Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-20T01:14:55.041Z Has data issue: false hasContentIssue false
  • English
  • Français

Reintermediation in FinTech: Evidence from Online Lending

Published online by Cambridge University Press:  20 June 2023

Tetyana Balyuk Open the ORCID record for Tetyana Balyuk [Opens in a new window]  and
Sergei Davydenko
Tetyana Balyuk*
Affiliation:
Emory University Goizueta Business School
Sergei Davydenko
Affiliation:
University of Toronto Rotman School of Management davydenko@rotman.utoronto.ca
*
tetyana.balyuk@emory.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We document the unique structure of the peer-to-peer lending market. Originally designed as decentralized, the market has become highly, but not fully, reintermediated. The platforms’ software now performs essentially all tasks related to loan evaluation, whereas most lenders are passive and automatically fund most applications on offer. Yet unlike banks, and in contrast to theories predicting full reintermediation, the platforms provide detailed loan information, and some active loan pickers coexist with passive investors. We argue that while intermediation attracts unsophisticated passive investors, transparency in the presence of active investors resolves the lending platform’s moral hazard problem inherent in intermediated markets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 5 , August 2024 , pp. 1997 - 2037
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Christoph Bertsch, Jeffrey Busse, Michele Dathan, Craig Doidge, Alex Dyck, Redouane Elkamhi, Rohan Ganduri, Christoph Herpfer, Julapa Jagtiani, Narasimhan Jegadeesh, Michael King, Florian Koch, Victor Lyonnet, Gonzalo Maturana, Alexandra Niessen-Ruenz, Nagpurnanand Prabhala, Boris Vallee, Christina Wang, and Robert Wardrop; seminar participants at Cass Business School, Scheller College of Business, Goizueta Business School, Rotman School of Management, and FED Board; attendees of the CFIC, Australasian Finance and Banking Conference, Philadelphia FED FinTech Conference, CenFIS (Atlanta FED)/CEAR Conference on Financial Stability Implications of New Technology, NFA, FDIC-JFSR Bank Research Conference, FinTech and Financial Risk Management Conference, FinteQC Conference, Showcasing Women in Finance Conference, and Toronto FinTech Conference; and an anonymous referee for helpful comments and suggestions.

References

Abadie, A.; Athey, S.; Imbens, G. W.; and Wooldridge, J.. “When Should You Adjust Standard Errors for Clustering?” Quarterly Journal of Economics, 138 (2023), 1–35.10.1093/qje/qjac038CrossRefGoogle Scholar
Balyuk, T. “FinTech Lending and Bank Credit Access for Consumers.” Management Science, 69 (2022), 555–575.10.1287/mnsc.2022.4319CrossRefGoogle Scholar
Berg, T.; Burg, V.; Gombović, A.; and Puri, M.. “On the Rise of FinTechs – Credit Scoring Using Digital Footprints.” Review of Financial Studies, 33 (2020), 2845–2897.10.1093/rfs/hhz099CrossRefGoogle Scholar
Boyd, J. H., and Prescott, E. C.. “Financial Intermediary-Coalitions.” Journal of Economic Theory, 38 (1986), 211–232.10.1016/0022-0531(86)90115-8CrossRefGoogle Scholar
Butler, A. W.; Cornaggia, J.; and Gurun, U. G.. “Do Local Capital Market Conditions Affect Consumers’ Borrowing Decisions?” Management Science, 63 (2017), 4175–4187.10.1287/mnsc.2016.2560CrossRefGoogle Scholar
Di Maggio, M., and Yao, V.. “FinTech Borrowers: Lax Screening or Cream-Skimming?” Review of Financial Studies, 34 (2021), 4565–4618.10.1093/rfs/hhaa142CrossRefGoogle Scholar
Diamond, D. W. “Financial Intermediation and Delegated Monitoring.” Review of Economic Studies, 51 (1984), 393–414.10.2307/2297430CrossRefGoogle Scholar
Duarte, J.; Siegel, S.; and Young, L.. “Trust and Credit: The Role of Appearance in Peer-to-Peer Lending.” Review of Financial Studies, 25 (2012), 2455–2484.10.1093/rfs/hhs071CrossRefGoogle Scholar
Franks, J.; Serrano-Velarde, N.; and Sussman, O.. “Marketplace Lending, Information Aggregation, and Liquidity.” Review of Financial Studies, 34 (2021), 2318–2361.10.1093/rfs/hhaa101CrossRefGoogle Scholar
Gorton, G., and Winton, A.. “Financial Intermediation.” In Handbook of the Economics of Finance, Vol. 1. G. Constantinides, M. Harris, and R. Stulz, eds. Amsterdam, Netherlands: Elsevier (2003), 431–552.Google Scholar
Guryan, J.; Kroft, K.; and Notowidigdo, M. J.. “Peer Effects in the Workplace: Evidence from Random Groupings in Professional Golf Tournaments.” American Economic Journal: Applied Economics, 1 (2009), 34–68.Google ScholarPubMed
Hertzberg, A.; Liberman, A.; and Paravisini, D.. “Screening on Loan Terms: Evidence from Maturity Choice in Consumer Credit.” Review of Financial Studies, 31 (2018), 3532–3567.10.1093/rfs/hhy024CrossRefGoogle Scholar
Hildebrand, T.; Puri, M.; and Rocholl, J.. “Adverse Incentives in Crowdfunding.” Management Science, 63 (2017), 587–608.10.1287/mnsc.2015.2339CrossRefGoogle Scholar
Iyer, R.; Khwaja, A. I.; Luttmer, E. F.; and Shue, K.. “Screening Peers Softly: Inferring the Quality of Small Borrowers.” Management Science, 62 (2016), 1554–1577.10.1287/mnsc.2015.2181CrossRefGoogle Scholar
Jagtiani, J., and Lemieux, C.. “The Roles of Alternative Data and Machine Learning in Fintech Lending: Evidence from the LendingClub Consumer Platform.” Financial Management, 48 (2019), 1009–1029.10.1111/fima.12295CrossRefGoogle Scholar
Keys, B. J.; Mukherjee, T.; Seru, A.; and Vig, V.. “Did Securitization Lead to Lax Screening? Evidence from Subprime Loans.” Quarterly Journal of Economics, 125 (2010), 307–362.10.1162/qjec.2010.125.1.307CrossRefGoogle Scholar
Lin, M.; Prabhala, N. R.; and Viswanathan, S.. “Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending.” Management Science, 59 (2013), 17–35.10.1287/mnsc.1120.1560CrossRefGoogle Scholar
Millon, M. H., and Thakor, A. V.. “Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies.” Journal of Finance, 40 (1985), 1403–1422.10.1111/j.1540-6261.1985.tb02391.xCrossRefGoogle Scholar
Morse, A. “Peer-to-Peer Crowdfunding: Information and the Potential for Disruption in Consumer Lending.” Annual Review of Financial Economics, 7 (2015), 463–482.10.1146/annurev-financial-111914-041939CrossRefGoogle Scholar
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.10.1093/rfs/hhn053CrossRefGoogle Scholar
Purnanandam, A. “Originate-to-Distribute Model and the Subprime Mortgage Crisis.” Review of Financial Studies, 24 (2011), 1881–1915.10.1093/rfs/hhq106CrossRefGoogle Scholar
Sacerdote, B. “Peer Effects with Random Assignment: Results for Dartmouth Roommates.” Quarterly Journal of Economics, 116 (2001), 681–704.10.1162/00335530151144131CrossRefGoogle Scholar
Stein, R. M. “Benchmarking Default Prediction Models: Pitfalls and Remedies in Model Validation.” Journal of Risk Model Validation, 1 (2007), 77–113.Google Scholar
Tang, H. “Peer-to-Peer Lenders Versus Banks: Substitutes or Complements?” Review of Financial Studies, 32 (2019), 1900–1938.10.1093/rfs/hhy137CrossRefGoogle Scholar
Thakor, R. T., and Merton, R. C.. “Trust in Lending.” Working Paper, Massachusetts Institute of Technology (2019).10.3386/w24778CrossRefGoogle Scholar
Vallee, B., and Zeng, Y.. “Marketplace Lending: A New Banking Paradigm?” Review of Financial Studies, 32 (2019), 1939–1982.10.1093/rfs/hhy100CrossRefGoogle Scholar
Wei, Z., and Lin, M.. “Market Mechanisms in Online Peer-to-Peer Lending.” Management Science, 63 (2016), 4236–4257.10.1287/mnsc.2016.2531CrossRefGoogle Scholar
Zhang, J., and Liu, P.. “Rational Herding in Microloan Markets.” Management Science, 58 (2012), 892–912.10.1287/mnsc.1110.1459CrossRefGoogle Scholar
Zou, H., and Hastie, T.. “Regularization and Variable Selection via the Elastic Net.” Journal of the Royal Statistical Society, 67 (2005), 301–320.10.1111/j.1467-9868.2005.00503.xCrossRefGoogle Scholar
Supplementary material: PDF

Balyuk and Davydenko supplementary material

Balyuk and Davydenko supplementary material

Download Balyuk and Davydenko supplementary material(PDF)
PDF 3.4 MB