A Borrower and Lender Be

By now, the internet has proven itself the great disruptor, giving rise to business models that threaten longstanding institutions. For Mingfeng Lin, associate professor of MIS, one of the most interesting of those disruptions arrived in the form of peer-to-peer (P2P) lending, challenging the centuries-old monopoly that banks have held on loans for the masses.

The change began small, with the nonprofit Kiva.org crowdfunding microloans to redress poverty, but soon platforms like Prosper.com and LendingClub.com cracked the P2P lending field wide open. The promise of the model was simple: by cutting out banks, lenders could make more money, and borrowers could get lower rates.

Lin noted that promise has shifted in the years since, and will likely continue to evolve. “There was little regulatory oversight at first, especially compared to today,” he explained. “Now P2P platforms are trying to survive by adhering to simpler, established models, but I think there will still be incentive to resurrect at least some of those novel features.”

For those new to the industry, it’s helpful to note some of the qualities that made P2P lending distinct. Chief among them was the “social” quality of participant connections within each platform. Lin researchers showed that by classifying those connections in hierarchies based on the nature of the relationships, they could often predict which borrowers were less likely to default on loans.

As another point of difference, some P2P platforms offered loans through bidding models meant to organically align the best interests of lenders and borrowers. Others let people seeking loans provide personal statements about themselves and their projects – content that Lin showed could be machine-analyzed for linguistic features correlated well with loan default or repayment.

While these innovations played to the early success of P2P lending, Lin found that some sites are increasingly similar to the banks that they sought to displace. Participants can no longer bid their way to optimal transactions. Sites no longer traffic personal statements to supplemented traditional loan criteria. Some P2P sites are even pushing lenders to pool and automate their investments. Will the industry survive?

As platforms move further from the innovations that made them distinct, they face increasing scrutiny and regulation, Lin pointed out. Perhaps most likely is an evolution now familiar in disruption: appropriation by the institutions once challenged. In 2013, about two- thirds of loans made on LendingClub.com were funded by institutional investors – i.e., traditional banks – and by October 2016, Goldman Sachs became the first traditional bank to enter the P2P arena with the launch of its “Marcus” consumer lending platform. – Eric Van Meter