BOCA RATON Fla., Mar. 11, 2021 (GLOBE NEWSWIRE) – Loans on the online marketplace are driving a surge in new businesses, evidence that lending platforms are helping to redefine the U.S. banking industry, according to a research team , who are professors at Florida Atlantic University.
The financial technology (FinTech) study, released by doing Journal of Financial and Quantitative Analysis, estimated that a 10 percent increase in market credit resulted in a 0.44 percent increase in businesses per capita.
The effects are even greater for less experienced entrepreneurs and small and less profitable businesses, as well as in low-income areas, noticed Douglas Cumming, Ph.D., and Sofia Johan, Ph.D., both FAUs University of Economics. Her research team included Hisham Farag, Ph.D. and Danny McGowan, Ph.D., both from the University of Birmingham in the UK.
“When we started this study, we expected that FinTech funding would help entrepreneurship, but we were surprised at how much it helped,” said Johan.
Marketplace lending platforms like Lending Club and Prosper emerged in the mid-2000s and have grown in popularity over the past decade, with around $ 6 billion in business lending annually in the US, the study found. They provide faster and cheaper access to credit than traditional lenders and enable startups and other businesses to grow.
The study suggests that marketplace lenders are expanding the loan offering by using digital algorithms in loan modeling to identify borrowers with “observably poor, but actually good credit quality.” While traditional lenders may use similar technologies, banks’ credit criteria do not allow them to lend to these borrowers, the researchers said.
Additionally, marketplace lenders use digital technologies that reduce procurement costs, which means lower interest rates compared to traditional lenders.
“By reducing borrowing costs, market lenders lower the expected operating costs of potential entrepreneurs and lead those who were previously unprofitable on the margin to entry,” the study says. “Overall, compared to traditional banks, there is reason to believe that marketplace lending has a disproportionately positive impact on entrepreneurship, especially for limited entrepreneurs who might be viewed as lower quality borrowers.”
The study compares the increase in business activity in states that limit marketplace lending (Idaho, Indiana, Maine, Mississippi, Nebraska, North Dakota, West Virginia, and Iowa) with states that do not restrict. Although these states have benefited from the lifting of these restrictions in recent years, there are still costs associated with less entrepreneurship and slower online marketplace development in these regions.
“With market lending restrictions, these eight states have really lost and had less entrepreneurship than they otherwise would have,” said Cumming.
With the American economy struggling to recover from the COVID-19 pandemic, states with increased market lending have benefited more. Cumming’s current work shows that online lending was much more stable, timely and resilient in the Covid-19 pandemic compared to consumer lending by banks.
Cumming and Johan said this study is part of their ongoing research into the growth of FinTech, especially crowd investing and marketplace lending, as they grow as an important external source of funding for entrepreneurs and businesses.
“Given the latest developments in FinTech, our goal as finance professors is to help students adapt to changes in the landscape of corporate funding sources,” said Johan. “We want to help the students at FAU to become more valuable not only for companies in the FinTech industry, but also for other companies that have to prepare for FinTech.”