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

In the past decade, the proliferation of online marketplace lending has been disrupting the consumer credit market, especially personal loans used 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 be used to replace marketplace loans when they are 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 also has implications for policy making, particularly in judging the ramifications of bank mergers and acquisitions. We utilize data from Lending Club, a major peer-to-peer (P2P) lending platform, to study whether local market structure drives heterogeneous incentives of traditional banks to convert borrowers of marketplace lending to conventional bank loans. The 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. Thus, borrowers from different markets do not benefit equally from online marketplace lending disrupting the consumer credit market. Our study has implications for online marketplace lending, other FinTech-based markets, and the consumer credit market in general.