Bank of One: Empirical Analysis of Peer-to-Peer Financial Marketplaces

Abstract

Peer to peer financial marketplaces provide a platform for individual lenders and borrowers to interact and transact. These marketplaces disintermediate the traditional financial services business models. In this exploratory paper we study the operation and effectiveness of one such marketplace: Prosper.com. We analyze six months of lender, borrower and loan repayment data to answer preliminary research questions about lender behavior, market effectiveness and antecedents of loan default. We show that lenders mostly behave rationally and charge appropriate risk premiums for antecedents of loan default. We also show that there are mismatches between risk premiums charged and relative importance of factors that drive loan default. We then explore the dynamic process of lenders adjusting their lending strategies to reduce these mismatches. We analyze the effectiveness of the group reputation used in the marketplace and show that it is not effective in promoting good borrower behavior. Our analysis provides a base for future research in this exciting and evolving context. Our results provide directions for practice applications as well as future research in design of financial marketplaces, investing and risk mitigation strategies and improving the effectiveness of peer-to-peer financial marketplaces.