Marketplace Lending Research Articles

How the Economic Policy Uncertainty (EPU) impacts FinTech: The implication of P2P lending markets

This study investigates the impact of state-level Economic Policy Uncertainty (EPU) on FinTech lending marketplace. Leveraging two large-scale Peer-to-Peer (P2P) datasets of LendingClub and Prosper from 2010 to 2019 alongside the news-based EPU index, we unveil a causal relationship between the EPU and both the interest rates and loan amounts. Economically, a one-standard-deviation increase in EPU causes 4.49 and 8.90 basis points change in P2P loan rates, and 1.56% and 1.28% variation in loan amounts, for LendingClub and Prosper, respectively. Furthermore, the national-sourced EPU has a relatively stronger effect on LendingClub, while the state-sourced EPU imposes more impacts on Prosper.

Bridging the credit gap: The influence of regional bank structure on the expansion of peer-to-peer lending

This paper investigates the extent to which the regional credit market structures, characterized by the presence and lending capacity of traditional banks, shape the growth of online lending marketplaces using peer-to-peer (P2P) lending data. Using an instrumental variables (IV) approach, our study suggests that areas underserved by traditional banks witness more significant growth in P2P lending. This impact is more pronounced in regions with a lower presence of small bank outreach. Furthermore, we find that an increase in P2P lending is associated with a reduced risk of borrower default. Our findings also show that the expansion of online lending marketplaces positively impacts borrowers’ financial well-being by improving their credit scores.

The Implementation of Investment Risk Management in Sharia Capital Market

The Sharia Capital Market has recently increased as an investment vehicle that complies with Islamic sharia principles. However, as with all investment forms, some risks must be managed carefully. This paper describes the context, urgency and process of investment risk management in the Sharia Capital Market. The Sharia Capital Market complies with sharia principles, including the prohibition of usury and haram business. The risks investors face include business, market, sharia, and liquidity risks. Risk management supports sharia compliance, protects investments and maintains portfolio sustainability. The risk management involves identifying, assessing, developing strategies, implementing, and monitoring risks. By understanding and implementing risk management well, investors can achieve their investment goals more successfully in the Sharia Capital Market. In the financial world, investors must pay attention to investment risks before deciding to avoid losses. The meaning of investment risk also needs to be studied and understood by investors so that investors do not feel cheated and believe in 'profits and losses' when choosing the type of business to invest in and then be able to learn from the business they are running. We will discuss the technical aspects of investment risk management below later. Apart from understanding investment risks, investment stages can also be known from the financial institution investors choose. For this reason, ask about the stages of investing before you disburse funds. One type of investment that is interesting for investors is peer-to-peer. Unlike traditional financing methods, Peer-to-peer (P2P) lending uses lending marketplace and scoring technology. This means that investment risk becomes measurable and suitable for investors. The funds that have been collected will be distributed to micro entrepreneurs and SMEs who need financing with investors who want to fund these businesses. Investors who have invested their funds using a peer-to-peer lending system will not need to worry about investment risks because later investors will get appropriate returns based on consideration of the investment risk profile.

Unpacking the effects of scams in marketplace lending: investor confidence and attention

ABSTRACT Both transformational and problematic platforms, corresponding to moderate and severe scam conditions, are considered abnormal in Chinese marketplace lending. This paper examines the impact of scams in marketplace lending on investor confidence and attention. We find that as the abnormal platform ratio increases, lenders are more likely to lose confidence and withdraw investments. They also become more concerned about the risks associated with marketplace lending and the entire industry. These effects are primarily driven by severe scam conditions. Additionally, the effects of severe scam conditions on investment withdrawals and industry-related news searches are contemporaneous, while there is a lag in the effects on searching for risk-related news. Furthermore, we also find that regulatory policies enhance individual sensitivity to severe scams, and severe scams result in greater capital outflows in first-tier regions and more significant levels of panic in other regions.

Lighthouse in the Dark: Search in Marketplace Lending

Lighthouse in the Dark: Search in Marketplace Lending

Default Data Manipulation in Marketplace Lending

Default Data Manipulation in Marketplace Lending

Promjena arhitekture financijskog sustava pod utjecajem tržišta fintech-a

In the past seven decades, especially since the Global Financial Crisis, the financial system’s architecture has changed significantly around the world. New financial market entrants, such as fintech start-up companies, offer financial products and services more efficiently than established financial institutions (especially banks and insurance companies), bypassing the regulatory requirements established intermediaries must comply with. Despite the heterogeneity in the fintech concept, we use this term to consider innovations in financial products and services based on emerging information and communication technologies (i.e., information technology and mobile connectivity) as solutions that are changing the financial structure worldwide. Although the share of new participants in the financial system is rather small compared to the incumbents, fintech innovations are continuously advancing (e.g., crowdfunding, marketplace lending, cryptocurrencies, copy trading, robo-advice, insurtech, etc.), and their share is growing fast. This paper provides an overview of the fintech market and its impact (actual and potential) on the financial system’s architecture based on a comprehensive review of the theoretical and empirical literature.

Fintech vs bank credit: How do they react to monetary policy?

Fintech credit, which includes peer-to-peer and marketplace lending as well as lending facilitated by major technology firms, is witnessing rapid growth worldwide. However, its responsiveness to monetary policy shifts remains largely unexplored. This study employs a novel credit dataset spanning 19 countries from 2005 to 2020 and conducts a PVAR analysis to shed some light on the different reaction of fintech and bank credit to changes in policy rates. The main result is that fintech credit shows a lower (even non-significant) reactivity to monetary policy shocks in comparison to traditional bank credit. Given the still marginal – although fast growing – macroeconomic significance of fintech credit, its contribution in explaining the variability of real GDP is less than 2%, against around one quarter for bank credit.

Decentralized trustworthiness score management with smart contracts on the trustlend platform

AbstractThe personal lending marketplace, known as Peer‐to‐Peer (P2P) lending, has increased globally. However, providing unsecured loans to peers without requiring collateral remains a challenge. A platform called TrustLend is proposed to enable trustworthy transactions in the personal lending application. The platform attempts to eliminate or minimize the collateral requirement. The trustworthiness score adds to this platform's variable selection rules and can help lenders decide on reliable candidates as borrowers. The prototype implementing the TrustLend platform based on Ethereum smart contracts that use the trustworthiness score is also described and it is illustrated with a Decentralized Application (DApp) case study and customized smart contracts. The prototype demonstrates fundamental features and supports borrowers, lenders, and recommenders in establishing proposals and approvals. Finally, the prototype shows how end‐users can easily access loans with reduced collateral without hidden costs and swift transactions.

The real effects of financial technology: Marketplace lending and personal bankruptcy

We examine how financial technology affects households in terms of personal bankruptcy by leveraging exogenous variation in marketplace credit supply to Connecticut and New York residents. We document a persistent rise in bankruptcies in the affected states following sharp decreases in marketplace lending, particularly among low-income households and in areas where marketplace loans for financing medical bills are severely rationed. Borrowers’ indebtedness or local economic conditions do not explain the results. The supply of other consumer credit by banks and finance companies remains unaffected, suggesting that the observed increase in bankruptcies arises principally from reversing access to marketplace credit.

Banking competition and the use of shadow credit: Evidence from lending marketplaces

The purpose of this study is to determine whether banking competition can affect the creditworthiness of borrowers relying on shadow credit. Upon analyzing the granular data from a leading online lending marketplace in China, we discover that marketplace borrowers from concentrated banking markets are generally more creditworthy than those from competitive banking markets. This phenomenon is more pronounced when new banks contribute to competition in the banking market and when borrowers are young or new to the marketplace. These findings suggest that borrowers may migrate from banks to lending marketplaces when the banking market is concentrated and that banking competition can improve the financial inclusion of individuals and households through relaxed credit checks.

MSMEs meet FinTech: Chance or challenge?

This paper studies the impact of micro-, small- and medium-sized enterprises (MSMEs) status in marketplace lending. Using data from one of the most prominent Chinese online lending marketplaces, we find that MSMEs borrowers are less likely to obtain loans and usually set lower interest rates, larger loan amounts, and shorter loan maturity. We also find that MSMEs borrowers tend to miss their repayments and attract lower bid ratios from lenders. Taken together, our results reveal that online marketplace lending is a chance for MSMEs to obtain funding, but its inclusion is limited.

Evolution in the Consumer ABS Market (Past, Present, and Future)

The consumer ABS market provides a large and growing source of funding to the US economy. Historically the market consisted primarily of auto loans, credit card receivables, and student loans. Over the past decade, esoteric ABS issuance has proliferated, as more markets are able to securitize cash flows to unlock a lower cost of funding relative to comparable corporate alternatives. Sectors that did not exist 10 years ago have grown to be large and liquid market sectors, including marketplace lending, solar, PACE, and consumer handset receivables. This trend has been aided by a pullback in bank lending, driven by post-Great Financial Crisis (“GFC”) regulation and capital regime changes. The Fed’s imposition of higher interest rates throughout 2022 and into 2023 is designed to slow the economy and reduce inflation but is also likely to put pressure on consumer performance in the coming months. While consumer balance sheets remain relatively healthy, excess savings accumulated during the pandemic have been eroding, and delinquency rates are expected to rise. While performance is expected to deteriorate, consumer ABS structures have gotten safer since the GFC—including via more credit enhancement and better-quality collateral—and some of the longer-standing structures have shown their ability to withstand a variety of macroeconomic environments without taking a loss. Despite the more robust structures, performance of newer esoteric asset classes will be watched closely as we enter a more volatile macroeconomic environment. The ABS market will continue to evolve in the coming years, as large structural change has tended to correspond to material changes in macroeconomic conditions. Regardless of the changes, we expect the market to remain an integral source of funding for the US consumer.

Homophilous intensity in the online lending market: Bidding behavior and economic effects

Using transaction-level data from a large online lending marketplace, we explore the role of homophilous intensity in online lending and uncover the evidence of a significant impact of homophily on the bidding behavior and economic effects of both lenders and borrowers. Lenders are more likely to invest in borrowers with more homophilous traits, and homophily induces higher bidding amounts. Moreover, lenders charge lower prices to more homophilous borrowers, but are able to earn higher returns due to better repayment from these borrowers. Our findings suggest that homophilous intensity has a statistically and economically significant effect on both borrowers and lenders in the online lending environment.

Concealing borrowers’ failure history in online P2P lending: A natural experiment

AbstractOnline peer‐to‐peer (P2P) platforms both disclose and conceal borrowers’ information. Minimal research has been conducted on the impact of concealing such information on borrowers’ funding success. We fill this research gap by exploring a natural experiment opportunity at Prosper, an online lending marketplace where the platform enacted a policy to conceal borrowers’ past failure history. We first find that the platform's decision to conceal such information can be rational because when this information was publicly available, borrowers with past failures had lower success rates than borrowers without past failures. We next investigate the effect of hiding this information on lenders' lending decisions. Our empirical results from a series of analyses demonstrate that concealing such information helps some borrowers but also surprisingly leads to an overall lower success rate, which ultimately harms the platform and runs counter to the platform's intention. These effects are strongest for low‐risk borrowers and would attenuate in the long run. We further find that the number of borrowers’ past failures is associated with lower repayment ability.

Big data pricing in marketplace lending and price discrimination against repeat borrowers: Evidence from China

In this work, we systematically investigate the pricing mechanism change from auction to big data pricing on one of the major marketplace lending platforms in China. We find that big data pricing reduces the average interest rate while the borrowers with delinquency or default histories are assigned higher interest rates. However, repeat borrowers are also faced with growing interest rates, even though they have been paying their debts on time. Further analysis shows that repeat borrowers have lower income and education levels. Moreover, investor returns become less dispersed after pricing with big data, which can be a result of homogeneous loans on the market. The implications of the above findings are discussed.

A Novel Default Risk Prediction and Feature Importance Analysis Technique for Marketplace Lending using Machine Learning

Marketplace lending has fundamentally changed the relationship between borrowers and lenders in financial markets. As with many other financial products that have emerged in recent years, internet-based investors may be inexperienced in marketplace lending, highlighting the importance of forecasting default rates and evaluating default features such as the loan amount, interest rates, and FICO score. Potential borrowers on marketplace lending platforms may already have been rejected by banks as too risky to lend to, which amplifies the problem of asymmetric information. This paper proposes a holistic data processing flow for the loan status classification of marketplace lending multivariate time series data by using the Bidirectional Long Short-Term Memory model (BiLSTM) to predict “non-default,” “distressed,” and “default” loan status, which outperforms conventional techniques. We adopt the SHapely Additive exPlanations (SHAP) and a four-step ahead model, allowing us to extract the most significant features for default risk assessment. Using our approach, lenders and regulators can identify the most relevant features to enhance the default risk assessment method over time in addition to early risk prediction.

Marketplace Lending: A Resilient Alternative in the Face of Natural Disasters?

Marketplace Lending: A Resilient Alternative in the Face of Natural Disasters?

ЦИФРОВЕ ЗАЛУЧЕННЯ КАПІТАЛУ: МОЖЛИВОСТІ, ВИКЛИКИ ТА ГЛОБАЛЬНІ ТЕНДЕНЦІЇ

The article examines the formation and development of the global digital capital raising market, elucidating the historical emergence and evolution of the market. It identifies that the transition from traditional financial intermediation to digital forms was bolstered by rapid technological progress, notably the widespread adoption of the Internet and the proliferation of digital technologies. These advances collectively facilitated the creation of a new ecosystem for capital mobilization. The essence and structure of the digital capital raising market are defined, encompassing crowdfunding, crowd investing, crowd lending, and marketplace lending. Digital capital raising encompasses digital financial services for business clients and private borrowers. The development of the digital capital raising market globally is analyzed, revealing significant growth in recent years. A substantial regional development disparity is observed, with the highest transaction volumes in the USA and the lowest in African countries. There are also notable differences in the average amounts of funding per campaign in digital capital raising, with the highest in America and the lowest in Asian countries. Differences in the regulatory policies of countries regarding digital capital raising are examined. Challenges that need to be overcome for effective digital capital attraction are identified. Regulatory uncertainty remains a significant barrier as policymakers grapple with the need to protect investors while fostering innovation. Volatility and security issues associated with digital assets, such as cryptocurrencies, also pose risks to investors and could hinder their broader application. The article outlines prospective development vectors for the digital capital raising market. The interaction between technological innovations, regulatory adaptation, and market dynamics will determine the growth trajectory in this sector. The global and decentralized nature of digital capital markets requires international cooperation and the harmonization of regulatory standards to mitigate risks and promote a stable and inclusive financial ecosystem. Keywords: digital capital raising, innovation, financial technologies, digitalization, global financial market, online platforms, crowdfunding, blockchain, cybersecurity.

Towards a Theory on Dominant Business Model Emergence of Marketplace Lending in Germany

In this paper, we analyze the business models of Germany’s biggest lending platforms smava, auxmoney, and Lendico to identify a standard business model as a dominant design in this industry. We use a mixed method approach in which a case study at firm level is conducted to analyze and contrast the business models together with their business model components. This qualitative analysis is complemented with a quantitative test of their total asset annual growth rates to triangulate the qualitative analysis. The results indicate that all three companies started with a similar approach but evolved over time into entirely different business model variants. This seems to contradict the previous theory of the emergence of standard business models and dominant designs. At first glance, an increasing convergence of business models over time into a standard business model in the German lending platform industry was not consistent with our results. However, we suggest to explain this contradiction by taking a closer look at the global context of the industry. The origin of lending platforms was pioneered outside the German market by firms such as Zopa (UK) or later Prosper and Lending Club (USA). We hypothesize based on initial evidence that the German lending platforms have largely adopted the business models of the early movers and later modified them according to their local value network such as local market, regulation, and competition conditions. Thereby we propose that the deficient standard business model as a dominant design or a winner takes all market outcome in the lending platform industry might depend on localized demand and regulative heterogeneity.