Several veterans of the British online bank Egg PLC have started an innovative person-to-person lending Web site, Zopa.co.uk, and plan to expand into the United States.
The idea is to match people who want to borrow with people with money to lend.
"The model has existed for centuries," said James Alexander, the chief financial officer of Zopa Ltd. "It's what people do in families; it's what communities do."
Mr. Alexander was Egg's strategy director. Three other people on Zopa's management team came from Egg, including Richard Duvall, its chief executive, who led the team that created Egg and was its first chief marketing officer. There is no business relationship between Egg, which is mostly owned by Prudential PLC, and Zopa.
The U.K. site went live March 7. Zopa takes its name from "zone of possible agreement," the place where two parties in a negotiation can find common ground.
Zopa considers its lenders investors, Mr. Alexander said. "Investing today is a bit like gambling," he said. "What we were looking for is something much more tangible."
No one may lend or borrow more than about $47,800 through Zopa. Those who put up money must specify the rates at which they are willing to lend it and what credit rating the borrower must have. The money is pooled so that no one borrows more than $383 from a single lender.
"You're investing in a portfolio," Mr. Alexander said.
The limits also are designed to avoid friction with regulators. The company warns on its Web site that investors who offered more would violate British laws against lending without a license and producing unenforceable loan agreements.
Because the business is run through the Internet, it can work anywhere, Mr. Alexander said. "Our viewpoint is the model is as applicable in the U.S. as it is in the U.K.," he said, and though the company is still new, it already has people working here to determine the state-by-state regulatory requirements.
Mr. Alexander said that it is still too soon to determine when Zopa will move to the United States, but that this would be its first choice for expansion. The company already owns the domain Zopa.com, which today mirrors the content of Zopa.co.uk.
U.S. banking law is "quite a complicated issue" for Zopa, Mr. Alexander said, "because it's not only a federal issue, it's a state issue." Zopa may need to impose different constraints based on the requirements of each state, he said - but "I'm pretty confident we're going to find a way through it."
Catie Marshall, a spokeswoman for the New York State Banking Department, said that in New York State, for example, "the general rule is loans and forbearances can be made by anyone or to anyone at 16% or less," although there are exceptions. However, if the agreement is made online, rules governing money transmission also come into effect, so the general rule may or may not apply to Zopa in New York. "The answer is there is no answer yet," she said.
Zopa makes money by charging the borrowers 1% of the loan amount. Those who default will be referred to a collection agency.
The U.K. site signed up more than 5,000 users, split almost evenly between lenders and borrowers, in its first week of operation, Mr. Alexander said.
By Wednesday morning, Zopa's site said it had over 7,000 members, and just over 2,500 eligible borrowers. Mr. Alexander said more borrowers are in the process of completing credit checks and setting up direct debits, so they are not listed yet as eligible borrowers.
Alenka Grealish, who manages the banking group at the Boston market research firm Celent Communications LLC, said Zopa is attempting to replicate on the Internet in a "fragmented" and "informal" form a business model that works in the offline world.
Offline, for example, brokers put wealthy investors in touch with prospective borrowers, such as independent filmmakers who need funding for their next project, she noted. But the human element is an important factor, Ms. Grealish said.
"The broker, in part, does some due diligence. Occasionally the lender might get screwed with a fraudulent loan, but they rely on brokers they trust," she said.
Gwenn Bezard, a research director at Aite Group LLC of Boston, said that in some countries person-to-person lending is "really a more prevalent form of lending than banking."
He compared Zopa to the person-to-person auction Web site eBay Inc. of San Jose, which has become a huge force in online shopping. "eBay has not invented the free market," Mr. Bezard said. "They just brought it online."
Mr. Bezard said the Zopa model could work in the United States, and said that consumer finance is a very profitable industry. "Any industry that is highly profitable is set for a new type of competitor and a war over the rates," he said. If it works in the United Kingdom, "I think it could work anywhere, in any country."
But bringing P-to-P lending online eliminates a lot of the benefits, Mr. Bezard said. In particular, he said, "you borrow from your family because the terms are going to be flexible, and that's an important point."
Ms. Grealish said part of Zopa's potential is that it may court borrowers whom banks have ignored.
"Banks, just by the fact that they're regulated, are conservative," she said, "so they tend to miss out" on unconventional-but-profitable products.
