UK startup Zopa aims to offer the equivalent of eBay for financial services. Instead of buying and selling goods, however, Zopa members lend and borrow money - with interest. Zopa itself profits by taking a small cut.

James Alexander, chief financial officer, and Tim Parlett, chief technology officer, shared their vision with IT Week.

IT Week: Most online finance ventures, including Egg and Cahoot, are backed by established organisations. Is Zopa different?
James Alexander: Definitely. Zopa was set up by three people who left Egg at the same time to create a new business. We did some research and the idea for Zopa popped out of that. [Zopa chief executive] Richard [Duvall] was the guy who came up with the idea for Egg, and although it was backed by Prudential, it really was just a tiny project to begin with. There haven't been many financial startups because they typically require a lot of capital, and a lot of that cash is tied up because of the regulation of financial services, which is a massive barrier to entry. Zopa, by contrast, is a very low-capital model.

IT Week: How do you operate?
Alexander: All we are doing is connecting lenders with credit-worthy borrowers, reducing the cost of the middleman to ensure everyone gets a better deal. Consumer lending is currently the most profitable bit of the banking industry - where the banks make all their money. The top five UK banks last year made £10bn from it in the UK alone, which equates to about £415 per household. That's profit, not turnover. Which explains why four of the FTSE top five are banks.

IT Week: How did the idea for Zopa arise?
Alexander: We were interested in how consumer attitudes are changing, because we wanted to create a business that would fit into the future, rather than just doing something faster or cheaper. We worked with ethnographers and social economists, looking at macro-economic trends and how technology affects society, government and regulation. We got very interested in a group of consumers we call free-formers - people categorised by self-reliance. They've given up on trusting corporations, government, and other institutions. They're more likely to be freelancers, or have double incomes, or move jobs more frequently. We now have 76,000 UK members of all ages and income brackets, but most are looking for an alternative to traditional banking.

IT Week: Zopa is regulated by the Financial Services Authority, but the regulation only relates to selling repayments insurance. Why not the core business?
Alexander: We want to be regulated - it's in everyone's interest. But we can't be regulated as a bank, because we aren't one. Before we launched we went to the FSA and said, can you tell us what we are? And in short, the FSA said you're nothing to do with us. Instead the Office of Fair Trading said they'd regulate us as a credit broker. We've also joined all the relevant trade bodies, such as the Finance and Leasing Association, and Cifas - the UK's central fraud register.

IT Week: How does each individual lender escape FSA regulation?
Alexander: The Consumer Credit Act was written in 1974, when no one had a clue that something like Zopa would come about. You need a consumer credit licence if you are (a) lending in the course of a business and (b) lending more than occasionally. We sought legal advice, which is why we have a £25,000 cap [for loans]. It produces interest too low to be called a business. But from July we will remove that cap and allow Zopa lenders - should they wish - to obtain a consumer credit licence, and lend as much money as they want.

IT Week: Borrowing is currently capped at £15,000. Will I be able to get a mortgage from Zopa one day?
Alexander: Possibly. We have no plans, but there's no reason why the model couldn't be extended to other areas of banking, be that mortgage, or credit cards, or cross-border lending, or even insurance. I think this model will continue to roll out - it's inevitable.

IT Week: How do you compare with US person-to-person loans startup Prosper.com?
Alexander: We're delighted that Prosper exists - it's more evidence that there is a market. What Prosper has done is to really bring alive the community aspect - it's very people-led. Over the next few months we are going to dial-up the experience of social reward at Zopa. But the main difference currently is that Zopa takes on an underwriting role. We work with all three of the UK's credit bureaus, and risk-assess every borrower ourselves. Plus we also automatically diversify lending across at least 50 borrowers. Prosper, by contrast, says it will share information with lenders and let them make their own decision. In our view the man on the street doesn't have a clue about assessing risk. Over time there might be merit in moving to a sort of open-source credit assessment, but at the moment it's much too risky. Our default rate, after 15 months, is less than 0.05 percent, whereas the Alliance & Leicester's personal loan default rate last year was 5.1 percent. So our underwriting is very rigorous. We also offer a guarantee against losses due to identity theft.

IT Week: Zopa is gearing up to launch in the US. Will the fact that the US allows patents on business methods be a problem?
Alexander: Fortunately we've already done that - for key parts of [our business processes]. But any international expansion is hard, particularly for a young company.

IT Week: There aren't many UK startups that then take on the US. Is it harder this way around when in comes to, say, access to venture capital?