Which do you prefer? Keeping your money warm under your mattress or cold in a bank account? Or for more returns, do you have to accept more risk: another punt on property in a stagnant market or stocks with their inherent volatility? And anyway, what if you are already happily exposed to property and stocks?

Thankfully, there now appears another way. Something half way between saving and investing. Something which provides the predictability of a bank account, but with returns closer to those you might expect to get from long-term investing in stocks and shares.

You see our forefathers did tell in times of yore that spare money wanting a return with safety should be deposited in Ye Olde Banke or Building Societye. Whilst the interest was pathetic and anaemic, at least it was safe…ummm unless you banked with the old Barings or BCCI.

Okay, so what is this new way and why has it taken hundreds of years to come along? Well, the answer to the second part is easy: because the internet has taken so long to come along. And what is this creation? ZOPA.

Zopa lets people who have spare money to lend it directly to people, like them, who want to borrow it. Yes, I know, it sounds scary. But wait. To minimise any risk, the money each lender puts in is spread amongst at least 50 borrowers (and likewise each borrower gets their money from a number of different lenders). And Zopa will do all the work a bank would do (and more) to make sure that you lend only to borrowers who can repay their loan.

Zopa's interest rates aren't squeezed by middlemen (the banks) because there are no middlemen – that's the Zopa idea. All lending and borrowing happens in the Zopa markets. The markets work just like, well, markets. Lenders put their wares on display; in this case, money they are prepared to lend to other people for a certain length of time.

And, just like any market, different lenders may have different prices (otherwise known as interest rates). Some may pick lower rates but only want to lend to borrowers who have a very high likelihood of paying it all back. Others may pick higher rates but be prepared to be more flexible, thereby taking a punt on borrowers who might be slightly more likely to default.

Zopa manages the collection of monthly repayments and if any of that money is not paid on time, uses exactly the same sort of recovery processes that the high street banks use.

Lenders are, on average, getting better rates than savings accounts and with more predictable returns than shares. Lenders are getting an average return , before any bad debt, of 7% and to date there has been negligible bad debt. In some Zopa markets, lenders have been getting returns over 10%. Register to see the actual rates. An email address, a user name and 30 seconds is all that's required.

So who is this for? Think of savings and investments as part of your wealth portfolio. Investments with low correlations (whose prices move less in tandem with each other) reduce ‘portfolio risk' – the chance all your investments will fall together – while maintaining returns. Harry Markowitz won a Noble Prize for that discovery. The upshot is that ZOPA should be thought of as both savings and investment. It is savings because you are getting a return, but it is an investment because you are spreading risk for higher returns.

Should you?

Before giving your money to any saving scheme, or investment, there are certain commandments one must follow. I devised these and checked Zopa against the benchmark:

The 5 Commandments of Financial Trust

1. Is the company regulated?
   ZOPA is regulated by both the Financial Services Authority (to provide protection insurance to borrowers) and by the Office of Fair Trading (as a credit broker)
2. Founders' credibility: who am I trusting?
   In the case of ZOPA it is one of the co-founders of Egg and part of the team that created Egg (plus the former Credit and Risk Director of Abbey and a Legal Director from GE Money)
3. Who are their financial backers?
   For instance, First Direct would be nothing if it was not backed by HSBC. Similarly, ZOPA is backed by two of the leading Venture Capital firms in the world – Bessemer Venture Partners, who also backed Skype, and Benchmark Capital, who also backed Betfair and eBay
4. A business model followed by others?
   I do not want to put my money on the line with a business which is too innovative. Remember with Barings when before the Nick Leeson affair, the Chairman said, ‘I think we have found a new way to make money'? No. I want a business which others are copying. After all, it is my money and there is some safety in knowing the business model is not crazy. ZOPA is now being copied in the US, Germany and elsewhere.
5. How many clients/members?
   Again, there is safety in numbers. Launched in March 2005, ZOPA has over 60,000 members. Okay, I do not mind being 60,001. I would mind being member number 61 though.

So what is the take-away when faced with an innovative financial product? It meets my criteria for safety, it beats returns for savings accounts, it's much more predictable than investing in stocks and shares and it helps diversify your portfolio. Does it fit what you're after? Well, it does show you the returns – and that is the most important aspect of any saving or investment.

Alpesh B Patel