Learnings from the class – P2P Lending

Last class we explored an interesting application of P2P Lending. In that we

saw that one way of mapping lender and borrower was via grades of loans to
allow choice of risk vs profits. Here, I want to go in-depth of the process that
makes that happen, Automatic Bidding and contrast it with manual bidding.
To give context, some platforms facilitate online auctions wherein a potential
borrower places a request for a loan. Potential investors/lenders bid on the
listing which contains information on the loan amount and maximum interest
rate. However in this, as soon as a loan attracts more
lenders, irrational herding behaviour can follow leading to platform and
investor losses. To reduce this the model of automatic bidding can be
considered, explained below:

In automatic bids, investors are not affected by previous investors' decisions

on a loan. In automatic bids, once investors authorize the platform to bid for
them, the platform will bid on a loan according to customized requirements
on rate and grade. PaiPaiDai(ppdai.com), one of the largest P2P lending
platforms in India follows this model.

Thus automatic bidding weakens the herding effect and reduces the risk of
the investors’ blind follow-up by producing a rational herding behaviour in
online P2P lending. However, every system can be improved and its worthwhile
to consider them. A challenge and consequent improvement I can think of is
that the platform should devote to alleviating information asymmetry by
timely disclosing the user’s hard and soft information and carefully verifying
the truth and reliability of the information.

What improvements can you think about?

More on the tech and research on this

here: https://www.sciencedirect.com/science/article/pii/S2214635018300704