Online saving: Finding the highest rate for your cash
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Thursday, 13, Aug 2009 06:56
Websites that empower investors are being pushed into the spotlight after bank crises and drastically low interest rates have shaken consumers to the core.
Sites such as Zopa and Licuro could prove to be an important step in the evolution of finance.
Not only are users in line for better deals but they are on the forefront a major shift in attitudes toward traditional banking institutions.
Kelly Gilblom looks at how these sites work what they mean for the future of saving.
Zopa functions as a peer-to-peer lending site - the first of its kind. Anyone can sign up to either lend or borrow money.
The site places borrowers in four categories ranging from A* to C based on their credit rating. Lenders choose the amount of money they want to loan, what type of person they want to loan it to and what rates are acceptable.
Zopa then mediates by making the two groups visible to one another and ensuring the security of the deal.
"It's very pure. It's literally people lending to other people. All we're really doing is bringing people together," said Zopa spokesperson Martin Campbell.
The borrowers then browse the loans available to them and if they find something they like, a deal is made.
Hence the name Zopa - which stands for 'zone of possible agreement' - an American academic term that describes the area which two party's appetite to form a deal overlaps.
Zopa also minimises the risk of default to the lenders. Since the return is not guaranteed like in a savings account, the group spreads lenders' money across at least 50 borrowers.
"It's there to make sure if someone defaults there is less risk. Amongst so many people usually just one or two default so the net effect is really quite small."
However, lenders are now starting to report a rise in defaults - across all categories - prompting greater caution.
Licuro works in a similar way but without completely surpassing financial institutions.
Investors sign up to the website for banks and building societies to bid on their money. The best rate they are offered is the rate they choose but are under no obligation to choose any at all.
The site helps the user find some of the best rates on the market without having to do the actual shopping around. Its service in Denmark sees the equivalent of over £200 million each month deposited.
MaxBips also offers a similar auction service for individuals.
The bottom line for borrowers of both Licuro, MaxBips and Zopa is the interest rates are displayed side-by-side in a short amount of time. Not only is the process simpler and more convenient, but it gives the user an idea of whether they're losing money by choosing a poorer rate.
It is worth noting for MaxBips and Zopa it is necessary to pay a subscription to sign up to the rate auctions.
Is this a good alternative to traditional saving?
As with any financial tool,these sites are not ideal for everyone.
As banks fall subject to the Bank of England's interest rate regulations, credit-worthy individuals may not be getting the loans they normally could. Zopa allows them to not only secure loans, but to do so at a better rate.
"We are tough about who can borrow, customers must be credit-worthy. Though this is a great place for people with a good credit record to turn," said Mr Campbell.
However, those looking for a loan with Zopa chance facing disappointment as there are times when the advertised rates that attracted them are not actually available.
Also, lenders are taking a greater risk than they would by depositing their money in a normal savings account, as borrowers can default.
"Lenders should recognize what they're doing. Rates are attractive because there is a default risk. However, the message is very overt. We stress it as a risk before anyone ever lends money," he continued.
Despite the fact that borrowers on the site have missed payments in the past, investors are making returns of 8 per cent annually on average. And no one has ever received a return rate less than the one they signed up for.
For both parties, the willingness to take on a bit of risk can have big rewards.
"We haven't shifted competitively. The rates at banks have steadily gotten worse. So what was a slightly better rate with us before is now an enormously better rate."
He continued: "An added advantage is Zopa is it's free of redemption penalties so there's no punishment for paying back a loan early. The only other institution with this practice is the Post Office."
For those who are a little hesitant to venture out and sidestep banks and building societies altogether, Licuro may be a reasonable alternative.
It mostly saves users the time of trawling round the high streets for the best rates, especially if they want to spread a large deposit.
The best rates are given to those who invest larger sums of money.
"At the moment, we suggest that the Licuro system will procure the highest interests for people who can deposit more than £30,000 - though of course the rates are driven by the participating banks and building societies rather than Licuro," said the company's spokesperson.
Currently, the site only has six participating banks and building societies - with just three UK-based providers - so it is possible to miss out on the best rates if a saver solely relies on Licuro's results.
However, the site is in the process of incorporating more lending institutions, making the banks and building societies more competitive as they seek out new investments.
MaxBips also has a minimum deposit of £30,000, and offers a larger panel of deposit takers numbering 23.
The emergence of Zopa, Licuro and other websites of their kind are characteristic in an overall shift in lending attitudes.
Customers' trust has fallen off a cliff after the nationalisation of Northern Rock and the support given to RBS and Lloyds Banking. Also, credit is increasingly difficult to come by- factors that have pushed fringe players like Zopa into the forefront.
"The credit crisis has been a huge advantage for Zopa. We went from being a niche player to being more mainstream," said Mr Campbell.
"Customers could see through the credit crisis that the money they deposited in the bank wasn't sitting in a safe somewhere. It was out being gambled in all sorts of ways. That's all going to play into the appeal of Zopa. Users know exactly where there money is down to the person lending it to them.
Mr Campbell believes the need for trust will soon be replaced by the need for transparency.
As for the future, the actions of banks and building institutions over the next two years will widely determine the success of peer-to-peer lending sites and money auctions.
If banks return to their original function of bringing together those who want to invest extra cash and those who need it, online financial networking may see a real dip in popularity.
"If a few players break from the pack and make a genuine movement away from profit margins and the bottom line that may cause a decrease in our rate of growth," said Mr Cunningham.
However, if traditional lenders continue to frustrate investors by leaving them in a haze, Licuro and Zopa have room to soar.
Though it's too soon to say what impact these websites will have on the greatermarket, an increase in lending and borrowing likely indicates better times ahead.