Online Payday Lending: System Dynamics Modelling

Анотація

The purpose of the article is to model the payday lenders activity, which carries out crediting on-line in the segment of subprime small-dollar credits (payday loans). The relevance of the research in this segment is stipulated by its dynamic developing in the latest decade. This is explained by intensive implementation of on-line technologies into the lending processes. The segment has distinctive features of credit activity, the analysis of which is presented in the article. Such basic features are a high risk, a highly competitive environment, and a high interest rate. Similar features generate the importance of the strategy of the company development, because a wrongly formed strategy generates a high enough risk of bankruptcy. The system dynamic application is presented for modelling of the credit activity of such companies. This approach allowed to model the influence of change of one element on another and on the system of payday lending as a whole. The built model includes four main ‘cornerstones’ of the system. Namely: the investor’s capital flow, the process of attracting borrowers, the dynamics of the transition of borrowers in the loan portfolio from one type to another, and the rigidity of credit risk management. The investor’s capital flow is a J-curve. The process of attracting borrowers is structured in the attracting of new borrowers and repeat borrowers. A feature of the payday loan market is the decreasing of borrower’s quality over time. The model presents the division of borrowers into five types depending on the revenues they generate for the lender. For each type, the model presents what profit/loss can be expected from customers of this type. The model takes into account such important relationships as the impact of interest rates on the deterioration rate of the borrower’s financial condition (transition between types of borrowers) and the impact of attracting new borrowers on their quality (distribution of borrowers by type), taking into account that borrowers leave the company. This model was illustrated using a simulation analysis, which allows to find the optimal lending parameters in relation to the amount of the lender’s initial capital. JEL classіfіcatіon: G21, E47 Manuscript received 30.04.2020

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