Zopa versus banks

Tom Watson talks up Zopa:

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.

Zopa is a peer-to-peer lending company that matches up people wanting to borrow money with people wanting to lend money. In doing so it bypasses the traditional middlemen for this function, banks.

Watson proposes some reforms that would help initiatives like Zopa:

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.

While we’re at it, it would be useful to reform banking law to make it easy for people to start up a small internet-only bank that concentrates on the function of movimng money around between accounts. Such a slimmed down bank would have very little overheads and would therefore be able to charge much less per transaction. If I buy something on the Internet, a middleman such as Visa or PayPal grabs a cut of 1%-5%; all they are doing is moving numbers around on a computer, so this function ought to be doable at much less cost, maybe 1p per transaction. Of course, such a bank would have no room for highly paid incompetents such as Sir Fred Goodwin, which is probably why the people running traditional banks aren’t keen on the idea.

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