If you want to earn more interest from your savings, or pay less to borrow money, here's a wonderful way to dodge the banks.
Britain's banks are among the most profitable in Europe, if not the world. Indeed, the UK's five biggest banks (HSBC, Royal Bank of Scotland, Barclays, HBOS and Lloyds TSB) made a combined pre-tax profit of £33.5 billion last year, which is an all-time record.
One reason why British banks are so profitable is that they are merciless middlemen. They pay inferior rates of interest to savers, while charging borrowers sky-high rates of interest. For example, according to independent financial researcher Moneyfacts, a typical savings account pays annual interest of less than 2.7% a year before tax. Quite frankly, with the Bank of England's base rate currently standing at 4.75% a year, it's clear that many savers are being taken for a ride!
Several of these super savings accounts pay 5%+ a year before tax!
What's more, millions of borrowers are being taken for a ride, too. For example, slipping into the red without permission can led to paying punishing rates of interest (up to 35% a year!) and fees on unauthorised overdrafts (see The Best And Worst Current Accounts). Is it any wonder that public confidence in British banks is hitting record lows?
Of course, there are several alternatives to banks: for example, the building-society movement is thriving. With total assets up 13% in 2005/06 to £279 billion, the UK's 62 building societies are the banks' main rivals. What's more, building societies generally offer better deals to their customers, because, as members of mutual organisations, savers and mortgage borrowers actually own their societies.
Another option is to join one of six hundred or so different credit unions, which are mutually owned, community-based, not-for-profit financial co-operatives. Credit unions take deposits and grant loans among people with a common bond, such as those who live or work in a particular area, work for a particular employer, or have the same occupation.
The third option (and my personal favourite) is to cut out financial organisations altogether and deal directly with people who want to lend or borrow money. Doing this in the real world would be prohibitively expensive. However, thanks to the wonders of the Web, you can now borrow from, or lend to, individuals via online lending exchange Zopa.
The Zopa concept is simple: people with cash to spare become lending members who lend money to those who need it (the borrowing members). So, rather than saving with, or borrowing from, a bank or other organisation, you deal with a large group of individuals, each of whom chips in a few pounds at a time. Naturally, Zopa needs to make money, too, so it charges a fee of 0.5% to both borrowing and lending members, plus it makes money from selling loan insurance to borrowers.
Since its launch eighteen months ago, Zopa has grown rapidly, and now has over 100,000 members, which is "bigger than Basildon" (population: 99,876)! What's more, direct person-to-person lending is heading Stateside, with Zopa US poised to open for business very soon.
In addition, Zopa won "Internet Innovation of the Year" at the 2006 CNet Technology awards (the online Oscars, if you will) and was named by American magazine Business 2.0 as one of the eleven most disruptive companies in the world. British banks must be getting seriously worried about Zopa's success!
Anyway, as I explained in How I Opened My Own Bank, I'm such a fan of Zopa that I became a lending member in March, known as "BankOfCliff". I'm so pleased that I've lent a few grand to sixty-nine people at decent rates of interest, and kept them away from greedy banks! However, my interest is not entirely unselfish, because I earn a much higher rate of interest by lending via Zopa than I would by keeping this money on deposit. So, everyone's a winner with Zopa, the "eBay for money", except the banks and their shareholders, of course!
This article is dedicated to the memory of Richard Duvall, founder of Zopa (and Egg, the world's largest online bank), who died last week after a short illness, aged 44. He will be sorely missed by all who knew him.
Disclosure: Cliff owns shares in HBOS and Lloyds TSB.
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