Competition Against Common Sense: Insights on Peer-to-Peer Lending as a Tool to Allay Financial Exclusion

Abstract

Purpose – The purpose of this research is to provide insights into peer-to-peer (P2P) lending which has served as one important tool to mitigate financial exclusion. The main proposition of this research is that P2P platforms, which in many ways resemble auctions, naturally instill competitive mindset among lenders; furthermore, given only limited objective decision criteria, certain borrower personal characteristics fuel interpersonal competition enough to impact lending decisions in suboptimal ways. Our two experiments support this proposition. As the result, while P2P lending offers unprecedented financial opportunities to some consumer groups, it may unintentionally exclude others, and even pose threat to the financial wellbeing of lenders.

Design/methodology/approach – Two experiments were used to collect data and are reported here. Rigorous pretesting of manipulation stimuli preceded a pilot (exploratory) and the main experiment.

Findings – We generally find a significant age bias, where ceteris paribus, younger borrowers are offered lower loan amounts as lenders most likely infer greater risk and lower likelihood to repay loans on time. However, and perhaps more interestingly, when age is not a strong indicator of experience (as in the case with thirtysomethings), we repeatedly find evidence of lending decisions driven by interpersonal competition: more attractive and financially successful loan applicants of the same gender as lenders are most likely perceived as a personal threat, decreasing lenders’ confidence, which subsequently results in lower amounts being invested into loans that are possibly the most promising.

Originality/value – To our best knowledge, this research is first to demonstrate the impact of interpersonal competition on decision making in the context of P2P lending. Furthermore, this article contributes to better understanding of P2P lending as a tool to allay financial exclusion, while raising concerns of possible unintended exclusion of certain consumer segments due to the competitive nature of P2P platforms.

Keywords: Competition, Peer-to-Peer Lending, Decision Making, Financial Exclusion

JEL Classification: M30, M31, G21, G23