Digital Inclusion and Financial Inclusion: Evidence from Peer-to-Peer Lending

We explore whether digital inclusion, a public policy designed to provide high-speed internet infrastructure for historically digitally excluded populations, is associated with the social and ethical challenge of financial inclusion. Using evidence from a sizable P2P lender in the U.S., we document that digital inclusion is positively associated with P2P lending penetration and that this relation is more pronounced in counties with limited commercial bank loan penetration and higher minority populations. Our new evidence from cross-sectional tests suggests that digital inclusion plays a key role in financial inclusion, particularly in regions with more vulnerable and/or underserved populations. In consequence tests, we document that high-risk borrowing is less likely to be denied in counties with higher digital inclusion and that digital inclusion is positively associated with P2P lending efficiency in the form of more repeated borrowing, decreased funding time, and improved funding fulfillment. In addition, we show that the availability of alternative information, a plausible channel through which digital inclusion is related to financial inclusion, is positively associated with efficiency in P2P lending. Our findings indicate that digital inclusion can empower financial service providers and other stakeholders to collaboratively fulfill their ethical and social responsibilities to meet the financial needs of historically marginalized groups.