An empirical study on the change of information set for loan decision as borrowers have built transaction history in Online Peer-to-Peer Lending

Abstract

Peer-to-Peer (P2P) lending is a financial service without intermediaries between lenders and a borrower. Recently, online P2P lending platforms have rapidly grown worldwide since Zopa.com launched its service in 2005. There are benefits of P2P lending such as lower interest rate for borrowers even without collateral and higher return on investment for lenders when compared to transactions through financial institutions. However, P2P lending attracts the non-bankable with its unique characteristics, which means that loans have additional risk factors on top of that from the online environment itself. Thus, information asymmetry problems become more serious between lenders and a borrower. According to previous research, it is claimed that “Wisdom of Crowds” works well at solving probabilistic problems. Considering inherent risk of P2P lending, it is expected that “Wisdom of Crowds” also work on the online P2P lending platform. In the meantime, however, the non-bankable have adequate incentive of making loan requests more than once and repeated transactions by the same borrower may reduce inherent risk of loans, since the borrower’s past history provides lenders additional information. Thus, problems faced by lenders become more structured form with borrowers who have past transaction history. In this case, lenders are expected to put more weight on past history compared to “Wisdom of Crowds”. In this research, we empirically proved that the information set considered by lenders changes as borrowers have built transaction history, with data sourced from Popfunding.com. The result shows that for novice borrowers with no funded history, “Wisdom of Crowds” heavily affects the funding success, while for those who experienced funding success before, transaction history becomes more important to be funded.