Recent platform frauds in the U.S. and other parts of the world raise skepticism about the viability of online marketplace lending (OML), a fast-growing new industry. In China, over onethird of peer-to-peer lending platforms have failed, many involve outright fraud. We find in the U.S., OML platforms profit from loan origination but do not bear borrower credit risk, giving rise to the incentive to overstate borrowers’ quality. In China, most OML platforms are “balance sheet lenders” but not subject to the banking regulations. Failure to control borrower credit risk and moral hazard lead to Ponzi Scheme-type platform-runs. Our comparative case study on Lending Club (NYSE: LC) versus Yirendai (NYSE: YRD), and empirical analysis of 735 OML plat-forms in China confirm these observations. We discuss regulatory responses and market-based solutions including leveraging users’ social networks in lending.
Recent platform frauds in the U.S. and other parts of the world raise skepticism about the viability of online marketplace lending (OML), a fast-growing new industry. In China, over one-third of peer-to-peer lending platforms have failed, many involve outright fraud. We find in the U.S., OML platforms profit from loan origination but do not bear borrower credit risk, giving rise to the incentive to overstate borrowers’ quality. In China, most OML platforms are “balance sheet lenders†but not subject to the banking regulations. Failure to control borrower credit risk and moral hazard lead to Ponzi Scheme-type platform-runs. Our comparative case study on Lending Club (NYSE: LC) versus Yirendai (NYSE: YRD), and empirical analysis of 735 OML platforms in China confirm these observations. We discuss regulatory responses and market-based solutions including leveraging users’ social networks in lending.