Don't just howl with rage. Try an idea that does away with banks altogether.

http://www.guardian.co.uk/commentisfree/2009/aug/18/bankers-bonuses-credit-zopa

by SwellJoe • 17 years ago

44 26 17 years ago

guardian.co.uk

onreact-com2• 17 years ago

Bankers and government officials work together on this so don't really expect each other to bite the hand that feeds them.

furyg3• 17 years ago

So, let me get this straight.

You give your money to Zopa. Zopa divides it up into chunks and combines it with money from other 'lenders' and gives it to borrowers (which it has performed credit checks on). The borrower pays a fee, a part of which is given back to the lender. Also, if someone defaults Zopa goes after them.

How is this not a bank?

onreact-com2• 17 years ago

I think the difference is that you are still the lender while a real bank just takes your money and does whatever it likes with it without even asking you. On Zopa you decide that you actually lend 500 or 5000$.

patio11• 17 years ago

It doesn't make money. Banks do that (well, prior to the recent financial crisis).

See Prosper, incidentally, which had lending peers decide which loans got funded and at what rates. If you think BoA was bad at estimating default risk, wait until you see the average Prosper portfolio.

mmt• 17 years ago

It would probably be generous to say Prosper acted in a shady fashion toward lenders. There's a great deal of discussion on this at prospers.org.

RyanMcGreal• 17 years ago

It doesn't make money.

Reminds me of classic SNL skit The Change Bank. "How do we make money? Volume!"

derwiki• 17 years ago

I blame this more on the average person than Prosper. They publish historic default rates; I even wrote some quick simulation models before I put my money in. The biggest problem is that people see 20% and don't realize just -what- the C grade means.

I can't speak from the borrowing side, but the lending side seemed on par with the risk of the market to me. And for what it's worth, my Prosper portfolio did much better than my 401k.

dant• 17 years ago

You have a contract directly with the borrowers, not with the institution. If the borrowers don't pay up, you loose that money. Zopa doesn't pretend that you have money sitting in a vault somewhere that you can take out whenever you like.

To be fair to banks they don't really try to push that vault myth either, but that is the mental model people still use when interacting with banks.

sethg• 17 years ago

The most significant feature of modern banks is fractional-reserve lending. Your bank borrows $100 from you (e.g. by letting you deposit money in it), lends $90 to your neighbor, and predicts that by the time you want your $100 back, someone else will have paid off its loan so that the bank has $100 in liquid cash sitting around. (If that prediction turns out to be false, then your bank borrows money from another bank, and if no other bank is willing to lend to it, then the government steps in.)

There's no way you can play this game without a large amount of money and a willingness to jump through the government's regulatory hoops.

brc• 17 years ago

This is an article which uses the popular 'hate the bankers' line to try and show something new.

I don't think the bankers with the big bonuses are going to get worried anytime soon. Banking is not really about personal loans and microfinance. If anything, banks do these things to keep customers coming in the door. The really big banks, the investment banks of the world, don't even do mortgages, because there's not enough scale. 50 million in loans isn't even the skin cells on the pimple on the bum of international banking. Until peer-to-peer finance can build a house, shopping centre or a bridge, I don't think those multi-million dollar bonuses are in any danger.

This is a bank, just with lower overheads and accordingly lower margins.

jrockway• 17 years ago

I agree completely here.

I am also not that bitter that bank employees are getting bonuses. There are probably some really smart people solving complicated problems there, they don't deserve to be punished because the government happened to bail out their employer. (They should have just let the banks fail, if this is such a big deal.)

rapind2• 17 years ago

Huh? That's the definition of bonus!

Let's say you do a little side project for a friend's business. He agrees to pay you $1,000 regardless of whether his business succeeds or fails. To motivate you to put in more time and effort he agrees to pay you a bonus of %5 of the profits should his business double within the first year of your work completing.

Because of this percentage enticement you put in way more time and effort than you normally would for $1,000. However, his business fails completely and bankrupts him, despite your efforts. You don't get a bonus.

Now a reasonable person would understand that this is the risk you took with your time and effort. That you were only guaranteed $1,000. Any extra effort you put in was essentially an investment.

Let's say though that your friend convinced his neighboors that his business was essential to their well being and took up donations. Now instead of laying low and working hard to get his business back on track and pay off his neighboors, he start throwing bonus money around, most likely because he is also compensated via bonus money as president of his business.

This seriously works for you?

mediaman2• 17 years ago

Thank you -- I see a lot of people thinking 'banking' is all about your personal small loan from the neighborhood bank. That's like a tiny slice of the tip of the iceberg.

Most banking takes place in volume, it is done through personal contacts, and it requires substantial knowledge and background in banking to do. Anyone who has ever managed a significant line of credit, term loan, or more sophisticated instruments used by larger businesses knows that you cannot just replace it with some peer to peer model.

silentOpen2• 17 years ago

This tiny slice is important. Disruption of industries starts at the bottom and the margins. Finance's lunch will be eaten by the internet or one of its successors sooner or later.

It could be argued that the mortgage market meltdown was only possible with modern computational and communication technology so in some sense, the disruption is already happening -- the i-banks couldn't keep their newly possible hyper-risk under control.

jorleif• 17 years ago

These kinds of startups have an advantage for small loans, but for larger ones the "real" banks that don't have to carry all the money they lend (fractional reserve banking) have quite an advantage. Also, in a system where people loan directly from each other the money supply is constant. That's bad if you want economic growth, and I suppose, good if you're an environmentalist.

If you want to do away with banks you would have to somehow do away with the fractional reserve system. Any ideas on how to do that?

ThomPete• 17 years ago

Well

Things have to start somewhere. A new "financial system" will have to grow naturally to create any sort of stability, that is based on the trust in the system. And mind you your bank adviser is not really an adviser but a salesman. If you want advise on money use Mint.com.

There is nothing that hinders this kind of thinking to scale.

Microfinancing shows that there are money to be made in decentralizing where the money comes from and where they go to. It fit's perfectly into the "spread your investments" that seems to be the most stable.

To add to that, I actually think the future will bring much more small to medium sized companies than necessarily large organizations so it seems to be the right way to approach it.

movix• 17 years ago

Would this work better for niche financial markets - like angel investing for instance?

proemeth• 17 years ago

Zopa acts here as a credit agency: they evaluate the borrower's creditworthiness but the lenders keeps the credit risk. What is their incentive to do this assessment thoroughly, and how are they going to get their credibility?

The idea of cutting overhead costs is good though, like you see with online banks. Credit unions (not for profit) can be another solution to avoid banks. It is very popular in Ireland for instance.

electromagnetic• 17 years ago

I know something much, much better. It's called a wall safe, hide it somewhere no one will see it and you're golden.

huntse• 17 years ago

A lot of the bank-bashing you see in the press is purely based on misconceptions of what banks do. The truth is that for small person-to-person loans of this type credit unions (and that's pretty much all Zopa really is by the way-a fancy-pants credit union with a website) have always been able to lend on lower margins than banks.

Now come to me when your credit union can give you a $50mm letter of credit to cover a shipment of goods from Brazil to China. In Portuguese and Mandarin, please, because the supplier and customer both want to see it. See, banks do all kinds of things that most people don't know or think about.

They get paid for doing something people want.

biohacker42• 17 years ago

I think the only thing that's kept credit unions from doing that is size. If, and this is a huge IF, a credit union like Zopa can grow sufficiently large, it could do it.

fatdog789• 17 years ago

No, they couldn't, without violating their fiduciary duties to the other members of the credit union.

Don't just howl with rage. Try an idea that does away with banks altogether.

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