In early 2015, we expressed skepticism about the prospects for peer-to-peer (P2P) lending. Like other efforts to slash financial transactions costs (think “block chain”), P2P was all the rage. The notion was that the lenders and borrowers could cut out the middle man, “disrupting” traditional finance.
For that to work, for P2P investors to get an attractive risk-adjusted return, it would have to embody a technology that can screen and monitor borrowers at a lower cost than do existing intermediaries in the long-established sector of consumer credit. That seemed especially doubtful in a competitive industry like credit card lending, which is what P2P lending often turns out to be...
Last week, our friend, Harvard Professor John Y. Campbell, delivered the American Economic Association’s 2016 Ely Lecture, the group’s most prominent invited lecture. His topic—a central challenge for policymakers and practitioners alike—is how to make modern finance work better for consumers who lack understanding of the opportunities and risks they face. Professor Campbell discussed how we can take the lessons from behavioral finance and household finance—a relatively new field that he helped establish—to help households manage the choices that they face. The ultimate goal is to foster decisions consistent with economic rationality (hence his title, “Restoring Rational Choice: The Challenge of Consumer Finance”) while minimizing the costs of government intervention.
We take this opportunity to highlight a few important points from Professor Campbell’s presentation (text here and webcast here)... Read More
Peer-to-peer (P2P) lending is all the rage. The idea is that individuals can bypass traditional financial intermediaries and borrow directly from investors at lower cost (or obtain credit that banks would not provide). Improving the lot of borrowers would be great if it works. But the key question is whether lenders can efficiently screen and monitor borrowers to get an attractive risk-adjusted return on their investment. In effect, individuals would be beating the technology that traditional lenders use. It’s far too early to tell, but there is plenty of scope for skepticism... Read More