Where You Live Matters: Local Bank Competition, Online Marketplace Lending, and Disparity in Borrower Benefits

Abstract

In the past decade, the proliferation of online marketplace lending has been disrupting the consumer credit market, especially for personal loans for debt consolidation. These lenders, for example, Lending Club, transcend the geographic boundaries within which local banks operate and offer homogeneous access and terms to borrowers. However, the ultimate benefits borrowers derive from marketplace lending can differ significantly because local alternatives may replace marketplace loans when available and favorable. Correspondingly, if local bank competition drives the substitution of an existing marketplace loan with a traditional bank loan, the promise of equal benefits to all borrowers from marketplace lending is unlikely to fully materialize. This competitive dynamic has implications for policy making, particularly in judging the ramifications of bank mergers and acquisitions (M&As). Our results indicate that a borrower who resides in a more competitive market is more likely to pay off a P2P loan early by making a large, one-time payment compared with a borrower from a less competitive market, indicating a substitution with a local bank loan. Thus, borrowers from different markets do not benefit equally from online marketplace lending, disrupting the consumer credit market. In particular, consumers in smaller markets continue to be disadvantaged because of the absence of competitive intensity. This is a consequence of traditional banks competing within their local markets and incentivized to attract marketplace borrowers to traditional loans primarily by their local market conditions. Therefore, unless geographic frictions in traditional lending markets are removed, digital disruptions cannot equalize the benefits to consumers.