In the financial services businesses, doing business with some customers could actually be losing money for the service providers. For example, life insurance business with unhealthy people, credit loans with people who will default,..etc. So, there are indeed customers who actually cause the company to lose money.
The questions for FinTech startups are:
- Under your business model, are you attracting bad customers, i.e. adverse selection? Or good customers, i.e. positive selection of those customers with lower risks (of default, dying, getting into an car accident, etc)?
- What data/technologies the FinTech startups are using to positively select good customers? For example, IoT such as telematics in the car to monitor driving behaviors; or smart wearables to monitor vital signals? Are these data/technologies working well to encourage even better behaviors of good customers?
- To what extent, regulators would allow certain positive selection measures while not violating anti discrimination acts? and still be fair to those who are perceived to be bad customers with high risks?
- What countermeasures the incumbents can take to defend themselves?
It is very enlightening to listen to the in-depth discussion by Alex Rampell and Frank Chen on the risk selection issues in financial services industry, which might be arcane to some outside of the industry.
You may find some answers to my questions above by listening to this Podcast of Alex and Frank here:
