discovers Ewan McIntosh.

When was the last time anyone saw an 8% return on their investments? For your average woman or man in the street those days are largely past, except for a minority of savvy investors who are lending via peerto- peer networks.

Zopa is the UK’s first and biggest company in this arena, matching anyone with some spare cash to those needing £1,000-£15,000 to top up their new home deposit, fit the bathroom or buy in some new equipment for their business.

Lenders put money into Zopa, specify which levels of risk they would like it invested in, and what kinds of return they’d like. Zopa then spreads that lending across different risk groups, matching lenders with borrowers who are happy with those terms, and brings in average returns of 8% for their lenders.

Lenders can also browse the listings and choose specific individuals to lend to. Scores of lenders come together, offering borrowers the total sum they need, with individuals lending as little as £10 or as much as several hundred pounds. For example, a BAA employee at Heathrow looking to clear his overpriced overdraft with a £2,430 loan over 36 months at 10% took less than an hour to get the cash he needed. A doctor trying to gather together a deposit for his new house may, on the other hand, have to wait: in nine days he’s only secured 3% of his necessary funds.

Zopa was the pioneer in the emergent industry of peer-to-peer lending which hit the mainstream media during the credit-strapped days of 2008. Its borrowers are all-prime: they are precisely the former customers of those banks who, over the past few years, have made lending difficult for perfectly credit-worthy individuals. Has Zopa collapsed in a pile of bad debt? Hardly.

From a relatively high default rate during the height of the 2008 crisis, Zopa now sees barely 0.5% of loans defaulting, meaning that those with some cash to spare are increasingly seeing a small 30-60 month loan as a better investment than having the cash sitting around in their bank account. Since November, lenders have also been able to duck out of their commitment – if they need their own cash back – and let another member of the community take over the lending.

The London-based start-up is booming. £110m has been lent to 22,000 people and Zopa has doubled every year since the financial crisis. Co-founder Giles Andrews believes that a growing distrust of big mainstream banks amongst consumers is the reason for his outfit’s exponential growth. Indeed, his firm won Moneywise’s Most Trusted Personal Loan Provider award in 2010, and the site’s tagline heralds a revolutionary tone: “Rather than making the fat cats fatter you pay interest to real people.”

Zopa’s site is delightfully easy to use, reducing credit scores, analysis of affordability and stability of individual borrowers to a snapshot star rating. The appeal of simplicity is working: the site consistently has more lenders than borrowers – at the time of writing some £4,033,088 was still available for lending – and site statistics, drawn from compare.com, show peaks of borrowing around the summer holidays, winter and Easter.

Zopa charges borrowers £124.50 to take out a loan, and lenders are charged a 1% annual fee for taking part.

Indeed, since the financial crisis kicked off, the number of copycat services appearing in Europe and the US has grown. Zopa can only borrow from and lend to individuals living in the UK. FundingCircle.com allows individuals to lend to small and medium sized enterprises in the UK. In the US , Prosper was first on the market, its model: to take a cut of both the amount loaned and any return in return for facilitating the transaction.

Having raised nearly $60m in venture capital since launch in 2006, and based atop San Francisco’s impressive Hunter-Dulin building, for-profit, peer-to-peer lending platforms such as Prosper aren’t just intending to remain a niche. They stand to easily outpace the no-interest, not-for-profit microfinance platforms of this world, such as Kiva, appealing to lenders who don’t just seek a fuzzy feeling inside. But their main target is well in sight: peer-to-peer lending companies like Zopa and Prosper plan to take on the de facto lending position of the high street bank itself.

And, with the current mood of austerity, Zopa is one lender that looks fit for the race: Zopa employs only 28 people in a modest office off the Tottenham Court Road. Their overheads are, compared to traditional banks, paltry. In terms of market positioning, it’s gold dust.

Lending to and from all-prime candidates in the UK is one market still far from reaching its full disruptive potential. Similar land-grabs are taking place in the non-profit world, where microfinance platforms such as kiva.org eliminate the middlemen of giving, and connect lender to Third World entrepreneur directly. In this way, cattle farms are expanded, grocery stores founded and mobile phone retailers flourish, returning the initial loan – with no interest – to its charitable owner back in Hemel Hempstead or New Jersey.

Both realms – microfinance and peer-to-peer lending – display remarkably low default rates. It begs the question of whether new, ethically responsible opportunities remain untapped in taking the for-profit motives of Zopa and Prosper and applying them to the feel-good factor engendered so successfully by the likes of Kiva. Is it possible that even bigger returns can be found by combining profitable peer-to-peer lending with the booming economies of the Southern hemisphere?

Ewan McIntosh’s firm NoTosh Ltd works with start-ups and investors in the UK digital media sector: www.notosh.com

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