study

Study Shows Women P2P Lenders Not More Risk-Averse

wiseclerk 1 Comment

Are women more risk-averse then men when it comes to lending money to strangers via p2p lending services? A recent study by Nataliya Barasinska, analyzed what impact gender has on the investment decisions. In the study, which was supported by a grant by the European Commission, she looked at bidding and loan data of the German p2p lending service Smava for the time span from March 2007 to March 2010.

Women are a minority among lenders, but are no more risk-averse than men

Only about 10% of the lenders at Smava are women. But they do not perceive and react to risks differently than men, when it comes to picking loans for investments. Continue reading →

Trust, Reputation and Community Aspects of P2P Lending

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One of the biggest challenges for a new internet startup to offer an innovative financial service is to gain the trust of its potential customers. Consumers approach new concepts with legitimate caution.

The book ‘P2P Kredite – Marktplätze für Privatkredite im Internet‘ examines how p2p lending services can address the uncertainties and what measures can be used to build trust. After a short introduction of how p2p lending works and a look at Cashare, Smava, Zopa and Prosper the author covers the aspects credibility, safety, reputation, guarantee, sanctions, information and communication. Fabian Blaesi also describes how community features can help.

In an empirical study the importance of several factors for the perception and acceptance of p2p lending services by lenders is quantified.

The book is available at Amazon.com, Amazon.co.uk, Amazon.de and Amazon.co.jp.

New Academic Study Quantifies the Benefits of Group Membership for Prosper Borrowers

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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:

  1. 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)
  2. 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)
  3. 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.

Continue reading →

Does p2p lending lead to discrimination?

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The study “What’s in a Picture? Evidence of Discrimination from Prosper.com” by the economic professors Devin Pope and Justin Sydnor finds:

We analyze discrimination in a new type of credit market known as peer-to-peer lending. Specifically, we examine how lenders in this online market respond to signals of characteristics such as race, age, and gender that are conveyed via pictures and text. We find evidence of significant racial disparities; loan listings with blacks in the attached picture are 25 to 35 percent less likely to receive funding than those of whites with similar credit profiles.  conditional on receiving a loan, the interest rate paid by blacks is 60 to 80 basis points higher than that paid by comparable whites. Though less significant than the effects for race, we find
that the market also discriminates somewhat against the elderly and the overweight, but in favor of women and those that signal military involvement.
Despite the higher average interest rates charged to blacks, lenders making such loans earn a lower net return compared to loans made to whites with similar credit profiles because blacks have higher relative default rates. This pattern of net returns is inconsistent with theories of accurate statistical discrimination (equal net returns) or costly taste-based preferences against
loaning money to black borrowers (higher net returns for blacks). It is instead consistent with partial tastebased preferences by lenders in favor of blacks over whites or with systematic underestimation by lenders of relative default rates between blacks and whites.

Their conclusion:

Yet the data tell a very different story that suggests that this peer-to-peer lending market actually treats the races more equally than would be expected in a market with accurate statistical discrimination.

I would interpret this conclusion as a negation of p2p lending leading to racial discrimination. However Ron Shevlin at MarketingROI comes to different conclusions.

New academic study estimates average Prosper ROI at 6%

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The new study "Dynamic Learning and Selection: The Early Years of Prosper.com" by Seth Freedman and Ginger Zhe Jin, both at the Department of Economics, University of Maryland analyses Prosper data in a time frame from April 19th 2006 to December 31st 2007.

The study analyses the development of the Prosper.com marketplace and how lenders refined their strategies as a result to own experiences and changed settings.

They write:

Overall, we conclude that Prosper is evolving from a comprehensive market to a market that primarily serves the borrowers who have access to traditional credit. This implies that Prosper will compete head-to-head with the traditional banks rather than pick up a missing market. Assuming away any cost in information processing, we estimate that the average rate of return of a Prosper loan is 6% if Prosper loans continue to perform according to what we have predicted from their existing performance. From the lenders point of view, this number compares favorably to 6-month certificate of deposit and 3-year Treasury bill, but less favorably to the rate of return implied by the S&P 500 in the same time period.

Other findings are that high interest loans yield lower returns due to high default rates and that the probability for defaults of Prosper loans peak at month 10 and the edge down.

The main uses of Prosper loans are:

33% of all previous Prosper listings have mentioned credit card consolidation, which is higher than the mention of business (23%), mortgage (15%), education (22%), and family purposes (20%) such as weddings.  

Cited from the conclusion chapter of the study:

The first two years of Prosper has enlivened the concept of P2P lending, but the road towards success is full of challenge. While it is tempting to expect P2P lending to alleviate credit rationing for near- or sub-prime risks, we find Prosper evolving from a comprehensive market toward a market that primarily serves borrowers who have access to traditional credit. This implies that Prosper will compete head-to-head with the traditional banks, rather than pick up a missing market. This pattern is not unique to Prosper. …

How can Prosper compete with traditional banks? Our study suggests that the microfinance approach, as implemented through Prosper groups, has failed to select good risks or enhance loan performance. But on the up side, lenders are learning fast about the pitfalls of P2P lending thanks to the transparency of Prosper. Our calculation suggests that, if the loans continue to perform as what we have predicted from the market performance, Prosper loans could yield an average return of 6%.

See related post on the Prosper blog.