Inf Technol Manag (2014) 15:239–254 DOI 10.1007/s10799-014-0187-z A trust model for online peer-to-peer lending: a lender’s perspective Dongyu Chen • Fujun Lai • Zhangxi Lin Published online: 31 May 2014 Ó Springer Science+Business Media New York 2014 Abstract Online peer-to-peer (P2P) lending is a new but Keywords Online peer-to-peer (P2P) lending Á Trust Á essential financing method for small and micro enterprises China that is conducted on the Internet and excludes the involve- ment of collateral and financial institutions. To tackle the inherent risk of this new financing method, trust must be 1 Introduction cultivated. Based on trust theories, the present study devel- ops an integrated trust model specifically for the online P2P The question of financing small and micro enterprises lending context, to better understand the critical factors that (SMEs) in an effective and efficient way has attracted drive lenders’ trust. The model is empirically tested using much attention from both academics and practitioners. The surveyed data from 785 online lenders of PPDai, the first and financing problem is especially critical in developing largest online P2P platform in China. The results show that countries like China. According to a report from the Chi- both trust in borrowers and trust in intermediaries are sig- nese Government Research Center, approximately 50 % of nificant factors influencing lenders’ lending intention. SMEs in China face financial constraints. With advances in However, trust in borrowers is more critical, and not only information technologies, a new type of financing method, directly nurtures lenders’ lending intention more efficiently online peer-to-peer (P2P) lending has, since 2005, become than trust in intermediaries, but also carries the impact of an important supplement to traditional financing. Online trust in intermediaries on lenders’ lending intention. To P2P lending allows people to lend and borrow funds develop lenders’ trust, borrowers should provide high- directly through an online intermediary without the medi- quality information for their loan requests and intermediaries ation of financial institutes. should provide high-quality services and sufficient security P2P lending has experienced rapid growth in recent protection. The findings provide valuable insights for both years around the world, including the UK., the US, Japan, borrowers and intermediaries. Sweden, Canada, and China [1]. Prosper.com, one of the largest online lending intermediaries in the world, has attracted over 1 million members and facilitated over D. Chen Á F. Lai 32,000 loans, totaling over $193 million [2]. As a leading Dongwu Business School, Soochow University, Suzhou 215000, China platform in China, PPDai (www.PPDai.com) has attracted e-mail: [email protected] 500,000 members and facilitated about 100 million RMB in loans in 2011. & F. Lai ( ) Online P2P lending has several unique characteristics College of Business, University of Southern Mississippi, Long Beach, MS 39560, USA that differ from traditional e-commerce business models. e-mail: [email protected] First, the ‘‘goods’’ exchanged on online P2P platforms are neither tangible products nor services, but rather the rights Z. Lin to claim principle and interests in the future. Second, The Rawls College of Business Administration, Texas Tech University, Lubbock, TX 79409, USA lenders make lending decisions mainly based on the risks e-mail: [email protected] and benefits of a lending transaction rather than on the 123 240 Inf Technol Manag (2014) 15:239–254 quality of the goods, services, logistics, or anything else. Table 1). These platforms employ similar lending proce- Third, the escrow systems that are used by traditional dures. The potential user who intends to borrow or lend e-commerce for product and service exchange are not must create an account, providing personal information, readily applied to online P2P lending settings. In traditional such as name, address, phone numbers, and social security consumer-to-consumer (C2C) e-commerce (e.g. Taobao in number. Some online P2P lending platforms (e.g., Prosper) China and eBay in the US), the intermediaries hold the also require users to provide bank account information. The funds from buyers and transfer them to sellers only after information is then verified and a credit number is assigned the buyer confirms they have received the product or ser- accordingly. For members of Prosper, a credit score is vice. Such an escrow system cannot be applied in online extracted directly from Fair, Isaac Credit Organization P2P lending because the funds themselves are the exchange (FICO). However, there is no such agency to provide credit object. Therefore, the transactional behaviors of online P2P scores in China, so borrowers’ credit scores are calculated lending may not be the same as those in traditional based on the information they provide, such as ID number, e-commerce business settings. In addition, previous studies bank account, income, age, and occupation. have mainly focused on developed countries, whose results Borrowers deemed creditworthy are invited to create their may not be applicable to Chinese settings. To better borrowing listings. The listings are essentially loan requests understand the lending behaviors in China’s online P2P that specify the amount they seek, the maximum interest rate lending platforms, further research on China’s online P2P they will pay, and other optional information, such as free- lending is warranted. format descriptions of loan purpose. Lenders make lending Online P2P lending is inherently high risk; it is not only decisions according to the listing information and the bor- characterized by uncertainty, but also by anonymity, lack rower’s personal information. On most P2P lending platforms, of control, and potential opportunism [3]. On online P2P such as Prosper in the US and PPDai in China, a lender lending platforms, lenders and borrowers are not able to chooses to finance only a portion of a loan, rather than the communicate face-to-face and funds trading is conducted entire loan. For instance, a lender can bid a minimum amount online. There is a high level of information asymmetry of $50 on Prosper. Borrowers can choose either a closed or between borrowers and lenders [4], which presents a sig- open auction format. In the closed format, the auction closes as nificant barrier to the further development of this market- soon as the total amount requested is reached. The loan’s place. P2P lending faces a variety of risks either from the interest rate is that specified by the borrower in the listing. In implicit uncertainty of using a sophisticated technological the open format, the auction is open for a pre-assigned period. infrastructure or from the conduct of borrowers involved in Even if the entire amount requested is funded, lenders can online transaction [3]. Prior studies have also reported that continue to bid down the interest rate. trust plays a central role in online transactions [5–8]. Once the bidding process ends, the listing is closed and Therefore, initiating trust between borrowers and lenders is submitted to the lending intermediary for further review a critical issue for online P2P lending. Previous studies [1]. Borrowers may be asked to provide additional docu- have investigated the antecedents of trust from a variety of mentation and information. If the lending is approved, perspectives in the e-commerce context, such as online funds are directly transferred from the winning bidder’s purchasing (e.g., [8–10]), the adoption of Internet banking account to the borrower’s account. In general, service fees (e.g., [11]), mobile payment (e.g., [12, 13]), and virtual are charged to both borrowers and lenders by the inter- community development (e.g., [14, 15]). However, few mediary. The borrower’s payback is also directly trans- studies consider this issue in the context of the online P2P ferred from the borrower’s account to the lender’s account. lending marketplace. If the payback is overdue beyond a pre-determined limit, The remainder of this paper is organized as follows. We such as 2 months on Prosper, the borrower’s default will be first briefly present the background of online P2P lending recorded and submitted to credit bureaus and then debt and then review the related literature, followed by devel- collection is initiated. oping a conceptual model with hypotheses. Subsequently, Although P2P lending has been growing rapidly in we present the research methodology and test the hypoth- China, it is still in the initial stages of development. The eses. Finally, we discuss the findings and implications and first online P2P lending platform, PPDai (ppdai.com), was make a conclusion. established in July 2007. Due to differences in legislation, credit systems, and network security, many unique prob- lems face China’s online P2P lending that may not exist in 2 Online P2P lending background developed countries. The most important problem is the lack of a legal basis in the supervision of online P2P There are several commercial lending platforms, such as lending intermediaries and the lack of safety guarantees for Prosper, PPDai, Lending Club, Zopa, and Easycredit (see lenders [16]. 123 Inf Technol Manag (2014) 15:239–254 241 Table 1 Online P2P lending Region Intermediary Start Region Intermediary Start intermediaries year year US Prosper 2006 China Yixin 2006 Zopa, LendingClub, VirginMoneyus, 2007 PPDai, Qifang, 2007 Loanio, Mircroplace, Fynanz Wokai People Capital, Zimple Money 2008 My089 2009 Zidisha 2009 ChangDai 2010 Vittana 2010 France BabyLoan 2009 Multi-national Kiva 2005 UK Zopa 2005 Microplace 2007 FundingCircle 2010 Italy Zopa 2007 Canada IOUCentral 2008 Boober 2007 CommunityLend 2008 Poland Kokos 2008 Japan Zopa 2008 Monetto 2008 Denmark Fairrates 2007 Australia IGrin 2007 Holland Boober 2007 Sweden Loanland 2007 Africa MyC4 2006 Germany Smava 2007 3 Related studies on P2P lending 4 Theoretical background and conceptual model Several studies have been conducted on the behaviors of High risk is inherent in P2P lending, in particular for online P2P.