Banking goes back to the future

Banking is about to face the kind of social transformation credited to so-called Web 2.0 services like Myspace and You Tube, according to a new study.

The reason is that the web facilitates a return to one of the oldest forms of financial service… social lending, which had its heyday in Britain in the 19th century with the growth of the Friendly Society, a kind of savings pool people could draw on in times of need.

Social lending has re-emerged in the form of several online schemes such as UK-based Zopa, which was started by a group of former executives from the Egg online bank, which allows some members to borrow money invested by others.

Three in four people in Britain would consider bypassing banks in this way, according to the study, Internet-based Social Lending, from the Social Futures Observatory .

About the same number believe that financial institutions should be more open about how they invest their money.

Professor Michael Hulme and Collette Wright, authors of the study, say in an executive summary that they believe the relative transparency of social lending establishes a relationship that goes "beyond the merely transactional".

By contrast the lack of transparency in formal banking leads to a perception of bad faith, they say.

People borrowing from social-lending schemes are more likely to repay the money because defaulting could mean fellow members lose out.

The authors say mainstream financial service are "structurally dependent" on bad debt because it enables them to charge additional interest. Traditional banks "tend to be perceived cynically because their fincial model is permeated by the need to put people into debt".