Distrust in Banks and Fintech Participation: The Case of Peer-to-Peer Lending
45 Pages Posted: 16 Feb 2018 Last revised: 4 Jul 2018
Date Written: February 15, 2018
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: Suggested Citation