Banks face a net loss

February's profits warning by HSBC - the first in its history - sent shockwaves throughout Europe's largest bank, and throughout key financial markets all across the world.

Rising exposure to bad debts in the US led to the exits of the head of HSBC's North American arm, and the boss of its American retail business, as well as piling the pressure on chairman Stephen Green and chief executive Michael Geoghegan. But outside the financial services industry, few would have called this a crisis - HSBC still went on to post record annual profits of US$22.1bn, up 5% from 2005.

What many see as obscene profiteering by their high street banks, however, has led a small group of consumers to fight back through an internet start-up, based not far from HSBC's 44-storey London HQ.

Zopa.com, standing for Zone of Possible Agreement, aims to cut banks out of one of their most lucrative markets - lending to consumers. As an ‘eBay for cash', it acts as a matchmaker between individual borrowers and lenders that are prepared to accept the same rates of interest. Over 100,000 people now use it in the UK, and the company is set to start expanding abroad. If it hits the Middle East, it could cause shockwaves for established regional banks, many of whom rely on lending for the vast majority of both profits and revenues.

James Alexander, its CTO and co-founder, says the site could cause the same problem for banks as those facing many other companies in traditional industries - it will force them to rethink how they serve their customers.

"We don't have shiny big towers in the city and branches all over the world," he says. "But by creating this community, we remove the banks' connection with customers, because that's what they are not very good at. What banks are good at is keeping your money safe and managing payments and processes. What they are rubbish at is helping the customer."

Just like ‘asks' and ‘bids' on the stock market, Zopa's members log onto the site and say how much they are looking to borrow or lend, and at what rate of interest. Both pay a 0.5% fee on the amount of transactions. Zopa isn't licenced as a bank, because it says it just acts as a middleman - although it does perform credit checks on borrowers to help provide a more secure environment for lending.

Before launching the site, Alexander and his co-founders looked at the huge success of online marketplaces like eBay, and how bond markets where big companies can trade debt could be adapted for individual consumers.

"We looked into why people were unhappy with the way banks were dealing with their money," he adds. "People were saying that investing felt a bit like gambling, that they didn't feel connected with their money or understand what it was being used for, and that banks didn't really understand their lifestyles."

For borrowers, Zopa offers an opportunity to obtain money at lower rates than those they can secure from traditional sources.

Borrowers can get loans of between US$2000 and US$50,000, while lenders can put up between US$1000 and US$50,000. A three-year loan of US$5000 has a typical APR of 6.3%, cheaper than most high street banks in the UK.

Alexander adds that there is more flexibility for people borrowing cash. "You can pay your money back at any point and not have to pay for it," he says. "One of the things that really upsets borrowers is that you get charged by the bank if you pay your loan back early. Many people think that's ridiculous."

For lenders, the site also offers an attractive alternative to traditional products.

According to Zopa, the average return for lenders is 7% gross, although you can earn a lot more depending if you are prepared to take on more risk. The site is also positioning itself as a means to provide balance in an investment portfolio.

"The more sophisticated people are looking at Zopa as just another asset class," says Alexander. "It isn't better or worse than property, cash, equities or anything else - it's just different. And for the first time, consumers are able to invest in the most profitable part of the banking industry. Banks make a lot of their profits on consumer lending, but Zopa allows lenders to access that market directly."