Distrust in Banks and Fintech Participation: The Case of Peer-to-Peer Lending

45 Pages Posted: 16 Feb 2018 Last revised: 4 Jul 2018

See all articles by Anders Broström

Anders Broström

Royal Institute of Technology (KTH); Royal Institute of Technology (KTH) - Center of Excellence for Science and Innovation Studies

Ali Mohammadi

Copenhagen Business School - Department of Strategy and Innovation; KTH Royal Institute of Technology

Ed Saiedi

Royal Institute of Technology (KTH), Department of Industrial Economics and Management (INDEK); Swedish House of Finance; Universidad Politécnica de Madrid

Date Written: February 15, 2018

Abstract

The volume of peer-to-peer (P2P) lending transactions has increased rapidly during the last decade. This paper empirically examines the effect of distrust in banks and financial institutions on the participation of lenders in P2P lending markets. We argue that in the choice of allocation of assets to banks, as an intermediary, or to alternative or disintermediated assets, such as P2P loans, distrust in the intermediary will shift allocation towards the latter. We exploit the role of geographical variation in distrust on lending on one of the largest P2P lending markets, Prospser.com. Our results show that beyond the effect of general trust on encouraging P2P participation, higher distrust in banks is associated with a higher likelihood of participation and higher levels of participation of lenders in loans. Furthermore, we find a negative correlation between the prevailing level of distrust in banks and volumes of commercial bank deposits, as well as banks’ ability to rely on deposit financing. The empirical evidence is consistent with our argument of asset substitution between banks and peer-to-peer lending due to lowered distrust in banks as intermediaries. Our study sheds light on a factor in the growth of digitalized peer-to-peer technologies which are reshaping the financial landscape, arising from failures society attributes to banks and financial institutions.

Keywords: Peer-to-Peer Lending; Crowdfunding; Distrust in Banks and Financial Institutions; FinTech.

JEL Classification: G20,

Suggested Citation

Broström, Anders and Mohammadi, Ali and Saiedi, Ed, Distrust in Banks and Fintech Participation: The Case of Peer-to-Peer Lending (February 15, 2018). Swedish House of Finance Research Paper No. 18-6. Available at SSRN: https://ssrn.com/abstract=3124301 or http://dx.doi.org/10.2139/ssrn.3124301

Anders Broström

Royal Institute of Technology (KTH) ( email )

Lindstedtsvägen 30-100 44
Stockholm, SE-100 44
Sweden

Royal Institute of Technology (KTH) - Center of Excellence for Science and Innovation Studies ( email )

Drottning Kristinas väg 30
Stockholm, SE-100 44
Sweden

Ali Mohammadi

Copenhagen Business School - Department of Strategy and Innovation ( email )

Kilen
Frederiksberg, 2000
Denmark

KTH Royal Institute of Technology ( email )

Stockholm
Sweden

Ed Saiedi (Contact Author)

Royal Institute of Technology (KTH), Department of Industrial Economics and Management (INDEK) ( email )

Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Universidad Politécnica de Madrid ( email )

Calle Ramiro de Maeztu, 7
Madrid, 28040
Spain

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