How can Snap Finance balance offering longer repayment terms to attract more customers against the increased risk of defaults on these extended loans?

Introduction

Balancing longer repayment terms to attract customers against increased default risk is a critical trade-off for Snap Finance. This scenario involves weighing customer acquisition and revenue growth against financial stability and risk management. I'll analyze this trade-off by examining key metrics, designing experiments, and providing a data-driven recommendation.

Step 1

Clarifying Questions (3 minutes)

• Based on Snap Finance's business model, I'm thinking this trade-off might significantly impact our revenue and customer base. Could you provide more context on our current repayment terms and default rates?

Why it matters: Helps establish a baseline for comparison Expected answer: Current terms are 6-12 months with a 5% default rate Impact on approach: Would inform the range of extended terms to consider

• Considering our user segments, I'm assuming we're targeting consumers with limited credit options. Is this accurate, and are there specific segments we're aiming to expand into with longer terms?

Why it matters: Identifies target audience and potential growth areas Expected answer: Correct, looking to expand into near-prime credit segment Impact on approach: Would tailor terms and risk assessment for new segments

• From a technical standpoint, I'm wondering about our risk assessment capabilities. Do we have machine learning models in place for credit scoring, and how accurate are they?

Why it matters: Determines our ability to mitigate increased risk Expected answer: ML models in place with 80% accuracy in predicting defaults Impact on approach: Would influence how aggressively we can extend terms

• Regarding resources, I'm curious about our capacity to handle potential increases in customer service and collections. Do we have the team and systems in place to manage this?

Why it matters: Ensures we can operationally support the change Expected answer: Current team at 70% capacity, some scaling needed Impact on approach: Would factor in operational costs and scaling time

• Looking at our strategic priorities, how urgent is this initiative? Are we aiming to implement changes this quarter or is this a longer-term strategy?

Why it matters: Helps prioritize and scope the project Expected answer: Aiming for pilot launch next quarter, full rollout in 6 months Impact on approach: Would determine the pace of testing and implementation