Where You Live Matters: The Impact of Local Financial Market Competition in Managing Peer-to-Peer Loans
41 Pages Posted: 13 Jun 2017 Last revised: 1 May 2019
Date Written: April 2019
With the boom of financial technologies (FinTech), a critical question is whether the local financial market structure still matters. Unlike traditional retail financial institutions that are predominantly territorial, FinTech-based platforms, in particular peer-to-peer (P2P) lending, provide individuals equal access to funds by removing typical geographic restrictions. Combined with other benefits such as ease-of-use and lower interest rates, P2P lenders are increasingly threatening the traditional local lenders. A largely unanswered question in the literature is whether the local retail financial institutions strategically respond to the rise of such P2P platforms. Moreover, if the strategic reaction of traditional institutions continues the legacy of being territorial, borrowers will ultimately gain unevenly from the competition. That is, where a borrower lives may still matter. In this study, we devise multiple strategies to empirically analyze the extent and nature of the strategic response of traditional institutions to P2P lending. This includes (1) utilization of a Probit model that leverages the richness of our local market data and (2) exploitation of bank mergers as exogenous shocks to local market structure. We find consistently that a borrower from a more competitive market is more likely to prepay, suggesting that local market structure plays a pivotal role in P2P borrowers’ debt management. We validate the underlying mechanism by studying the improving credit profiles of borrowers and platforms’ (exogenous) changes in pricing in moderating the main effect. This mechanism reveals that traditional banks, especially when their local market conditions support, credibly responds to the growth of P2P and are successful in attracting consumers back to traditional financial products. Relatedly, we document heterogeneity in the benefits that borrowers gain from the local market structure (using a machine learning algorithm) and verify the robustness of our main findings. We discuss the implications for P2P lending, other crowd-based markets, and local retail financial markets. impact of P2P borrowers improving credit profiles in mediating this effect.
Keywords: Peer-To-Peer Lending, Debt Management, Market Structure, Crowdfunding, Household Finance
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