Financial Innovation and Borrowers: Evidence from Peer-to-Peer Lending

Abstract

This paper provides empirical evidence on the impact of financial innovation on credit demand and supply in consumer credit markets. I study the effect of financial innovation on access to credit by looking at borrowers on a peer-to-peer (P2P) lending platform. I document the presence of two effects from credit disintermediation. The first effect is repricing of credit that induces borrowers to shift from banks to P2P lending. I show that creditworthy borrowers reduce utilization of their revolving accounts by paying down revolving balances with proceeds from P2P loans. The second effect is credit expansion because of reduced credit rationing. Using regression discontinuity design, I estimate the causal impact of disintermediation on credit to marginally-funded borrowers. I find that banks respond to financial innovation by increasing credit limits and improving access to mortgages for this category of borrowers. I also find that these borrowers increase utilization of revolving credit over and above the increase in credit limits. Collectively, these findings suggest that financial innovation may reduce profits of financial intermediaries but improve availability of credit for financially constrained consumers.