Network Formation and Financial Inclusion in P2P Lending: A Computational Model

Abstract

What characteristics of fintech lending platforms improve access to funding and increase financial inclusion? We build a computational model of platform lending that is used to study the endogenous loan network formation process on the platform. Given the multidimensional nature of financial inclusion, we address what factors influence the number of loans, the level of investment/debt, and how those relate to the distribution of investment/debt across agents. We find that platform scale and SME reach are essential in determining the number of loans on the platform. However, the willingness to accept risks is the main driver behind the value of those loans. We also find that increased platform scale, high-risk thresholds, and low-interest rates lead to more evenly distributed investments. Moreover, we find that large platforms help increase diversity and lead to a more evenly distributed power among peers. We conclude that digital platforms increase financial inclusion, helping to foster investment and achieve a more egalitarian allocation of resources. These results can guide new theory development about the impact of P2P lending on inequality as well as help platforms to promote financial inclusion.