Peer-to-peer (P2P) lending, directly matching borrowers and lenders without the presence of an intermediating bank or the need of deposits, has grown rapidly in many countries. This growth has placed in focus the competition between this new form of un-intermediated lending and the traditional intermediated bank lending. A series of questions regarding the competition between banks and P2P platforms arise: When do banks lose market share to P2P operators? What are the type of risk characteristics of loans that potentially move from traditional banks to P2P platforms? Are P2P platforms skimming the cream or bottom fishing for loans? Besides the quantity and type dimensions, what is the cost of capital of P2P loans: are P2P platforms lending at lower or higher risk-adjusted interest rates compared to banks? These questions become even more important when considering the regulatory dimension to which traditional banks are exposed. Calebe de Roure, Loriana Pelizzon, and Anjan V. Thakor investigate this questions in their paper “P2P Lenders versus Banks: Cream Skimming or Bottom Fishing?” First they present a theoretical model that can capture the competition between P2P and banks and then test it on data obtained from Auxmoney, the largest and oldest P2P lending platform for consumer credit in Germany, and from the Deutsche Bundesbank.
The paper documents that P2P and traditional bank loans are partial substitutes: lending increases, while total bank lending declines, when some banks are hit by higher regulatory costs in the form of higher capital requirements. The authors then find that Auxmoney charges higher loan interest rates than banks, but P2P borrowers are found to be riskier and less profitable than bank borrowers. This result is suggestive that P2P lenders are not skimming the cream but rather bottom fishing when they compete with banks. Relatedly, the paper finds that risk-adjusted interest rates are lower for P2P loans than for bank loans. There are two important implications from these results. First, P2P lending may expand through a bottom-fishing strategy that should have a positive social welfare effect by serving borrowers who have difficulty accessing bank loans. Second, the rise of P2P lending may lead to the banking sector shrinking and becoming less risky and possibly more profitable.
Spotlight by Andrew Ellul
Photos courtesy of Calebe de Roure, Loriana Pelizzon, and Anjan V. Thakor