What Is ‘Outside-In’ Testing, And How Does It Accelerate Learning for Fintechs?

We recently worked with a fintech trying to increase the profitability of their loan product. The obvious lever: price. Lower the interest rate, increase uptake. Raise the interest rate, increase the interest income, but volume takes a hit. Econ 101.

So, this lender ran tests: increasing or decreasing the interest rate 100 bps for different groups. The results were underwhelming, with customers barely responding to the new interest rates. This puts the lender in a frustrating position. Are customers truly price-insensitive? Or maybe the changes weren't large enough to produce a noticeable effect in the small sample sizes of the tests? Should the lender spend time running more tests or abandon the idea?

Nibbling at the edges like this is a common approach to testing, especially in lending, where caution and conservatism are often rewarded. "Outside-in" testing is its opposite. In this approach, you test the extremes first to provoke the maximum reaction.

For this lender, that meant setting the price at unrealistic levels. They weren't going to make loans at 0% interest. But a test revealed that even super-low prices didn't move the needle much on customer uptake. So their first assumption, that price was the lever, was incorrect. (It turned out that their consumers weren't that price-sensitive, but they did respond to tweaks in messaging content and frequency.) Beliefs about the dynamics of customer behavior, risk, and unit economics that are based on common-sense assumptions often turn out to be wrong. Outside-in testing is a fantastic way to quickly discover that. Once you've discovered the right levers by testing the extremes, you can hone in on the realistic levels. Outside -> in.

Note that outside-in is especially helpful for smaller lenders. A larger lender might have big enough test groups to see movement in a +100 bps interest rate test. Outside-in testing allows small lenders to learn just as quickly.

Curious what outside-in testing might reveal about your customers, or what you could gain? Not sure where to start? We love helping lenders create and execute efficient, impactful learning agendas. Let's talk.