Bank bosses are really sweating now. Credit a new form of social networking.
From file trading to Internet telephony, the once powerful middle-man, free to charge fees and set prices with impunity, is slowly losing his power.
The explosion in popularity of such sites as MySpace and Facebook is already old news. What's making headlines and making bank execs quake in their loafers is the emergence of websites that apply this social networking model to the matter of borrowing and lending money.
In mid-2005, a company sprang up in the United Kingdom called Zopa, which stands for the Zone of Possible Lending. Its website ( www.zopa.com ) allows people to network with one another with the express intent of exchanging money directly. Folks with money to invest can lend funds with a greater return than they'd get in a mutual fund, and people who need cash can borrow money at a lower rate than is charged by a bank line of credit or credit card.
To make sure no one skips out on a loan or posts fraudulent loans to scam easy cash, all the lenders and borrowers are given credit ratings ranging from A+ to D. All transactions are cemented by a legal contract, and applicants' identities are confirmed before any money changes hands.
In addition, Zopa borrowers only get a small chunk of money from any one individual lender. The funds of those lending more than $1,000 are spread across at least 50 borrowers, to minimize risk, just as smart investors ensure they have diverse stock portfolios. Borrowers commit to monthly payments using direct debit, and if payments are consistently missed, a collections agency is hired to track down the errant borrower.
A recent survey showed that 70 per cent of borrowers felt Zopa offered them "significant control" of their debt, while only 1 per cent believed the banks gave them such control. With over 100,000 members in the UK, Zopa is planning a U.S. site launch within the year.
Earlier this year, a similar website called Prosper ( www.prosper.com ) appeared in the U.S., offering the Zopa model to those opportunity-seeking Yanks. It's set up like eBay, with members given community-determined credit ratings and posted income-to-debt ratios.
Prosper charges 1 per cent for transactions, Zopa 0.5 per cent both rates cheap enough to keep people coming back.
Members are quick to praise the sites, some for purely monetary reasons, others because of their ethical distaste for bank and credit card lending practices they equate with usury.
Social lending of a more traditional sort, between family and friends, predates the involvement of banks. It's this return to principle, via the Internet, that has the traditional financial institutions worried.
As the Zopa site says, "Everyone's happy: lenders get great returns, borrowers get great rates, and there's not a bank or a bank manager in sight."