Quantitative Marketing and Economics

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

Risk transfer versus cost reduction on two-sided microfinance platforms

  • Bryan BollingerEmail author
  • Song Yao


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, 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.


Microfinance Crowdfunding Two-sided platforms FinTech Lending Pricing Risk transfer 

JEL Classification

D21 D22 D47 D53 L11 L2 L3 



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.


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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

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