Richard Duvall - Founder of Zopa Borrowing Exchange

Turning revolutionary ideas into reality is Richard Duvall's trademark. After co-founding online bank Egg, he's switched his attentions to a pioneering online lending exchange called Zopa.

Richard Duvall takes a seat, fixes a point somewhere on the wall ahead of him and begins an unprompted monologue on his specialist subject, "freeformers". He looks relaxed, perhaps well rehearsed, leaning so far back in his chair it might as well be a sun lounger. Freeformers are, he says, a new type of consumer-tired of institutions, more inclined to go it alone, less inclined to worry about it-a consumer who thinks just like an entrepreneur.

Richard Duvall - Founder of Zopa Borrowing Exchange

Duvall is the entrepreneur who thinks just like a consumer, a self-styled champion of consumer causes who talks of his "desire for change that really helps people in their lives". Ideally he'd like to help freeformers. His market research has identified six million of them-and they are all potential customers of his latest venture, Zopa.

Zopa is an online loans exchange, allowing people who want to lend money to be matched with those who want to borrow. It cuts out the middle man-the bank-so lenders, in theory, can expect a better rate of return and borrowers should get a fairer hearing. Zopa takes a one per cent cut of the borrower's loan amount.

Duvall, who co-founded online bank Egg, says his target customers are sick of banks taking everything and explaining nothing, particularly when it comes to credit risk. "Banks have a 20th century model of your money," says Duvall. "They look for financial stability; the indicators being job, home ownership, continuity. We don't take that view, as long as you pay the money back."

That isn't to say that Zopa credit checks are soft. But they are designed to be more rounded, more thorough perhaps, than the banks' checks. Duvall says they are designed to include people who don't conform to normal financial stereotypes. "If you are a freelancer or you are self-employed, we are likely to take a much more constructive view of you than a bank would do," says Duvall. "We ask you about cashflow and other sources of income, we ask you about your financial assets, we ask you about your attitudes to money-all sorts of things that a bank won't typically ask."

Duvall's financial know-how was sharpened at Egg, Prudential's phone and internet banking spin-off, which he co-founded in 1998. At the time, the press found the whole concept laughable-until a combination of generous interest rates and the site's ability to allow the user to manage the movement of their own money prompted a flood of enquiries, causing the website to crash repeatedly under the strain.

Egg managed to sustain the early interest, but eventually Duvall decided he'd had enough of the corporate way of life. "It was the longest job I'd ever had," he says. "I wanted to do something else, change my lifestyle. I didn't use this phrase but I wanted to be a freeformer, I wanted to have time and space to think and to appreciate my children and to talk to people. I had an idea that we were living in a very different society and I wanted to go and experience it."

In 2003, with the help of two other Egg executives (strategy director James Alexander and group strategy manager Dave Nicholson) Duvall set up a market research company. After some pretty exhaustive field work-"we lived with a load of them for four days"-Duvall and his team concluded that there were quite a few freeformers about. "They had much less of a spending model of money and much more of an asset model of money," says Duvall, "so whether or not they ran their own business, they treated their money as perhaps a small business might."

It was only after a suggestion from one of the research volunteers that the team came up with the Zopa concept. "There was an 'are you a man or a mouse' flavour to the question, so we went away and started working on the business model," recalls Duvall. Zopa launched in March this year, grabbing quite a few headlines. Duvall's PR agency, Sputnik, had predicted there would be enough coverage for around 3.5 million people to read about Zopa. In the end, the story spiralled, offering the opportunity for around 200 million people to read about it.

Duvall claims the coverage was at least 80 per cent positive. This should be taken with a pinch of salt. For a couple of weeks in March it seemed that consumer groups, debt charities and finance experts were queuing up to highlight the added risk of the Zopa model. Many pointed out that the reason people use banks is to lower their exposure to risk. But Zopa does address this concern. It spreads lenders' money among at least 50 different borrowers, with a £200 maximum exposure to each. Lenders can also choose their exposure to risk, lending money to Category A borrowers, with a higher credit rating, or Category B borrowers, with a slightly lower credit rating.

Critics were also quick to suggest that Zopa's rates weren't quite as competitive as they could be. Duvall responds by pointing out that much of the criticism came from the same camp. "It wasn't banks, building societies and credit-card companies," he recalls, "it was financial experts and intermediaries. The guy from [Richard Mason] gave one quote that got taken and taken. But intermediaries aim to make money by advising people on the best financial product to buy. Zopa's aim is to make it so transparent that we don't need a whole industry of intermediaries. These people have a vested interest."

"Intermediaries make money by advising people on the best financial product to buy.
Zopa's aim is to make it so transparent that we don't need a whole industry of intermediaries"

Mason told various publications he couldn't see a benefit for either borrower or lender. "Personal loans are an already highly competitive product in a market where rates are at historic lows," he said. "I can get rates over five per cent from a selection of top-ranking institutions where I have the protection of the Bank of England Deposit Protection Fund." Christine Ross of private bank SG Hambros agreed with him: "You can receive more than five per cent from the best savings accounts for almost no risk. With Zopa you are taking a step into the unknown." Duvall refers to the average unsecured lending rate to defend his borrowing rates. "There are some fantastic headline, loss-leading rates, but the average is 10.6 per cent. Zopa at the time of the press coverage was around sixes and sevens." Zopa currently offers Category A borrowers £1,000 at 5.5 per cent, £3,000 at 5.9 per cent, or £5,000 at 6.2 per cent. "These are fantastic rates," says Duvall.

Zopa is backed by Benchmark, the venture capital outfit behind eBay and Betfair, which uses similar models to Zopa. Essentially it relies on the internet to create an exchange between buyer and seller. Benchmark's Johan Brenner, also Zopa's chairman, says that when start-ups reach the right size they experience "a catapult" in growth potential. "When that is, I don't know. We've had more attention than we could have dreamed about, but it's going to take a number of months to see how big [Zopa] can become," he says. Big enough for Brenner would be around one or two per cent of the £60bn UK loans market, but the model could also work in other countries.

The potential is huge. And with such strong backing from such a renowned capital source, you might expect Duvall to want to position Zopa as a threat to the structure of traditional banking. But he is surprisingly uneasy about mounting too fierce a challenge. "We're not trying to conquer the world, but there's a gap here," he says. "There are some people that have a need that's not being met-they're not happy with what they're getting. What we're trying to do is provide them with something that makes them happy." But it's a disruptive technology, isn't it? "Our objective isn't to disrupt banking," says Duvall. "It's a big, powerful market, no doubt with lots of happy customers. Equally there are some pretty unhappy customers and those are the people we want to help."

But in helping those who want to be helped, an aggressive model such as Zopa will find it practically impossible to avoid altering the traditional platform on which the financial world is built. The more Duvall explains the Zopa concept, the more he helps to pull the traditional financial model apart. His speech is littered with examples. "The credit industry makes billions and billions of pounds [of] profit and I think they should do better." Or, "The advisers make their money by taking you through this maze of complexity, and the financial organisations make their money from dirty tricks and penalty clauses that you didn't know existed. I would like to see a simpler world where these things don't exist." Or even, "Zopa's ambition is to remove product managers from the equation-with Zopa you are your own product manager, you make your own financial products."

Whatever its true ambition, Zopa is steadily building up a loyal following. It already has 25,000 members, with a ratio of 60:40 in favour of borrowers. There is currently around £3m worth of lending on offer-the higher this figure goes, the better the borrowing rates will become. Zopa has signed an advertising deal with The Guardian-surely a sign that Duvall is going after the numbers. But rather confusingly, he tries to deflate that perception. "Zopa is not for everyone," he says. "It's for people who want to deal with real people. Eighty per cent of our borrowers say they'd like a good rate, but their main motivation is that they'd rather pay interest to real people than pay it to a bank.|

From physics to finance -:

1962 Born Hythe, Hampshire.

1983 BSc(Hons) Physics & Electronics, London University.

1983 Joins GEC Hirst Research Centre as a Telecommunications Research Engineer. Develops speech compression system.

1986 Joins Logica as head of a team evaluating the security of networked systems.

1987 First of three positions at Coopers & Lybrand. Joins as an IT consultant before becoming director, Information Systems and Financial Services Practices, then establishes a retail financial services consulting practice.

1998 Co-founds Egg as launch director, before becoming chief marketing officer.

2003 Leaves Egg to undertake a research project with socio-economists to identify possible consumer trends of the next 20 years.

2005 Co-founds Zopa.

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