Building Consumer-to-Consumer Trust in Finance

International Journal of Electronic Commerce / Winter 2010–11, Vol. 15, No. 2, pp. 105–136.Copyright © 2011 M.E. Sharpe, Inc. All rights reserved. 1086-4415/2011 $9.50 + 0.00.DOI 10.2753/JEC1086-4415150204Building Consumer-to-Consumer Trust in E-Finance Marketplaces: An Empirical AnalysisMartina E. Greiner and Hui WangABSTRACT: People-to-people (P2P) lending, a specialized consumer-to-consumer e-commerce model, facilitates borrowing and lending between individuals in on-line marketplaces. On-line market exchanges are usually characterized by uncertainty and risk. Since trust-building mechanisms and establishing trust can reduce the uncertainty arising from information asymmetries in exchange transactions, trust-building mechanisms are crucial to the prosperity of on-line marketplaces. Based on the elaboration likelihood model (ELM), which explains attitudinal change, trust-building mechanisms for P2P lending marketplaces are investigated empirically and tested. The study uses data collected from Prosper, the largest U.S. P2P lending marketplace. The results support the importance of the central route (economic status) as the major driver for bidding behavior and of pe-ripheral cues (social capital and listing quality) as trust-building mechanisms that influence trust behavior. These findings will help on-line marketplace providers to build successful P2P lending marketplaces.KEY WORDS AND PHRASES: E-finance, elaboration likelihood model, on-line communi-ties, P2P marketplace, trust, trust-building mechanisms.The Web and Internet have created many possibilities for new business mod-els. The eBay on-line auction marketplace for buying and selling products, for example, has successfully connected individual sellers and buyers around the globe. A specialized e-commerce model that has more recently been created is a finance model that facilitates borrowing and lending between individuals in an electronic market. Peer-to-peer lending marketplaces (also called P2P , people-to-people, person-to-person, or social lending) are on-line marketplaces that function similarly to eBay, but instead of listing and bidding on items, participants list and bid on loans without the mediation of a traditional bank or credit institution. The marketplace can be seen as a brokerage that facilitates the transaction process between people in need of money (borrowers) and people who want to invest money (lenders). Although profit-oriented on-line P2P lending marketplaces such as Prosper or Lendingclub in the United States have been enjoying considerable growth (in loan requests, loans, and member development) since their inception, they are still in their infancy. Zopa UK, the oldest on-line P2P lending marketplace, was launched in 2005. Prosper, the oldest U.S. P2P lending marketplace, was launched in 2006. Lending Club, the second-largest P2P lending marketplace in the United States, was launched in June 2007.On-line P2P lending marketplaces differ from off-line P2P lending, tradi-tional financial institutions, and C2C retail marketplaces in many respects. The consumer behaviors and institutional mechanisms of on-line P2P lending mar-ketplaces need to be studied to ensure the success of on-line P2P lending.On-line P2P lending marketplaces are different from off-line P2P lend-ing, where the borrower and lender know each other face-to-face and often106 GrEInEr and WanGhave connections of kin or friendship. In on-line P2P lending, by contrast, the lenders do not know the borrowers and have no way to directly request the return of their money. Thus on-line P2P lending marketplaces are similar to Akerlof’s example of the automobile market, which is characterized by information asymmetries between buyers and sellers [2]. Exchanges in P2P marketplaces are prone to uncertainty, opportunism, and deception because of their anonymous nature. Lenders do not know before they invest whether the borrower is willing or able to repay the loan. In addition, borrowers may misrepresent facts in order to get lower interest rates or increase their chance of being funded. If lenders are not able to distinguish good loans from “lemons”(i.e., loans that become delinquent before reaching maturity), good loans may be driven out, precipitating a market failure [2].P2P lending marketplaces are also different from traditional bank lend-ing, where the intermediary bank offers such services as guarantees in case of delinquency by borrowers and evaluating the credit risk of borrowers. In P2P lending marketplaces, such functions are taken over by the lender. P2P marketplaces do not offer the same assurance against loan defaults as banks or credit companies. Thus, it is the task of the individual lender to evaluate and assess the borrower’s capability and willingness to pay back. However, lenders do not have the experience, information, and staff that banks do to evaluate credit risk. Therefore, it is theoretically and practically important to investigate how lenders evaluate loan listings and make investment decisions. In addition, social factors are expected to play an important role in on-line P2P lending, where lenders and borrowers are complete strangers but are given ways to build connections electronically. Banks do not offer borrowers (and lenders) the ability to connect via personal networks or groups. It remains to be tested whether social capital actually meets the expectations of helping P2P lending practice.P2P lending marketplaces also differ from C2C retail marketplaces. This is so primarily because lenders take a higher risk, since the marketplace provides very few institutional mechanisms, and in case of default, a lender may only get a small percentage of the original loan sum. Moreover, since transaction frequency is low (the average number of loans per borrower was 1.08 as of July 2008), feedback and reputation mechanisms are presumably less effec-tive. Previous trust literature extensively studied reputation mechanisms on C2C retail marketplaces such as eBay or Amazon, where sellers and buyers transact frequently. Their findings may be only partially applicable to P2P lending marketplaces. Finally, transaction or loan duration can last many years and involve many monthly payments, so trust issues are not limited to only one exchange.In summary, for a P2P marketplace to flourish, it is important to examine how lenders make their decisions, what factors they use to evaluate borrowers, and how a P2P marketplace can build mechanisms that facilitate trust between lenders and borrowers so that lenders are encouraged to invest in a loan. This paper examines the trust-building mechanisms specific to P2P marketplaces to determine which of them increase the likelihood of trusting behaviors. It tests the research question: What trust-building mechanisms induce trusting behaviors between P2P participants?IntErnatIonal Journal of ElECtronIC CoMMErCE 107The elaboration likelihood model (ELM) is a theoretical lens that can help in the exploration of trust-building mechanisms. ELM explains persuasion and attitudinal change through a central route (i.e., task-relevant arguments) and peripheral cues. In P2P lending, borrowers try to persuade lenders to trust them and invest in their listings. ELM enables the identification of salient trust-building factors (central route and peripheral cues) and their relative importance in the context of P2P lending.The study found empirical evidence that the central and peripheral routes both influence lenders’ on-line P2P lending behaviors. Central route variables, such as the borrower’s economic status, act as a primary influence on a lender’s trust behavior. This is especially true for variables that are straightforward, objective, and comparable across borrowers, such as credit score and having a verified bank account. Therefore, the marketplace should strive to provide information about such matters. Peripheral cues, such as borrowers’ social capital, were also found to have an influence, alongside borrowers’ economic status, on P2P lenders’ decisions. By implication, P2P lending marketplaces should provide social networking features and help borrowers to build social capital by affiliating with good groups and collecting endorsements.Previous Research and LiteratureResearch on P2P lending has focused on three areas: (1) case studies of P2P lending marketplaces, such as Prosper (e.g., rational lender behavior) and Zopa (e.g., structural analysis) [27, 28, 37]; (2) detailed investigations of the social side and social features of P2P lending (groups and loan performance, social networks, groups as intermediaries, social networks) [6, 14, 17, 29]; and (3) economic theories and the effectiveness and efficiency of P2P lending marketplaces for creating a more competitive credit market [18]. The present research adds to the growing literature on P2P lending by empirically testing the trust-building mechanisms of P2P lending marketplaces, using ELM as a theoretical base.The objective of this study is to investigate trust between individuals in a C2C relationship like the one between a borrower and a lender. Most of the existing C2C trust literature focuses either on institution-based trust, reputation systems, or trust in the population of sellers in general [4, 5, 40, 56, 57]. Very little research on trust in individual sellers has gone beyond studying reputation systems. However, due to the nature of P2P lending, reputations systems and institution-based trust are less likely to be effective. Loans are unsecured, so the marketplace as intermediary offers no guaran-tees that the borrower will pay back. Feedback and reputation systems rely on high transaction frequency. In P2P lending, transaction frequency is low because of the long loan duration. Consequently, other mechanisms have to be established to build trust. This study contributes to the line of C2C trust research that looks at the interpersonal trust between seller and buyer by investigating multiple factors relating to individual sellers and how trust can be induced between seller and buyer (i.e., borrower and lender in the present context) [4, 54].108 GrEInEr and WanGTheoretical BackgroundTrustTrust and trust-building mechanisms are important in e-commerce because they can reduce the perceived uncertainty and risk associated with anonymous on-line exchanges and help consumers to engage in trusting behaviors, such as exchanging personal information and purchasing goods [4, 9, 19, 32, 40]. The discussion in this study follows the widely accepted definition of Mayer, Davis, and Schoorman, who conceptualize trust as the “willingness of a party to be vulnerable to the actions of another party based on the expectations that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party” [30, p. 712]. This defini-tion emphasizes important points common to on-line transactions: (1) despite the uncertainty surrounding the transaction, (2) one party is willing to take the risk and potentially lose something important by depending on the other party, and (3) this willingness is dependent upon certain expectations or beliefs about the other party.Trust in C2C markets in general, and P2P specifically, is different from trust models in B2C markets and also in off-line C2C markets [57]. In C2C marketplaces, three trust parties are involved: the intermediary (i.e., the party that sets the rules and creates the institutional framework [40]), the seller, and the buyer. Consequently, in on-line C2C markets, transaction intentions and behaviors do not rely only on a vendor’s characteristics, as in B2C markets, or on a seller’s characteristics, as in off-line C2C markets, but on the buyer’s evaluation of the intermediary’s characteristics as well as the seller’s charac-teristics [57]. In the trust literature, this difference is reflected by introducing concepts such as intermediary trust and seller trust [40, 57]. Intermediary trust refers to the trusting beliefs a buyer holds about the intermediary and is closely related to the concept of institution-based trust [40, 49, 57]. Intermediary trust in on-line marketplaces involves institutional mechanisms and regulations, such as feedback mechanisms, escrow services, and credit card guarantees [40, 49]. Conversely, the counterpart of seller trust is interpersonal trust or party trust, which refers to the buyer’s trusting beliefs about how the seller will behave in a transaction [30, 31].This study examines the trust-building mechanisms between seller (i.e., the borrower—the seller of a loan) and buyer (i.e., the lender—the purchaser of a loan) that facilitate a transaction (i.e., borrowing). Intermediary trust is not relevant in this context because the focus is on the relationship between lender and borrower and not on the relationship between lenders and the P2P marketplace. The discussion also deviates from the definition of seller trust. The literature conceptualizes seller trust as the belief that the population of sellers in a marketplace is honest, dependable, and reliable [40, 57]. In this study, seller trust is examined not as a belief about the population of sellers in a marketplace but as a belief about one specific seller, a conceptualization closer to the concepts of interpersonal and party trust as defined by Mayer et al. [30]. This definition of trust between borrower and lender makes it pos-IntErnatIonal Journal of ElECtronIC CoMMErCE 109sible to investigate why lenders invest in some borrowers but not others in the same marketplace.Trust can develop through many sources (e.g., familiarity, personality-based, institutional-based, knowledge-based) and the importance of these sources is likely to depend on the context, such as the stage of trust development [4, 33, 34]. Interpersonal trust is often considered to develop through personal interaction and past experiences. However, trust and trusting beliefs may form quickly before the transaction partners are able to acquire more meaningful information through experience and personal interaction [34]. Transaction partners may then rely on simple heuristics derived from peripheral cues to evaluate the trustworthiness of the other transaction party [11, 25]. The elaboration likelihood model provides a theoretical base to examine and dif-ferentiate between task-relevant arguments and simple cues that influence trust formation [23, 25, 59].Elaboration Likelihood ModelThe elaboration likelihood model (ELM) is a dual-process theory that relates directly to influence processes and their impacts on human perceptions and behavior [41, 43]. ELM posits that attitudes are influenced by two routes of influence that differ in respect to types of information processed, amount of cognitive effort requested in the processing, and duration of the attitudinal change. The central route changes attitudes through diligent contemplation of issue-relevant arguments; the peripheral route changes attitudes by associating the attitude object with heuristic cues, such as a credible, attractive, power-ful source or identification with the source. The central route requires much more cognitive effort, or elaboration, than the peripheral route, whereas the peripheral route shapes attitudes with little or no issue-relevant thinking [44]. Attitude changes induced via the central route tend to be more stable and more predictive of behavior because they are based on deliberate contemplation [43]. Which route is dominant depends on a person’s ability or motivation to carefully evaluate issue-relevant arguments [41, 43]. When the motivation and ability to think are high, the central route is more likely to be taken, whereas when the motivation and ability to think are low, people depend on peripheral cues to form attitudes [41]. ELM also holds that any variable can serve either as an argument or as a cue, depending on the person’s motivation and ability to think carefully about the merits of the appeal [41]. When thinking is high, peripheral cues are likely to be analyzed as arguments and their impact on attitudes may differ from when they are used as cues. For instance, an attrac-tive source influences attitudes positively when associated with the attitude object as a cue; but when considered as an argument, the same appeal may be regarded as irrelevant to the issue and hence rejected.In the context of P2P lending, borrowers try to influence lenders to fund their loan listings. The specific influence of concern here is establishing trust—in other words, the borrower wants the lender to believe that “I can be trusted to repay the money.” Borrowers can influence lenders by providing credit110 GrEInEr and WanGand financial information, by the content of their listing, and by means of their social capital. Credit and financial information (e.g., credit score, debt-to-income ratio, home ownership) are most directly relevant to the argument “I can be trusted to repay the money” and therefore serve as the central route in the influence process (see figure 1).What specific peripheral cues are used is likely to depend on the context. Prior research of on-line trustworthiness looked at peripheral cues, such as feedback ratings, interface design and Web site quality, e-image, and avail-ability of author information [4, 9, 13, 21, 24, 33, 50]. P2P lending marketplaces give borrowers the opportunity to influence the appearance and content of their listings as well as to build social capital. The focus in this paper is on borrowers’ listing appearance and social capital. The appearance or content of a listing may give a lender important cues about the borrower’s willingness and ability to repay a loan. In addition, P2P lending marketplaces commonly allow their members to connect to one another through personal networks or membership in communities. Information about social capital (i.e., the indi-vidual’s social connections) does not directly tell a lender how trustworthy a borrower is, but it gives relevant cues that a lender may use in making a judg-ment. For instance, the number of friends or endorsements shows how much a borrower is trusted by other people, and membership in a group makes it possible to evaluate whether the people related to a borrower are trustworthy. Lenders may feel comfortable about trusting a borrower if a good many other people trust that borrower or if the borrower belongs to a group that has a good reputation. Therefore, in P2P lending, the borrower’s listing quality and social capital serve as peripheral cues in the influence process (see figure 1).Figure 1. Research ModelIntErnatIonal Journal of ElECtronIC CoMMErCE 111Development of Research HypothesesCentral Route: Participant’s Economic StatusAvailability of information about the other party is important and has the potential to decrease uncertainty and increase trustworthiness [10, 47, 50]. Information about the borrower allows a lender to better evaluate the bor-rower’s competence, integrity, and predictability. Information about the borrower’s economic status may help lenders to evaluate the borrower’s ability to repay a loan. One of the unique characteristics of transactions in the P2P lending market, as compared to other C2C marketplaces, is that the borrower is not required to make a one-time payment, but must be able to make monthly payments over the course of the loan duration, often many years. Hence, a lender needs to be confident about the borrower’s ability to make payments over many years. Financial institutions use diverse informal and formal credit scoring methods to differentiate bad borrowers from good ones and to evaluate whether to grant a new loan application [15, 58]. Past credit history, economic data, and personal information about the borrower are a critical part of credit-scoring methods. Similarly, lenders in P2P lending markets use economic criteria such as credit grades, possession of a bank account, debt-to-income ratio, home ownership, and past loan performance to estimate the ability and willingness of a borrower to repay a loan on time [6, 14, 27, 52]. It is here proposed that lenders will consider criteria of this kind when considering whether to bid for a listing. What specific economic status variables are effective is likely to depend on the context and their availability to the lender. It is here proposed that better economic status influences the perceived trustworthiness of a borrower and consequently the likelihood of a listing being funded. Previous studies suggest that better economic status also helps borrowers to secure better interest rates [6, 17, 27]. In auction-style P2P lending marketplaces, lenders may bid against one other by proposing lower interest rates. Trustworthy borrowers should be able to attract more lenders that bid against each other, thereby lowering the interest rate the borrower has to pay. This leads to two hypotheses relating to the central route:H1a: Better economic status will increase the likelihood of funding.H1b: Better economic status will reduce the interest rate a borrower is able to obtain.Peripheral Cues: Participant’s Social Capital andListing QualitySocial CapitalIncreasingly, financial institutions are using “soft” social factors and not just “hard” economic data for credit scoring and making lending decisions [14, 16].112 GrEInEr and WanGThe idea behind the concept of social capital is that an individual’s network of relationships can provide a valuable resource for conducting various activi-ties [8, 36]. Social capital has the potential to be a basis for trust [36, 49, 55]. Social capital can provide the members of a social network with “the backing of collectively-owned capital, a ‘credential’ which entitles them to credit, in the various senses of the word” [8, p. 51]. Prior research has identified that social capital has three dimensions: structural, relational, and cognitive [36]. The discussion that follows concentrates on the relational dimension of social capital because it has been most closely linked to trust and trustworthiness [36, 55]. The relational dimension of social capital describes the set of personal relationships that people develop through interaction [36]. An individual’s personal relationships to others and to social networks can influence the in-dividual’s perceived trustworthiness. Social capital can take many forms and needs to be set into the context of P2P lending [36]. P2P lending marketplaces have deployed two fundamental ways to build social capital: affiliation with groups or communities, and development of personal networks.Groups or communities can play an important role in market exchanges [3]. The central idea is that groups hold all of their members responsible for the behavior of each individual member. Groups are motivated to discipline members who are cheating because the misbehavior of a single member could potentially harm other members and the reputation of the group as a collec-tive. Therefore, the group’s reputation can serve as a proxy for determining an individual’s trustworthiness [3]. In a P2P lending setting, lenders might make inferences from the reputation of a group to the reputation of an individual borrower who belongs to the group. Lenders might also believe that group members will socially influence other group members to pay back their loans in order to maintain the group’s reputation.Personal connections between marketplace participants are a second source of social capital. The personal connections of borrowers show how they are embedded as individuals in the social network of the marketplace. These con-nections might also provide endorsements that help the borrower to build up a good reputation. Reputation is one determinant of a seller’s trustworthiness in C2C purchasing behavior [35, 54]. Individuals might use the generally held view regarding the reputation of a transaction partner as a basis for forming their own perceptions about the trustworthiness of that transaction partner [26]. If others perceive a borrower as trustworthy, a lender might conclude that the borrower has this quality. Consequently, a lender might perceive a borrower who has built up connections as more trustworthy because other members have shown trust in the borrower. The social capital gained through such relationships can give borrowers “a ‘credential’ which entitles them to credit” [8, p. 51].Both groups and personal networks can provide valuable cues about a borrower. Therefore, it is proposed:H2a: Higher social capital will increase the likelihood of funding.H2b: Higher social capital will reduce the interest rate a borrower is able toobtain.IntErnatIonal Journal of ElECtronIC CoMMErCE 113 Listing QualityWeb site quality has been found to have a significant impact on assessments of the trustworthiness of vendors in B2C markets and consequently on willing-ness to transact with a specific vendor [13, 22, 33, 48]. However, the Web site quality factors commonly used in the B2C context, such as site navigation, layout of information, security, and visual design, are often the same for all sellers in a marketplace. In on-line marketplaces, it is necessary to assess other factors, such as the seller’s e-image, which the individual seller can influence [21]. Although borrowers on P2P lending marketplaces have only limited influence on the overall design and usability of the Web site, they are often able to control several variables, such as their own image and screen name, and the title, content, and structure of their listing description.People derive their trust perceptions from what they know about another person, and information quality has been found to be important in judging and evaluating a trust source [34, 47]. In a B2B marketplace, profile disclo-sure is arguably a trust-building mechanism that provides cues about the e-marketplace’s reputability, stability, and viability [51]. C2C research has found that a Web site’s text description and text comments influence trust in sellers [20, 38]. In P2P lending marketplaces, the listing is the borrower’s main way to directly communicate with and appeal to potential lenders. Con-sequently, cues from social capital aside, lenders have to rely on the listing to assess and evaluate whether they want to invest in a particular borrower. In their listings, borrowers are able to provide information about themselves and the purpose of the loan. They are free to disclose whatever and how much information they want. The listing description might include information about the borrower’s background, detailed budget and income information, and explanations of the purpose of the loan. ELM explains that in addition to the argument quality (i.e., the central route; in the present context, the content of the description), even simple peripheral cues, such as the number of argu-ments, may lead to attitude change [42]. In support for P2P lending, previous research has found that the number of bids increases with the length of the description [27, 46, 53]. The length of the description might therefore be a cue for lenders about the borrower’s listing quality. If used for evaluating the trustworthiness of the borrower, it could lead to a higher likelihood of fund-ing and reduced interest rates. Similarly, the appearance and visual design of a listing might encourage or discourage lenders to invest in the borrower. For example, images can act as trust-builders because they induce lenders to form initial impressions about a listing [46, 53]. Including an image in a listing may attract lenders’ attention, thereby increasing the chance of being funded. Previous research has found that visual self-disclosure on P2P lend-ing markets influences the borrower’s interest rate significantly [6]. Based on this discussion, it is proposed:H3a: Better listing quality will increase the likelihood of funding.H3b: Better listing quality will reduce the interest rate a borrower is able toobtain.。