The study aims to determine whether P2P lending serves as a complement or substitute to traditional bank lending, particularly in the context of decreasing bank branch availability. This research investigates how local banking competition, and demographic factors influence P2P loan activity. We aim to provide insight into the potential of P2P lending to enhance access to credit and present new evidence through 2023.
We utilize a unique, comprehensive dataset that integrates data from the Census, financial institutions, and peer-to-peer (P2P) loans issued by Prosper, the first marketplace lending platform in the USA. This dataset covers over 5,000 US cities from 2018 to 2023. AI (ChatGPT) is employed to help merge approximately 166,000 P2P loans per year with the other datasets. Our analysis considers local banking market access and competition, demographics and P2P loan usage. We apply panel fixed-effect models to control for both city-specific and year-specific effects.
We find that access to financial institutions is positively related to P2P borrowing, with more Prosper loans issued in competitive banking markets and areas with a greater presence of small banks. P2P lending complements traditional bank lending, but it does not significantly benefit the lowest-income households or areas with high unemployment rates. P2P activity increases with income up to a median threshold of $75,000 and is not significantly affected by cities’ racial, educational and age compositions or population sizes. These findings suggest maintaining a competitive banking market that includes both traditional and P2P lending to promote broader credit access.
This research offers original insights by analyzing the interplay between traditional banking and peer-to-peer (P2P) lending. Prior research in this area is limited. Furthermore, we provide new evidence on the dynamics of this relationship through 2023. Utilizing a comprehensive dataset from Prosper, financial institutions and the Census, this study uniquely explores how local banking competition and demographic factors influence P2P loan activity. The study contributes to existing literature by highlighting that P2P lending complements, rather than substitutes for, traditional banking. Our findings underscore the importance of maintaining a competitive banking market that includes both traditional and Fintech lenders to enhance credit access.
