Where You Live Matters: The Impact of Local Financial Market Competition in Managing Online Peer-To-Peer Loans
Mohammad Saifur Rahman
Associate Professor of Management
Krannert School of Management, Purdue University
Friday, September 28, 2018
10:30 AM – noon
Speakman Hall Suite 200
Internet related technologies have fundamentally changed many industries, and, in the age of financial technology (FinTech), a question that is being widely discussed is whether the local financial market structure still matters. Unlike traditional retail financial institutions, which are predominantly territorial, FinTech products — in particular, peer-to-peer (P2P) lending platforms — provide equal access to funds to borrowers from across the country, removing any typical geographic restrictions in borrowing options. However, if P2P lending platforms are not immune to competition from local financial institutions and borrowers ultimately gain from the strategic interactions between the local financial institutions and P2P platforms, where a borrower lives might continue to matter! Consequently, we study the impact of local financial market structure on borrowers’ personal loan management decisions — to prepay or to default — on the two leading P2P lending platforms, Lending Club and Prosper. We find consistently, across the two platforms, that an online borrower from a more competitive market is more likely to prepay and less likely to default. Additionally, this study offers novel insights regarding the extent and nature of the substitution between traditional financial institutions and their online, potentially disruptive, alternatives. Also, we utilize machine learning techniques that capitalize on the rich granularity of the data set to create a pseudo-experimental design and further validate the underlying mechanism behind our results. Going beyond P2P lending, these findings suggest that borrowers benefit disproportionately, based on their geographic location, from local lending institutions. We discuss managerial, practical, and policy implications for the burgeoning P2P lending industry as well as other crowd-based markets.