In the recently published study “Emergence of Financial Intermediaries in Electronic Markets: The Case of Online P2P Lending“, Sven Berger and Fabian Gleisner examined more then 14,000 Prosper loans (originated from Nov. 2005 to Sep. 2007) to evaluate the benefits borrowers derived from joining a Prosper group versus listings with no group affiliation.
They tested the following hypothesises for statistical evidence:
- Borrowers within groups are able to borrow at lower credit spreads.
- The recommendation of a credit listing by the group leader leads to lower credit spreads.
- A group leader’s bidding serves as a credible signal for the quality of the credit listing and results in lower credit spreads.
- A group leader’s bidding on a credit listing signals information quality and has a stronger impact on credit spreads than a recommendation by the group leader.
- A higher group rating leads to lower credit spreads.
- Increasing group size leads to lower credit spreads.
They found that the group leader as intermediary played a very important role on the ability of the borrower to obtain a loan and to obtain this loan at a lower then average interest rate.
Since most of the bids on group affiliated loans came from lenders that were not members of the group, the authors conclude that the group leader has an important signaling function.
Some of the empirical results:
- The results … confirm our fundamental hypothesis H1: the use of an interme- diary in the electronic marketplace significantly lowers borrowers’ loan spread. Group affiliation ceteris paribus lowers the credit spread by 25 basis points. (page 15)
- Does the choice of the intermediary matter? Should borrowers make demands on paid intermediary services? In order to be able to compare the net impact of unpaid and paid groups, we analyze Bor- rower Rate Net … and find that intermediation significantly lowers borrower’s cost of credit overall. However, we document a dif- ference in the net impact of group membership of 42 basis points: An unpaid intermediary reduces borrower’s credit spread by 107 basis points, a paid intermediary by 65 basis points. It follows that the group fee can turn the case for a paid intermedi- ary borderline. The average group fee of 110 basis points … will more than counter the net reduction in credit spread. Taken together, inter- mediation has a positive net impact but the choice of intermediary matters. We hereby do not com- ment on the overall impact of paid groups, since this analysis does not incorporate the intermediary’s role in overall access to credit or the long-run performance of the loan thus originated. (page 15ff)
- the group leader’s bid for the borrower’s credit listing exerts a significant stronger impact on borrowers’ credit conditions than a recommendation. Moreover, Certification is only significant at the 10-percent level. We can confirm Hypothesis H3b: the regression coefficient of Group Leader Bid exceeds Certification. (page 18)
The study delivers strong evidence that Prosper borrowers benefited financially from joining Prosper groups.
Read the study now in BuR – Business Research.
