Where Lender Meets Borrower Directly

The New York Times/Business
February 5, 2006
On the Contrary

By DANIEL AKST

ABOUT 10 years ago, a man named J. Richard Fredericks, who focused on commercial banking during a career in the securities business, made an interesting observation. "Banking is essential to a modern economy," he said. "But banks are not."

Recent events have made Mr. Fredericks look prescient. The most obvious development has been Wal-Mart's request for federal permission to enter the banking business. Although the company says it wants permission only to operate a quasibank — known as an industrial loan company — in order to save money on credit card processing, America's smaller banks worry that eventually the big retailer will eat their lunch.

Less noticed, and potentially more significant, are a couple of fascinating banking developments on the Internet, the greatest strength of which may yet turn out to be in matching supply with demand, whether the arena is goods, services, information, love or money. In Britain, a site called Zopa.com has built a system of matching borrowers and lenders that eliminates the traditional middleman: the bank that accepts your deposits and then lends your money, assuming credit risks as it does so. Zopa, which started last March, has 48,000 members, a spokesman said.

Zopa makes it possible for individual lenders and borrowers to connect without going through an old-fashioned financial institution. Presumably, lenders can earn higher rates of return — and borrowers can get better deals — because there is no bank overhead to pay, not to mention all those pesky reserve, accounting, community lending and other requirements. Zopa gets a 1 percent fee from borrowers, but beyond that allows lenders and borrowers to set rates themselves in its online marketplace.

More:http://www.nytimes.com/2006/02/05/business/yourmoney/05cont.html