Where You Live Matters: The Impact of Local Financial Market Competition in Managing Online Peer-To-Peer Loans

P2P lending platforms provide equal access to funds to borrowers from across the country, removing any typical geographic restrictions in borrowing options. However, if P2P lending platforms are not immune to competition from local financial institutions and borrowers ultimately gain from the strategic interactions between the local financial institutions and P2P platforms, where a borrower lives might continue to matter!

Alyakoob et al. study the impact of local financial market structure on borrowers’ personal loan management decisions—to prepay or to default—on the two leading P2P lending platforms, Lending Club and Prosper. The findings indicate across the two platforms, that an online borrower from a more competitive market is more likely to prepay and less likely to default. Additionally, this study offers novel insights regarding the extent and nature of the substitution between traditional financial institutions and their online, potentially disruptive, alternatives. Going beyond P2P lending, these findings suggest that borrowers benefit disproportionately, based on their geographic location, from local lending institutions. We discuss managerial, practical, and policy implications for the burgeoning P2P lending industry as well as other crowd-based markets.

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