Going online? The motive of firms to borrow from the crowd

Using a novel dataset from Tomorrow and other limited liability firms in Sweden, Li (2016) investigates what motivates firms to seek online crowdfunding. Firms that borrow from “the crowd” are usually small private businesses that are dependent on bank financing. The paper explored the determinants of firms to borrow from the crowdlending market by comparing the ex-ante characteristics of those firms with other private limited liability firms that borrow from banks.

Continue reading

The 4th Annual UK Alternative Finance Industry Report

Cambridge Centre for Alternative Finance has published the 4th annual UK alternative finance industry report. This report is titled ‘Entrenching Innovation’, which is a reflection upon both the historical development and the current state of the UK online alternative finance industry. The data collected from 77 alternative finance platforms, as well as over 8,300 retail investors within the UK. The data revealed that the UK online alternative finance market grew from the £3.2 billion in 2015 to £4.6 billion in 2016, representing an annual growth of 43%. Over the six years between 2011 and 2016, a total of £11 billion worth of market volume has been facilitated through online alternative finance channels in the UK. Continue reading

The Fintech Trilemma

Regulators around the world have made it a top policy priority to respond to the exponential growth of financial technology (or “Fintech”) in the post-Crisis era. Mapping traditional regulatory strategies to new technological ecosystems has, however, proven conceptually difficult. Part of the challenge lies in the inherent tradeoffs involved in the complex work of supervising technologies that can both help and hurt consumers and market participants. Problems also arise from the common assumption that today’s Fintech is a mere continuation of the story of innovation that has shaped finance for centuries.

Continue reading

Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information

Julapa Jagtiani and Catharine Lemieux investigated the advantages/disadvantages of loans made by a large Fintech lender and similar loans that were originated through traditional banking channels. Banks have been concerned about the uneven playing field because Fintech lenders are not subject to the same rigorous oversight. There have also been concerns about the use of alternative data sources by Fintech lenders and the impact on financial inclusion. Continue reading

P2P debt and the capital structure of private SMEs

Coakley et al. (2017) investigate the role of P2P (peer-to-peer) debt in the financing decisions of 1,001 unique firms that were financed by Funding Circle from 2010 to 2015. The firms are small (10-49 employees) with a median age of 11 years, virtually all are privately held, and two thirds of the debt raised has a maturity of 5 years.

Continue reading

Economic Value of Texts: Evidence from Online Debt Crowdfunding

The role of textual data has been widely explored in the finance area. The measures include readability, sentiment and similarly etc. In the online crowdfunding market,  Gao and Lin examine whether linguistic styles of texts can help mitigate issues of information asymmetry, and more importantly, whether investors can “correctly” interpret the economic value of texts. Continue reading

Screening Peers Softly: Inferring the Quality of Small Borrowers

Do P2P lenders smarter than credit agency?  Iyer et al. (2016) examine the performance of new online lending markets that rely on non-expert individuals to screen their peers’ creditworthiness. The P2P lenders predict an individual’s likelihood of defaulting on a loan with 45% greater accuracy than the borrower’s exact credit score (unobserved by the lenders, who only see a credit category). Continue reading

The Taste of Peer-to-Peer Loans

Roure et al. (2016) find that P2P lending is substituting the banking sector for high-risk consumer loans since banks are unwilling or unable to supply this slice of the market. P2P lending platforms advertise that they provide access to credit to those that are underbanked, and that they lower the cost of borrowing through refinancing, and even enhance one’s credit scores. Is it true? Whether borrowers can obtain benefits for future financing? How do P2P loans affect credit score of borrowers compared with non-P2P borrowers? Continue reading

Herding in a P2P lending market: Rational inference or irrational trust?

Herding behaviour-which originates from the phenomenon of animals moving and foraging in a group-has been widely explored in financial markets, especially stock markets. In previous post, we reviewed a rational herding paper in US P2P market. Compared to traditional lending institutions, lenders in P2P lending markets are retail investors who are difficult to acquire sufficient information for their decisions. Zhang and Liu (2012) find that well-funded loan requests tend to attract more funding, lenders can review creditworthiness of borrowers by observing peer lending decisions and use publicly observable borrower characteristics to moderate their inferences.

Continue reading