A recent Fitch Ratings report shows that the peer-to-peer (P2P) digital banking space has become a billion-dollar industry and is growing fast.
The largest P2P lenders in the world include Lending Club and Prosper in the U.S. and RateSetter, Zopa and Funding Circle in the U.K. According to Fitch, the largest lenders had a total of $3.5 billion outstanding loans at the end of 2013, up from $1.2 billion a year prior.
Lending Club and Prosper control a whopping 98 percent of the U.S. market, The Economist reports, issuing $2.4 million in loans last year.
Here's how their services work: Digital brokerages match potential borrowers and lenders online. Theoretically, you can get a loan even if you're an individual or a small business. And as a lender, you can collect a tidy fee. Zopa reportedly pays its lenders 4.9 percent and charges borrowers 5.6 percent for personal loans once their applications are approved.
There are no banks involved: no overhead, and no meeting a loan officer. However, there are rumors that some big banks might consider snapping up the entrepreneurial banking platforms or launching their own for small-loan servicing.
Marketwatch reports that most P2P loans help people pay off debt and crowd-funded digital banks will have to find new markets to really expand. Where that business will come from exactly is unclear, but there seems to be growing interest.
George Abdallah used Funding Circle to open a Papa John's Pizza franchise in Los Angeles. "They offer entrepreneurs opportunities that might not be there with other lenders," he said in a promotional video. "The biggest challenge we faced in starting this business was finding finance."