What's up with online credit?
Traditional forms of credit have been supplemented by online credit brokerage. Now, brokers act as intermediaries between customer and lender, and receive fees from both parties. Funded by the EU, the 'Insights from person-to-person credit markets' (P2P CREDIT MARKETS) project studied this environment. Running over a period of four years to September 2013, the project utilised new rich data from two large credit platforms: prosper.com and kiva.org. Areas of investigation included the effects of interest rate restrictions, whether the markets exhibit local bias and the value of non-verifiable information. Additionally, the project considered the effects of transaction costs and social distance. Research revealed that higher interest rate caps increase the probability that a loan will be funded. This is especially likely if the borrower in question had previously been just outside the threshold. In the online environment, higher interest rate caps did not affect loan amounts and default probability, but the interest rate is slightly elevated. The study also showed a strong local bias. A lender is more likely to lend to a nearby borrower, with chances of credit approval decreasing proportionally with distance. The trend was stronger with medium-risk borrowers. Project researchers proposed that comfort with familiarity is a plausible explanation for this. Consistent with results, the study of verifiable information revealed that non-verifiable information affects lending decisions. The nature of the effect depends on the sentiment expressed in the information. For example, optimistic sentiment has a greater effect. To test the role of transactional costs and social distance in decision making, the project submitted non-English loan applications either with or without translation. Relatively small transaction costs greatly reduce the share of loans given to speakers of languages other than that of the application. Social distance was found to have a lesser role. The project's findings have been published in journal articles. As a result of the work, issues surrounding the online credit environment will become clearer.