Platform Perils: The winners curse on B2C consumer lending platforms

Abstract

Abstract This article compares the estimate of credit risk and actual defaults on unsecured loans originating from a B2C lending platform to a bank with those taken directly from the same bank. Our study expands on earlier research by comparing credit scoring and default-level differences through simulations of banks’ bidding process for a loan with similar credit risk models. We find that banks systematically and significantly underestimate the risk of loan applications through the B2C lending platform. The bank also experiences a disproportional loss of profitable clients on platform loans. Credit risk models from direct lending should be adjusted for this bias before they are employed in platform lending. Both effects can be linked to a winner’s curse, consistent with both theory and simulations, which have not previously been explored.