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I am not sure I follow the adverse selection in credit cards marketing statement. That the lowest rates would attract the worst customers because no other bank is willing to offer cards at that rate.

So, let us do a small thought experiment here. Say, credit card companies operate at rates between 15 and 25%. Also, there are exactly two customers in the market-place; one who is desperate for credit and the other who is trying to get the best rate for their balances. (The dealseekers, if you will.) If a competitor drops price to 10%, the one who is desperate for credit will apply but then so will the deal-seeker. If the competition increases price to 30%, the one who is desperate will still apply but the deal-seeker won't. So from a selection standpoint, the company at 30% is actually getting the worst customers as only the ones who are desperate (and therefore likely to default) apply. That is when you get adverse selection. Not when you compete on price. When you lower price, you are getting good selection but you are hurting your margins.


Krish: Here's how to think about it. There are two banks in the market, A and B. Bank A is conservative while bank B is a risk-taker. Now enter an individual who has a poor credit score. Let's say bank B is willing to give credit to this customer at a 30% interest rate. However, bank A, the conservative one, has a strict credit score cutoff, meaning it will reject applicants like him. So he will get credit from bank B. The "adverse" part of adverse selection says that bank B has (perhaps inadvertently) selected the lowest slither of customers in the market.

Free FICO Credit Score

Groupon doesn't have a problem as far as I can see, they have enough cash flow to keep themselves a float. Worst case scenario they probably have what 10 million emails with a high open rate? Sounds pretty good to me.

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