In the following paper, I want to give an insight in two financial markets, the online peer to peer lending market and the payday loan market. Both are examples for disintermediated finance. Disintermediation means to withdraw funds from intermediary financial institutions, such as banks and savings/loan associations, in order to invest them directly. Simply put, in disintermediated finance one gets rid of the middleman or intermediary.
This paper is organized as follows. At first Chapter 2 will look into the online peer to peer market of Prosper.com. Therefore, I will analyse a paper of the authors Lin, Prabhala, and Viswanathan (2013) called "Judging borrowers by the company they keep: Friendship networks and information asymmetry in online peer-to-peer lending".
In Section 2.1 I will start with an introduction to the market and the author’s intention. Section 2.2 will explain the system of the online platform Prosper.com. The following section will outline the empirical results of the authors, in order to express the result’s implication in the last section of chapter 2. Chapter 3 will continue with payday loans. The first section 3.1 gives an introduction into payday loans and explains how the industry of payday loans works. The second section 3.2 will analyse one specific paper of Adrian Morse (2011) called "Payday lenders: Heroes or Villains?" The last section 3.3 will give a summary of the author’s findings and question them critically.
Table of Contents
- 1. Introduction
- 2. Online peer to peer lending
- 2.1 Introduction to the Market and the Author's Intention
- 2.2 The System of Prosper
- 2.3 Data and empirical Results
- 2.4 Result's Implications
- 3. Payday Loans
- 3.1 Definition of Payday Loans and how the Industry works
- 3.2 Payday lenders: Heroes or Villains?
- 3.3 Review of the Author's Findings
Objectives and Key Themes
This term paper analyzes two examples of disintermediated finance: online peer-to-peer lending and payday loans. The main objective is to provide insight into these markets, focusing on how they function and their implications. The paper examines the role of information asymmetry and the impact of social networks in online lending, as well as the ethical and economic considerations surrounding payday loans.
- Disintermediated finance and its implications
- Information asymmetry in online peer-to-peer lending
- The role of social networks in creditworthiness assessment
- The functioning of the payday loan industry
- Ethical and economic considerations of payday lending
Chapter Summaries
1. Introduction: This introductory chapter sets the stage by defining disintermediated finance and outlining the paper's structure. It introduces the two main topics – online peer-to-peer lending and payday loans – and their significance as examples of this financial model where intermediaries are bypassed. The chapter lays the groundwork for the subsequent analysis of each market, highlighting the author's intention to explore the mechanisms, benefits, and potential drawbacks of each.
2. Online peer to peer lending: This chapter delves into the online peer-to-peer lending market, focusing on the Prosper.com platform. It begins by introducing the market's rapid growth and the concerns surrounding information asymmetry. The core of the chapter analyzes the research of Lin, Prabhala, and Viswanathan (2013), which investigates the impact of borrower friendship networks on loan funding success, interest rates, and default rates. The chapter explores how these networks may mitigate adverse selection by providing lenders with valuable social signals about borrowers' creditworthiness. The analysis explores the mechanism of Prosper.com and the empirical findings of the cited paper, ultimately examining the implications of these findings for the understanding and regulation of online peer-to-peer lending.
3. Payday Loans: This chapter shifts focus to the payday loan industry. It begins with a definition of payday loans and an explanation of how the industry operates, highlighting the speed and ease of access these loans provide. The chapter then centers on an analysis of Adrian Morse's (2011) research on payday lenders, examining the debate of whether they are beneficial or detrimental to borrowers. This section critically reviews the author's findings, weighing the potential benefits of providing quick financial assistance against the risks of high interest rates and potential debt traps for vulnerable populations. The chapter synthesizes the research to offer a nuanced perspective on the role and impact of payday lenders in society.
Keywords
Disintermediated finance, peer-to-peer lending, payday loans, information asymmetry, social networks, creditworthiness, adverse selection, risk assessment, financial regulation, Prosper.com.
Frequently Asked Questions: A Comprehensive Language Preview of Disintermediated Finance
What topics are covered in this term paper?
This term paper analyzes two examples of disintermediated finance: online peer-to-peer lending and payday loans. It examines how these markets function, their implications, the role of information asymmetry and social networks in online lending, and the ethical and economic considerations surrounding payday loans.
What is the main objective of this paper?
The main objective is to provide insight into the online peer-to-peer lending and payday loan markets, focusing on their mechanisms and implications. It explores the benefits and potential drawbacks of each.
Which online peer-to-peer lending platform is analyzed?
The paper focuses on the Prosper.com platform as a case study for online peer-to-peer lending.
What role does information asymmetry play in online peer-to-peer lending?
The paper examines how information asymmetry is a concern in online lending and how social networks might mitigate adverse selection by providing lenders with valuable social signals about borrowers' creditworthiness.
What is the significance of social networks in the context of online lending?
The paper investigates the impact of borrower friendship networks on loan funding success, interest rates, and default rates in online peer-to-peer lending. It explores how these networks may help in creditworthiness assessment.
How does the paper address payday loans?
The paper defines payday loans, explains how the industry operates, and analyzes research examining whether payday lenders are beneficial or detrimental to borrowers. It weighs the potential benefits against the risks of high interest rates and potential debt traps.
What are the key ethical and economic considerations discussed regarding payday lending?
The paper discusses the ethical and economic implications of payday lending, considering the potential benefits of providing quick financial assistance against the risks associated with high interest rates and potential debt traps for vulnerable populations.
What are the key themes of the paper?
Key themes include disintermediated finance and its implications, information asymmetry in online peer-to-peer lending, the role of social networks in creditworthiness assessment, the functioning of the payday loan industry, and the ethical and economic considerations of payday lending.
What are the chapter summaries?
The paper includes summaries of each chapter: an introduction defining disintermediated finance and outlining the paper's structure; a chapter on online peer-to-peer lending, focusing on Prosper.com and the research of Lin, Prabhala, and Viswanathan (2013); and a chapter on payday loans, analyzing the work of Adrian Morse (2011).
What are the key words associated with this paper?
Key words include: Disintermediated finance, peer-to-peer lending, payday loans, information asymmetry, social networks, creditworthiness, adverse selection, risk assessment, financial regulation, Prosper.com.
What is the structure of the provided document?
The document includes a table of contents, objectives and key themes, chapter summaries, and keywords, providing a comprehensive preview of the term paper.
- Quote paper
- Christian Kreutzer (Author), 2016, Disintermediated finance peer-to-peer lending and payday loans, Munich, GRIN Verlag, https://www.grin.com/document/432918
