1 Introduction
2 Literature Review
3 Stakeholders on P2P Lending Platforms
4 Risks on P2P Lending Platforms
5 Theoretical Framework
6 A Framework for Risk Categorization
Risk types | Description | |
---|---|---|
Financial Regulatory Authority—Borrower | Platform regulatory risk | David and Murphy (2016) stated that regulation risk occurs when there is a lack of high-quality regulation enacted by regulatory authorities and central banks to govern the operational activities and capital flow of P2P lending platforms (Davis & Murphy, 2016). We theorize this concept to specifically explain the risk generated by regulatory institutions of the Peer-to-Peer lending platforms, also the policy execution by P2P lending platforms. |
Financial Regulatory Authority—Custodian Bank | Platform market entry risk | We theorize that platform market entry risk occurs when there are no entry requirements and standardized processes set by financial regulatory authorities when starting a P2P lending business. As a result, the platform owners have diminished capability in managing their businesses, ending with significant financial loss. In this case, the custodian bank takes an increased level of pressure to process the fund. |
Financial Regulatory Authority—Lenders | Platform users’ right risk | Platform users’ right risk occurs when regulatory authorities have failed to enact policies that protect users’ rights. To be specific, borrowers and lenders can exit the platform anytime once they apply for. |
Loan information transparency risk | This risk is when there is a lack of policies introduced by regulatory authorities that ensures all the historical transaction information is managed by and disclosed to both the regulatory party and users. | |
Users’ information security risk | Users’ information security risk occurs when there is a lack of rules imposed by regulatory authorities to guarantee that platform owners have strong protection regarding user personal information. If the risk management mechanism is not sufficiently consolidated, P2P lending platforms may suffer cybersecurity issues, such as data breaches and malware that are exploited by criminal gangs. Hackers can easily access borrowers' personal information, and fraudsters may utilize capital from one lender to pay another lender, resulting in a default on the loan repayment to the original lender. | |
Loan investment concentration risk | This risk occurs when lender’s investments are not diversified on the lending platforms, so the lender takes on a large volume of risk on a single loan if the borrower defaults. This incident happens frequently because of the lack of a diversification system on the platforms also investment knowledge provided by platform. It also occurs due to the existence of platform information asymmetry risk, as lenders overestimate the repayment capability of borrowers leading to an instance where the lender invests too much capital. | |
Borrowers—Lenders | Loan liquidity risk | This relates to the difficulty for the platform provider to repay lenders when the amount of loan exceeds the P2P lending platform’s solvency. Therefore, lenders are not able to withdraw cash and will not receive repayment. This risk is measured by using funding time and funding quantity of each loan. |
Loan default risk | Loan default risk occurs when the borrower is not able to repay the lender with the guaranteed amount of loan on time once the loan is matured, meaning the borrower will break the contract (Du et al., 2020). This is due to the weakness of the credit scoring system to assess borrower’s creditworthiness. | |
Loan information asymmetry risk | Information asymmetry risk occurs when borrowers reveal insufficient personal information, so the lenders and the platform are unable to assess their credit scores accurately (Lin et al., 2013). This affects lenders’ investment decisions. Furthermore, if there is insufficient information revealed by borrowers and lenders, the platform will be unable to measure lenders’ risk-aversion levels and offer appropriate loans to lenders. | |
Platform operation risk | Platform operation risk originates from technical and management issues, such as the weaknesses of software operation and platform management team (Lim et al., 2011), and can be affected by the economic environment. In P2P lending platforms, it originates from the weakness of the online credit assessment system, the internal risk management mechanism, and in some cases the low quality of data processing. This can lead to platform information asymmetry between lenders and borrowers, making borrowers’ credit scores inaccurate. | |
Others | Loan interest rate risk | We theorize this concept in this paper as interest rate risk for online lending platform particularly. It occurs when regulatory authorities have no restrictions on the loan interest rate in P2P lending platform, then platform owners can set interest rate as higher as they expect to earn profit. Borrowers will have higher chance to default, and lenders might invest irrationally. |
7 Mapping Risks to Major Stakeholders
8 Extended Social-Technical Risk Relationship Model
8.1 Technology-Actor interdependencies
8.2 Structure-Actor Interdependencies
8.3 Structure-Task Interdependencies
8.4 Task-Actor Interdependencies
8.5 Risk Relationships
9 Propositions and Justification
-
Proposition 1: The platform regulatory risk increases the loan default risk in the P2P lending platforms.
-
Proposition 2: The loan information transparency risk increases the loan investment concentration risk in P2P lending platforms.
-
Proposition 3: The loan information asymmetry risk increases the loan investment concentration risk inP2P lending platforms.
-
Proposition 4: The platform market entry risk increases the loan liquidity risk in P2P lending platforms.
10 Empirical Validation of Propositions
10.1 Data and Research Context
10.2 Methods
10.3 Results
Model (1) | Model (2) | Model (3) | Model (4) | |
---|---|---|---|---|
IVs: | y = loan default risk | y = Investment concentration risk | y = Investment concentration risk | y = Loan liquidity risk |
\({\chi }_{PlatformRegulationRisk}\) | 0.002** (0.080) | |||
\({\chi }_{InfoTransparencyRisk}\) | 0.038** (0.000) | |||
\({\chi }_{PlatformMarketEntryRisk}\) | 0.002** (0.000) | |||
\({\chi }_{InfoAsymmetryRisk}\) | 0.002** (0.000) | |||
Controls: | ||||
\({\chi }_{Launch MobileApp}\) | -0.001** (0.048) | 0.016** (0.048) | 0.017** (0.000) | -0.002** (0.000) |
\({\chi }_{LaunchBiddingTool}\) | -0.0248** (0.000) | -0.019** (0.100) | -0.019** (0.000) | |
\({\chi }_{CollabWithCustodianBank}\) | -0.002** (0.000) | -0.001** (0.000) | -0.004** (0.000) | -0.001** (0.000) |
Cons | 0.088** (0.000) | 0.042** (0.000) | 0.042** (0.000) | 0.013** (0.000) |
Obs | 102,736 | 7,519,488 | 7,519,488 | 102,736 |
R-squared | 0.0758 | 0.013 | 0.013 | 0.0758 |
11 Risk Mitigation Strategies
Level of Risk | Strategies | Risk Types |
---|---|---|
Structure-Actor: Stakeholders and regulation authorities | Optimize platform trading page design by exposing credit information about borrowers (eg. social media and third-party payment systems) | Loan information asymmetry risk |
Apply deep learning techniques to optimize credit scoring systems | Loan information asymmetry risk | |
Enact regulations that requires platform intermediaries to expose up-to-date trading information of borrowers and lenders on the web page | Loan information transparency risk | |
Establish supervision systems by regulatory institutions to ensure lenders and borrowers receive funds as agreed | Platform users’ right risk | |
Building solid collaboration with custodian banks and SaaS systems | Loan liquidity risk | |
Establish multiple scenarios to meet users’ funding requirements such as (car loans; education loans) to remain users | Loan liquidity risk | |
Structure-Task interdependencies: Internal structures and external regulatory structures | Improving the effectiveness of policies by establishing supervision systems that observing each platforms’ implementation on regulations | Platform regulatory risk |
Standardize market entry thresholds by conducting due diligence on new P2P lending platforms to keep the entry thresholds optimized for new platform owners | Platform market entry risk | |
Set interest rates based on borrowers’ credit level and prepare sufficient provision funds for lenders | Loan default risk | |
Regulatory institutions set the range of interest rates for platforms to control the maximum of interest rates | Loan interest rate risk | |
Technology-Actor interdependencies: Platform Service Design | Optimizing loan recommendation systems by using deep learning techniques to provide high quality loans to lenders who have sufficient funds | Loan default risk |
Create automatic loan diversification services to lenders and provide financial investment knowledge to lenders on the platforms’ web page | Loan default risk; Loan investment concentration risk | |
Establish secondary trading platforms to allow lenders to resale loans to other new lenders to transfer the risks taken by lenders | Loan investment concentration risk | |
Optimizing the effectiveness and efficiency of internal software to maintain the security level of users’ trading information | Users’ information security risk | |
Establish societal credit scoring systems; Optimize internal credit assessment systems | Loan credit assessment risks | |
Partnership with custodian banks to allow the custodian banks to manage funds instead of managing funds by the platform owners | Platform operation risk | |
Partnership with institutional lenders who have sufficient financial investment knowledge and have capability of dealing defaults | Loan investment concentration risk |
11.1 Structure-Actor Interdependencies: Supervision Infrastructure
11.2 Structure-Task Interdependencies: Internal Structure and External Regulatory Structures
11.3 Technology-Actor Interdependencies: Platform Services Design and Nature of Transaction
12 Risks and Development of P2P Platforms
Status | Risk Identifications | Organizational Perspective | Risk Mitigation Strategies | |
---|---|---|---|---|
LendingClub | Successful aspects | Investment concentration risk | Technology-Actor interdependencies | Operating second trading platform to allow lenders sell loans between each other |
Loan liquidity risk | Structure-Actor interdependencies | Collaborating with custodian banks (WebBank) to manage funds | ||
Platform market entry risk | Structure-Task interdependencies | SEC standardized the entry requirements for P2P lending platforms in the US | ||
Problematic aspects | Platform regulatory risk | Structure-Task interdependencies | The “Quiet Period” is suggested to be shortened and the loan application procedure can be simplified | |
Loan information transparency risk | Structure-Task interdependencies | Investor advisory team (LCA) should maintain the authenticity of the loan products to lenders | ||
Upstart | Successful aspects | Loan credit assessment risk | Technology-Actor interdependencies | Undertaking multi-types of businesses |
Platform operation risk | ||||
Loan investment concentration risk | Structure-Technology interdependencies | Implementing AI Risk Management Systems; Combining multiple machine learning algorithms into credit scoring model | ||
Platform operation risk/Loan credit assessment risk | Technology-Actor interdependencies | Collaborating with banks to create SaaS systems | ||
Renrendai | Problematic aspects | Loan information asymmetry risk | Structure-Actor interdependencies | Collaborating with custodian banks (WebBank) to manage funds; Creating secondary platform for selling loans; |
Loan investment concentration risk | Technology-Actor interdependencies | Building robust credit scoring/recording system | ||
Loan information transparency risk | Structure-Task interdependencies | Establishing a mechanism that maintains the transparency of loans | ||
Zopa | Successful aspects | Platform market entry risk | Structure-Task interdependencies | Regulatory authorities guarantee that platform owners need to attain a good level of financial management capabilities |
Loan information transparency risk | Structure-Task interdependencies | |||
Platform users’ rights risk | Structure-Actor interdependencies | Users must receive specific, predetermined levels of compensation if bankruptcy were to occur | ||
Loan credit assessment risk | Technology-Actor interdependencies | Collaborating with the credit reference agency Equifax to accurately calculate borrowers’ credit scores on a scale of 1–10 |