Fintech Market and Regulation : Lessons from China's Peer-to-peer Lending Platforms

This paper proposes a theoretical model to study the competition and regulation of peer-to-peer lending platforms. We show that inadequate regulatory capability and fierce competition jointly induce platforms to offer principal guarantee to investors. As platforms deviate from pure information intermediaries, investors are exposed to the risk of platform collapse and absconding. We investigate the welfare implications of increasing the regulatory capacity, lowering the interest rate ceiling, imposing a credit scoring system, investor naivety, and information disclosure. Our model can be used to explain many stylized facts during the boom and bust of China's peer-to-peer lending market