Financial Literacy in For-Profit vs Pro-Social Peer-to-Peer Lending

Abstract

Fintech applications enable convenient direct access to online lending opportunities and highlight the need for financial literacy. This study examines heuristics and behavioral decisions in for-profit vs. pro-social online Peer-to-Peer (P2P) lending. The goal is to support financial literacy towards borrower inclusion and lender success in P2P platforms. More specifically, this experimental study examines 1,347 lending decisions by 449 finance students. Each participant was asked to make three lending decisions. Testimonials were used to condition participants towards either for-profit or pro-social decision making. The loan applications were identical except for a female or male headshot (vs.an icon) and reports of half the loan being raised in either 3 or 11 days (vs. 7). Data analysis shows that pro-social lenders pursue returns on investment and state a lower trust in P2P borrowers than for-profit lenders. However, compared to for-profit ones, pro-social investors underestimate the risk in P2P lending and overestimate their financial literacy. Second, pro-social investors are more confident than for-profit investors when lending to borrowers highly trusted by other lenders, especially if the popular loan applicant is female. Third, pro-social conditioning increases lending to male applicants who are less trusted by other lenders. Forth, pro-social investors who have experienced financial trauma have greater confidence in bad loan recovery. The findings assist P2P platforms and regulators by highlighting the need for balanced testimonials and transparent comprehensive data analytics on P2P sites.