Zopa: Why peer to peer lending is a threat to big bankers

Out of all the digital start-ups I met as a minister, the one that most inspired was Zopa. Why? I think they have the capacity to completely re-write the terms of trade in the banking sector. I won’t go into my reasons in detail except to say that they can inject trust back into a financial system that is deeply lacking in that most important commodity right now.

Peer to peer lending is about an individual or groups of individuals betting on the ability and integrity of the person requiring the loan. See the debate being had over at the FT blog to see how some – in the banking sector – disagree.

I was so impressed with Zopa and the potential for P2P in this sector that I wrote to Alistair Darling about them before the last Budget. Government can take small decisions that can help this sector grow at an even bigger rate than it currently is already. I haven’t got the letter I wrote to the Chancellor in front of me but essentially I suggested three things:

1. Change the tax regime so that people who make loans – investors – can aggregate their total ‘wins’ and ‘losses’ for the purposes of tax. So, if you make 10 loans and nine of them fail, you should be allowed to offset them again the tenth loan that made you money.
2. Consider allowing people to use P2P within their ISA allowances.
3. Bring P2P within the remit of the small loans guarantee scheme. It is this area that I think could have a great impact in the small business sector. If people are prepared to bet their own cash on a business, then they are likely to conduct as much, if not more due diligence on the company as any bank. And when the banks make silly, greedy, short term risk averse decisions, groups of small private investors can step in.

If you’re interested in P2P then also take a look at how Kiva is having a huge impact on the developing world with micro credit. I’ve been with them for about a year now and as their byline says they give “loans that change lives.” (All hail Muhammad Yunus)

19 thoughts on “Zopa: Why peer to peer lending is a threat to big bankers”

  1. Tom, I’ve worked with Zopa in the past (and I’m a customer – got my car loan through them). One of the best ways to let this sector grow is to encourage the development of pension links to operations like Zopa.

    At retirement pension investors have a huge pool of capital looking to generate income and currently getting stiffed with very low rates of income or highly risky equity investment.

    The flow of capital would also be great for potential borrowers!

    I’ve worked with Zopa trying to develop a pension wrapper for their product and whilst it’s possible it’s not easy and could be made easier and could also be given a positive nod from the FSA or government.

  2. Couldn’t agree more.

    I’m a lender on a similar platform in the US called LendingClub. So far I’ve invested in just above 200 loans, and even though I do have some defaults, my return on investment is a whooping 8.57%

    What I love is that those people I lent to, are super happy because they are paying less interest

    Only when governments realize that this concept can be part of the solution, help to make it safer, and encourage people to do it, it will take off and show its value.

  3. Notice that the problem is the state. The state and its stupid rules have made a problem that shouldn’t exist.

    Now I’ve no doubt that there will be more problems with lending and borrowing than you think. It’s just more debt after all. You would know all about debt, since you’ve put the country into hock.

    800 billion on gilts.

    1150 billion on state employee pensions.

    Unknown amounts of toxic debt

    4-5 trillion of pension debts.

    PFI on top.

    Since you’re now in favour of more debts like Zopa, just how are you going to pay the 8 trillion back that you’ve run up?

    300K plus interest per worker.

    What’s the solution to the problem you’ve made?

    Back on Zopa. It was your lack of regulation that meant some banks did just what you wanted. Lend lots to people who where high risk. ie. Affordable borrowing. They did your bidding, and know you have to bail them out. Well stupidly you have bailed them out. So why now do you want the regulations removed? Be consistent.

    However, I think this should happen. All restrictions should be removed. Caveat Empourer. The reason being that we’ve paid for the regualation, and you didn’t regulate, with the result that’s exactly the same as no regulation.

    Remove the regulation, and you will have failures. Just as we have done, but smaller.

    People will then quickly learn what to do about it.

    Put your money with safe banks or banks backed by assets such as gold and not fiat.


  4. Zopa is a nice idea. It’d be good to combine it with an internet-only bank geared solely to moving money between accounts, with very low overheads and therefore very low fees.

  5. Excellent post, than you.

    Amusing rebuttal of the widespread claims that Hannan/Carswell and their ilk lead the idealogical debate.

    Likely they will use arguments for this scheme to reduce the access of ordinary folk to standard loans though.

  6. Tom – all great ideas to support Zopa.

    As a member of Zopa, I am struggling to understand why losses cannot be set off against profit for tax purposes. Ultimately, if the losses/profits are in the course of business, then set off should be automatic. I don’t know if this changes if the amount put through Zopa exceeds a certain amount (e.g. £25,000 – being the threshold requiring a consumer credit licence) or not. However, I wonder whether the position of the HMRC would stand up if anyone had the temerity to take them on in court and argue that the losses should be allowed? Perhaps the community should rally together to fund a test case?

  7. Thanks for your contunuing support Tom. It was good to hear the Chancellor say on Today last week that he wanted to see more competition for banks – well he could start by levelling the playing field in terms of the tax treatment of credit losses!

  8. Hi Tom,

    Very well done on supporting an initiative like Zopa and bringing it to the attention of the Chancellor.

    Eventually I don’t see why Zopa shouldn’t have the same advantages as other banks such as the right to hold only fractional reserves (albeit far better regulated ones).

    It will never truly be able to complete until it does.

  9. Nice to hear you are supporting zopa and the issue of how losses are treated for tax purposes. Going forward if this issue is not addressed it is difficult to see peer to peer lending growing sufficently to become a serious alternative to the banks and building societies as after 2 years as a lender on zopa the current treatment of losses as a 40% tax payer makes the risk/reward issue one that has prevented me injecting further funds over the last 12 months.

  10. I have recently started to lend on Zopa and find it very rewarding.
    The satisfaction of helping some one get a loan and to get a return from this has meant that I am now looking at other ways of saving and investing.
    With Normal saving investment its all about the profit and for most people the few pounds return on small amounts of savings are so small its nothing to get excited about, the excitement comes from spending it. Where as my interest payment I received today from a £10 loan I made last month is exciting and I am now looking at other ways to save and invest.
    Zopa is a great way to get people interested in saving and investing, for the new saver investor it would be nice to be able to have Zopa as part of an ISA.

  11. I find Zopa a social entity in helping people get back on there feet. Zopa is doing a much better job than the banks. I would think a True Labour Goverment would be backing Zopa all the way. Instead of playing a blocking regulation game via OFT and HMRC.

    Is the goverment running away from Zopa and backing the banks.? Now who owns the banks.?

    These are fair questions for Mr Darling.

  12. Nice to see you you supporting zopa Tom. Zopa is a great idea and deserves to succeed but the result of the HMRC ruling means it has become very difficult in my opinion to get a return that justifies moving funds out of a high paying savings account and into zopa as a lender. In the early days i did put a fair amount in but since the ruling have put a hold on adding any further funds.

  13. Zopa should be viewed as a black box into which money is put and out of which rent for that money is retrieved. It should not matter what the mechanism is inside so far as tax is concerned, it is the net return that matters and only that should be subject to taxation, thus making the losses due to defaulted loans tax deductible.

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