Online P2P Lending: Factors, Behaviors, and Mechanisms

Online P2P Lending: Factors, Behaviors, and Mechanisms

Xifei Feng (University of Science and Technology of China, China) and Jin Qin (University of Science and Technology of China, China)
DOI: 10.4018/978-1-4666-9787-4.ch119
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Online P2p Lending

P2P lending refers to lending and borrowing between individuals through a for-profit online platform (Gonzalez & Loureiro 2014). The rest of this section describes the notion of the platform and the lending process.

Platform

Online P2P platforms are regarded as an innovation of financial market. There are some differences between online platforms and traditional financial institutions. Traditional financial institutions are involved in the credit process and entail some degree of default risks, while online platforms disconnect themselves from the lending process and the risks they bear are from the platform operation. Generally, lenders in traditional context have no knowledge of the borrowers, whereas lenders in online platforms can browse borrowers’ information and have the determination right. Revenue source of traditional institutions are mainly financial spreads, while online platforms charge service fee as an intermediary.

Online platforms are also regarded as part of the crowd funding movement that uses the internet to rally crowd for collective funding (Burtch, Ghose et al. 2013; Zvilichovsky, Inbar et al. 2013). However, P2P lending and crowdfunding are essentially different in purpose and funding model. The primary purpose of P2P loans is for debt consolidation and credit card refinancing (Zhu, Dholakia et al. 2012). Regarding to the funding model, P2P lending platforms all adopt all-or-nothing funding model, that is, the funds are returned to the funder unless the funding goal is reached (Gerber, Hui et al. 2012). Some crowdfunding platforms use Keep-what-you-raise model, such as RocketHub.com and IndieGoGo.com.

Key Terms in this Chapter

Herding: The behavior that individuals instinctively gather together.

Hard Information: The information that can be accurately quantified and efficiently transmitted.

Soft Information: The information that is hard to quantify.

Moral Hazard: The phenomenon that people make more risk decision when there is information asymmetry between the two parts.

Information Asymmetry: A phenomenon that occurs when one party has more or better information than the other.

Adverse Selection: The phenomenon that bad quality product drives out good quality product.

Online P2P Lending: A new financing model that individuals borrow or lend directly through online platform.

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