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Ask Gini: Adverse Selection – Street Smarts

blog-thumbails-AskGiniDear Gini,
We are experiencing a significant amount of adverse selection in our medium to high score ranges. Delinquency rates far exceed the forecast for credit offers accepted by this group of customers. How can we adjust for adverse selection? I remember some research on this topic, but I’m unable to find it.

Thank you,

Dear Carl,

Forget the research. When was the last time you talked to your customers? I mean, actual walking, talking customers. My guess is not lately. I suggest you visit your branches or wherever customers got to apply for your products. Yes, you heard me correctly. Meet them! Talk to them! Understand them!

When you meet and talk to your customers, ask them these questions. Why do you like our products? What about our products don’t you like? How are you using our products? Take notes or record their answers for later reference.

After spending time with your customers, look over the information they shared with you. What did customers in your target customer group tell you about your products? What product features are unappealing to them but appealing to customers in the poorly performing groups?

Then take a good hard look at your newer customers with the higher delinquency rates. What product features do they find appealing? What are the common denominators with this group?

Street smarts, not research could do the trick here. When your pricing is out of whack with the industry, all kinds of things happen.

Here’s an example. You ask a new personal loan customer why she applied for your product. She excitedly tells you, “I know the 12% interest rate you’re charging on this loan is high, but the return on investment with the stock market right now is 25%. During the 12-month loan term, I can invest the money I’m borrowing from you and make a killing. All my friends told me about it.”

In the example above, you don’t have the customer value proposition you were hoping for. Consider how you’re marketing this product. There is no way to learn this from all the MIS in the world.

So, go meet some customers. You might even like them, especially when you discover they’ll tell you all kinds of helpful things!


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