Advertisement

Quantitative Marketing and Economics

, Volume 16, Issue 3, pp 251–287 | Cite as

Risk transfer versus cost reduction on two-sided microfinance platforms

  • Bryan Bollinger
  • Song Yao
Article
  • 169 Downloads

Abstract

Microfinance can be an important tool for fighting global poverty by increasing access to loans and possibly lowering interest rates through microlending. However, the dominant mechanism used by online microfinance platforms, in which intermediaries administer loans, has profound implications for borrowers. Using an analytical model of microlending with intermediaries who disburse and service loans, we demonstrate that profit-maximizing intermediaries have an incentive to increase interest rates because much of the default risk is transferred to lenders. Borrower and lender interest rate elasticities can serve as disciplining mechanisms to mitigate this interest rate increase. Using data from Kiva.org, we find that interest rates do not affect lender decisions, which removes one of these disciplining mechanisms. Interest rates are high, around 38% on Kiva. In contrast, on an alternative microfinance platform that does not use intermediaries, Zidisha, interest rates are only around 10%, highlighting the dramatic impact of intermediaries on interest rates. We propose an alternative loan payback mechanism that still allows microfinance platforms to use intermediaries, while removing the incentive to increase interest rates due to the transfer of risk to lenders.

Keywords

Microfinance Crowdfunding Two-sided platforms FinTech Lending Pricing Risk transfer 

JEL Classification

D21 D22 D47 D53 L11 L2 L3 

Notes

Acknowledgments

We would like to thank Manuel Adelino, Wilfred Amaldoss, Preyas Desai, Pedro Gardete, Debu Purohit, and participants at the 2015 INFORMS Marketing Science Conference for valuable comments. We would also like to acknowledge the excellent feedback we received from the editor and two anonymous reviewers. We also thank Huanxin Wu, Nazli Gurdamar and Boya Xu for excellent research assistance. All errors are our own.

References

  1. Aaker, J., & Akutsu, S. (2009). Why do people give? The role of identity in giving. Stanford University Graduate School of Business Research Paper No. 2027.Google Scholar
  2. Agrawal, A.K., Catalini, C., Goldfarb, A. (2011). The geography of crowdfunding. NBER Working Paper No. 16820.Google Scholar
  3. Banerjee, A.V., & Duflo, E. (2010). Giving credit where it is due. Journal of Economic Perspectives, 24(3), 61–80.CrossRefGoogle Scholar
  4. Banerjee, A.V. (2013). Microcredit under the microscope: What have we learned in the past two decades, and what do we need to know?. Annual Review of Economics, 5, 487–519.CrossRefGoogle Scholar
  5. Banerjee, A., Chandrasekhar, A.G., Duflo, E., Jackson, M.O. (2013). The diffusion of microfinance. Science, 341, 363–371.CrossRefGoogle Scholar
  6. Banerjee, A., Duflo, E., Glennerster, R., Kinnan, C. (2015). The miracle of microfinance? evidence from a randomized evaluation. American Economic Journal: Applied Economics, 7(1), 22–53.Google Scholar
  7. Banerjee, A., Karlan, D., Zinman, J. (2015). Six randomized evaluations of microcredit: Introduction and further steps. American Economic Journal: Applied Economics, 7(1), 1–21.Google Scholar
  8. Burtch, G., Ghose, A., Wattal, S. (2013). An empirical examination of the antecedents and consequences of contribution patterns in crowd-funded markets. Information Systems Research, 24(3), 499–519.CrossRefGoogle Scholar
  9. Chu, M. (2007). Commercial returns at the base of the pyramid. Innovations: Technology, Governance, Globalization, 2(1-2), 115–146.CrossRefGoogle Scholar
  10. Dieckmann, R. (2007). Microfinance: An emerging investment opportunity. Technical report, Deutsche Bank Research.Google Scholar
  11. Duarte, J., Siegel, S., Young, L. (2012). Trust and credit: The role of appearance in peer-to-peer lending. The Review of Financial Studies, 25(8), 2455–2484.CrossRefGoogle Scholar
  12. Flippen, A.R., Hornstein, H.A., Siegal, W.E., Weitzman, E.A. (1996). A comparison of similarity and interdependence as triggers for in-group formation. Personality and Social Psychology Bulletin, 22(9), 882–893.CrossRefGoogle Scholar
  13. Galak, J., Small, D., Stephen, A.T. (2011). Microfinance decision making: A field study of prosocial lending. Journal of Marketing Research, 48(SPL), S130–S137.  https://doi.org/10.1509/jmkr.48.SPL.S130.CrossRefGoogle Scholar
  14. Hulme, M.K.C. (2006). Wright Internet based social lending: Past present and future. Technical report, Social Futures Observatory.Google Scholar
  15. Iyer, R., Khwaja, A.I., Luttmer, E.F., Shue, K. (2015). Screening peers softly: Inferring the quality of small borrowers. Management Science, 62(6), 1554–1577.  https://doi.org/10.1287/mnsc.2015.2181.CrossRefGoogle Scholar
  16. Kawai, K., Onishi, K, Uetake, K. (2014). Signaling in online credit markets. working paper.Google Scholar
  17. Kent, D., & Dacin, M.T. (2013). Bankers at the gate: Microfinance and the high cost of borrowed logics. Journal of Business Venturing, 28, 6.CrossRefGoogle Scholar
  18. Kogut, T., & Ritov, I. (2005a). The “identified victim” effect: an identified group, or just a single individual?. Journal of Behavioral Decision Making, 18(3), 157–167.Google Scholar
  19. Kogut, T., & Ritov, I. (2005b). The singularity effect of identified victims in separate and joint evaluations. Organizational Behavior and Human Decision Processes, 97(2), 106–116.Google Scholar
  20. Kogut, T., & Ritov, I. (2007). “One of us”: Outstanding willingness to help save a single identified compatriot. Organizational Behavior and Human Decision Processes, 104(2), 150–157.CrossRefGoogle Scholar
  21. Krebs, D. (1975). Empathy and altruism. Journal of Personality and Social Psychology, 32(6), 1134–1146.CrossRefGoogle Scholar
  22. Lin, M., Prabhala, N.R., Viswanathan, S. (2013). Judging borrowers by the company they keep: Friendship networks and information asymmetry in online peer-to-peer lending. Management Science, 59(1), 17–35.  https://doi.org/10.1287/mnsc.1120.1560.CrossRefGoogle Scholar
  23. Liu, W., & Aaker, J. (2008). The happiness of giving:the time-ask effect. Journal of Consumer Research, 35(3), 543–557.CrossRefGoogle Scholar
  24. Michels, J. (2012). Do unverifiable disclosures matter? evidence from peer-to-peer lending. Accounting Review, 87(4), 1385–1413.CrossRefGoogle Scholar
  25. Nevo, A. (2001). Measuring market power in the ready-to-eat cereal industry. Econometrica, 69(2), 307–342. http://www.jstor.org/stable/2692234.CrossRefGoogle Scholar
  26. Phillips, R. (2013). Optimizing prices for consumer credit. Journal of Revenue and Pricing Management, 12(4), 360–377.CrossRefGoogle Scholar
  27. Pope, D.G., & Sydnor, J.R. (2011). What’s in a picture? evidence of discrimination from prosper.com. Journal Human Resources, 46(1), 53–92.Google Scholar
  28. Ravina, E. (2012). Love & loans: The effect of beauty and personal characteristics in credit markets. working paper.Google Scholar
  29. Rossi, P.E. (2014). Invited paper – even the rich can make themselves poor: A critical examination of iv methods in marketing applications. Marketing Science, 33 (5), 655–672.  https://doi.org/10.1287/mksc.2014.0860.CrossRefGoogle Scholar
  30. Small, D.A., & Simonsohn, U. (2008). Friends of victims: Personal experience and prosocial behavior. Journal of Consumer Research, 35(3), 532–542.CrossRefGoogle Scholar
  31. Small, D.A., & Verrochi, N.M. (2009). The face of need: Facial emotion expression on charity advertisements. Journal of Marketing Research, 46(6), 777–787.CrossRefGoogle Scholar
  32. Stephen, A., & Galak, J. (2012). The effects of traditional and social earned media on sales: A study of a microlending marketplace. Journal of Marketing Research, 49(5), 624–639. http://www.journals.marketingpower.com/doi/abs/10.1509/jmr.09.0401.CrossRefGoogle Scholar
  33. Stotland, E., & Dunn, R.E. (1963). Empathy, self-esteem, and birth order. The Journal of Abnormal and Social Psychology, 66(6), 532–540.CrossRefGoogle Scholar
  34. Wei, Y., Yildirim, P., den Bulte, C.V., Dellarocas, C. (2016). Credit scoring with social network data. Marketing Science, 35(2), 234–258.CrossRefGoogle Scholar
  35. Weining, B., Ni, J., Singh, S. (2017). Informal lending in emerging markets. forthcoming at Marketing Science.Google Scholar
  36. Zephyr, A.M. (2004). Money is not enough: Social capital and microcredit. Issues in Political Economy, 13, 1–12.Google Scholar
  37. Zhang, J., & Lui, P. (2012). Rational herding in microloan markets. Management Science, 58(5), 892–912.  https://doi.org/10.1287/mnsc.1110.1459.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Marketing at the Fuqua School of BusinessDuke UniversityDurhamUSA
  2. 2.Marketing at the Carlson School of ManagementUniversity of MinnesotaMinneapolisUSA

Personalised recommendations