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People Who Need People (And Their Money)

U.K.-based Zopa offers an unusual twist to lending, cutting banks out of the loop.

Imagine if private citizens in search of loans were able to go online and receive their money from lenders - who just so happen to be private citizens as well? This unlikely concept actually is being put into action in the U.K. by a company called Zopa (www.zopa.com).

Zopa, which is the acronym for the business negotiating term "zone of possible agreement," is the brainchild of Richard Duvall, the firm's CEO. Duvall also was one of the minds behind Egg, the U.K.-based Internet bank that made quite a splash in its own right. Unlike Egg, however, Zopa's market is more narrowly focused.

"We did about a year's worth of consumer research and found a group called 'freeformers,'" relates Duvall. "These people are self-reliant, often self-employed and want to be in more control of their lives. They're more likely to have more-complex financial issues and are poorly served by banks."

Zopa, therefore, was created as an alternative for this consumer segment. It was designed to make the lending process more "human," according to Duvall. "When asked how they felt about borrowing money, [freeformers] said the experience was like sitting outside the principal's office. Some of these people just don't like banks," he says. "[Zopa] is people lending to each other - it's not a faceless corporation. There's an almost philanthropic notion to it of helping the community."

As utopian as Duvall makes it sound, the idea also may conjure nightmarish scenarios that could land Zopa participants on "Judge Judy." However, Duvall claims Zopa does all it can to make the process safe. For starters, Zopa is regulated by Britain's Office of Fair Trading as a credit broker. Furthermore, Zopa members undergo background checks to ascertain their creditworthiness.

An algorithm is used to match lenders' offers to borrowers who want to borrow on particular terms. To reduce the probability of its lenders losing money, Zopa divides each loan into small chunks and spreads them out to 50 different borrowers. If someone does not pay back a loan, his credit record takes a hit. Zopa has been operating since March, and, in that time, no one has missed a payment, claims Duvall.

New Alternatives for Borrowers and Investors

Duvall also says that in addition to the more personalized feel brought to lending, financially, Zopa offers a valuable alternative to banks. For borrowers, they are provided with more flexibility to choose loans with more appealing interest rates or lending times. Zopa makes money by charging a fee to borrowers of 1 percent of the value of their loans. It also sells protection insurance to them in case they cannot pay their loans, due to sudden unemployment, for example.

On the lender side, a new asset class is now open to them. "If you're an investor, you can put your money in the bank, in real estate or in stocks," Duvall says. "Zopa lets lenders put their money in personal debt - this is what banks do and it's a new product to consumers." Lenders are not charged by Zopa.

So far, according to Duvall, there are about 28,000 people registered with Zopa. Sixty percent intend to borrow and 40 percent intend to lend. There is approximately $5.5 million in lending at Zopa.

Duvall plans to expand Zopa. "I think Zopa would flourish in the U.S. Research shows that Americans are angry with banks - the poor level of service and poor rates of returns," he says. "There are no cultural barriers [to Zopa], but there might well be regulatory barriers," Duvall admits. Zopa currently has a team in the U.S. testing the waters.

"I think [banks] believe Zopa is too small to matter - for now," Duvall remarks. "But eBay was small once, too."

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