How Does On-line/P2P Lending Fit Into the Consumer Credit Market

Topic & Objectives

In recent years, we observe the growth of the internet economy. That has progressively led to crowd-based” platforms that allow direct matching between lenders and borrowers. Via the so-called peer-to-peer (P2P) lending platforms the process of loan origination is given into the hands of private lenders and borrowers. The emergence of P2P credit market raises some fundamental questions that we aim to investigate with this project. How do P2P loans compare with bank loans on the dimensions of risk and risk-adjusted internet rates? How does the emergence of the P2P lending market affect the profitability and riskiness of bank loans? How does the emergence of the P2P credit market affect the aggregate volume of bank lending?

Although P2P lending is a relatively young sector, which started in 2005 with the launch of Zopa, an increasing amount of research has been devoted to the topic. The information technology nature of P2P lending grants access to granular data on credit provision and the investigation of new questions. On the one hand, by looking to the first period of this market, scholars ask to what extent consumers' characteristics impact their interest rate. On the other hand, researchers ask to what extent information facilitation and institutional design enhance credit provision. Our work abstracts from the behavioral aspects of the P2P credit market. Instead, we offer a macro-perspective by analyzing how the P2P market outcome fits into the credit market.

We examine how P2P lenders and banks compete for borrowers. We develop a simple, theoretical model of bank and P2P lending that generates three predictions we test.

Key Findings

• We find that P2P lending increases and total bank lending declines when some banks face higher regulatory costs.
• This effect is more pronounced in states where the banks that are unaffected by the regulatory shock are capital-constrained nonetheless, and where borrowers are more “aware” of Auxmoney’s existence – i.e., where these two forms of lending are at least partial substitutes.
• Auxmoney, the largest P2P lender in Germany, charges higher loan interest rates than banks.
• P2P borrowers are riskier and less profitable than bank borrowers.
• P2P lenders are not skimming the cream. Rather, they are bottom fishing when they pry borrowers away from banks.
• Risk-adjusted interest rates are lower for P2P loans than for bank loans.

Policy Implications

• P2P lending appears to be expanding with a bottom-fishing strategy that likely has positive social welfare implications because it extends credit to borrowers who were either not served by banks or being denied credit by banks experiencing an increase in regulatory costs.
• The advent of P2P lending may cause the banking sector to shrink, but also to be less risky and possibly more profitable in terms of risk-adjusted returns on assets.