Peer-to-peer lending has recently gained significant media attention with the IPOs of Lending Club and OnDeck, multi-billion dollar industry leaders.

There are now hundreds of companies focused on lending via online marketplace to borrowers in the consumer, education, real estate, and startup verticals.

But, how did online investment marketplaces get their start? What were the factors and conditions that led to the creation of the industry?

The Rise of Marketplace Lending

The Financial Crisis greatly contributed to the growing demand for alternatives to the traditional banking system. After 2008, the government put strict regulations into place mandating that financial institutions hold more cash on their balance sheets. As a result, banks severely cut back on lending.

During this time, two of every five small- to mid-size businesses saw their credit lines threatened.

Around the same time, the Federal Reserve lowered interest rates to historically low levels as part of a larger program to jumpstart economic recovery, making it more attractive to borrow, but more difficult to earn a high-fixed rate of return for yield-hungry investors.

As the demand for capital grew in the years following the Crisis and investors continued to seek higher rates of return on their investments, the natural synergy of online lending was born, allowing both sides of the transaction to benefit.

The Role of the Internet

The other major factor that facilitated the rise of marketplace lending was the advent of the Internet. And, even more than that, the willingness of individuals to transact online.

Though fewer than one in 10 customers of national banks would recommend their bank to a peer, willingness to bank online has skyrocketed. Upwards of 75% of US Internet users bank online—that’s more than 50% of US adults. And this isn’t just desktop, mobile and tablet usage for banking is growing rapidly, too.

Through e-commerce, first with the sale of books on Amazon, which slowly turned into the sale of everything imaginable (and unimaginable), we’ve all gotten comfortable with making payments and banking online.

Without consumer willingness to transact online, P2P lending would not exist.

Current Status of the Space

As traditional capital sources begin to lend more aggressively again, the alternative lending space continues to see enormous demand from borrowers who are attracted to the speed, convenience, and efficiency of the online platform. According to a study conducted by four federal banks, 18 percent of all business seeking funding applied for online loans.

Capitalizing on the speed and expanded network of the Internet, lending platforms bring investors, lenders, and borrowers together with improved efficiency. Loans are syndicated electronically and can be sold with greater speed and scale then any investment handled on a one-off basis offline.

Meanwhile, getting a loan through a traditional bank still takes an average of 25 hours of paperwork, not to mention the time you wait to actually receive your funds and the in-person meetings required.

Forbes recently published that the number of peer-to-peer lending platforms has increased 175 percent annually. Similarly to how Amazon has changed the retail landscape, marketplace lending will drastically alter the way that lending and investment takes place. Instead of months of calls, meetings, and applications, borrowers can secure funding with the click of a button.

Looking Forward

In just over five years the marketplace lending industry has grown more than 9000%, closing more than $9 billion in loans in 2014 alone. Furthermore, it’s expected that marketplace lending will be a $1 trillion industry by 2025.

Though the marketplace lending industry is centered on removing the unnecessary middlemen that drive costs up and add inefficiencies, the best platforms will continue to have some sort of intermediation, but a data-driven one that vets loans in real-time and enables investors to make smart decisions.

And, since real estate is one of the largest industries in the world, it should be no surprise that it provides the greatest opportunity in the peer-to-peer space. A historically lucrative investment, real estate has generally been limited to institutions and ultra high net-worth individuals. Online portals like Fundrise have now forever changed that.

Note: See Foundation Capital’s white paper “A Trillion Dollar Market By The People, For The People” for a more detailed summary of the rise of the peer-to-peer lending industry.

Image Source: Lending Memo