Money, banking & insurance

Peer to peer lending

Zopa is a new UK company that puts individuals with money to lend in touch with people who want to borrow it. The company takes a 1% fee from the borrower for facilitating the introduction and takes a cut of any repayment insurance taken out on the loan. Lenders set their own rate depending on the risk level they are happy with and borrowers are given a credit (trust) rating based on their Equifax rating and, over time, past behaviour. Actual risks are minimised because loans are aggregated across groups of at least fifty similar lenders and borrowers (a spread bet if you like) and also because each loan is subject to normal recovery processes. Rates are set by individuals and can be changed instantly so niches like ethical or local lending can be tapped with great precision. So where does this leave the banks? At the moment Zopa is a curiosity. But if it takes off it could take out the loan sharks and ultimately some banks too unless they acquire similar companies or set up their own loan sites. Of course the idea could fail if security issues like identity theft grow or if there's a high profile abuse of the system. And don't think that Zopa is just an interesting local anomaly either. Apart from eBay, there are countless other businesses starting up on the Internet that match buyers with sellers. Another example is Betfair - which allows individuals anywhere in the world to bet against each other on anything they like.

A future financial disaster?

America is currently borrowing 75% of the rest of the world's savings and importing 50% more goods and services than it exports (Wal-Mart alone is responsible for 1% of Chinese GDP). As a result the US is issuing Treasury bonds to the value of US $600 billion per year to pay for the deficit. Is this trend sustainable? One would think not - if America was a corporation it would have been declared bankrupt long ago - but it's in no other country's interest to upset the status quo. Most of the US debt is being financed by Asian countries such as Japan and China, but if either country was to pull the plug, US dollar and bond markets would crash. This would lead the US into recession and other countries would almost certainly be sucked in too. So as Larry Summers (previously Treasury Secretary under President Clinton) once put it, we are all benefiting from a "balance of financial terror" - a system of mutually assured financial destruction. That's of course unless the US does something to antagonise China and they just pull the plug regardless.

Death and taxes

Benjamin Franklin once remarked that the only things that you can be certain of in life are death and taxes. True, but as countries face ageing populations and a simultaneous decline in fertility rates, the amount of taxes needed to pay for the ageing citizenry that is still alive has nowhere to go but up. For example, in Germany and the US the level of public debt needed to finance old age is currently 65% of GDP. By the year 2050 this figure will rise to 200% of GDP - unless someone comes up with a solution. One option is to extend the retirement age. Another is to remove state pensions and make people finance their own retirement. However, the problem with the latter is the level of debt that people are currently living with. In the US 1.6m people filed for Chapter 7 under the bankruptcy code (up 100% over the past 10 years). Under 25 year-olds are the largest group filing for bankruptcy due to the availability of credit (30% of US teenagers have checking accounts and some teenagers as young as 13 carry credit cards). It will be interesting to see whether such fiscal irresponsibility is carried through to old age.

Green loans

If you're the sort of person whose credit card has a conscience (Co-op bank - UK) or makes 'ethical' investments then this idea might be for you. A credit union in Australia is lending money to people to buy cars - and the 'greener' the vehicle the less interest you pay. For example, if you choose to buy a BMW X5 you pay 9.75%. But if you purchase a Toyota Prius the rate is just 7.54%. Moreover, the company (MECU) also promises to plant trees to soak up your car's likely carbon emissions (the less 'green' your car the more trees they'll plant). This leads us to an idea: if countries and companies are already able to trade carbon and emission credits, maybe in the future individuals will be given a personal emissions quota. You could use this yourself or, you could sell on your quota for cash to someone else - just like countries do already.

Verbal signatures on the way?

With identity theft on the rise, it's somewhat surprising that the security used by banks only goes one way. Let us explain. Banks regularly contact their customers to make special offers or return telephone calls. However, while banks require their customers to prove who they are verbally, the authentication process does not work in reverse. Hence fraudsters (for example someone in possession of a stolen wallet or passbook) can contact a customer by telephone and ask for authentication details such as date of birth and mother's maiden name. Once in possession of these details the fraudster can activate existing credit or apply for new loans. The solution could be very simple indeed. When a bank asks for a password they provide one in return. There could even be triple protection whereby they say one, you say one and then they say one back.