Based on paper on Profitbased acquisition strategy

for credit cards by RT

Stewart
Presented by Piyush

Credit Card Profit & Loss

1. Revenue

Spends/Interchange
Finance charges
Others

2. Cost

Fixed costs
Acquisition costs
Other operating costs

3. Loss

Which customer to acquire?

Current practice for customer

acquisition

Potential Revenue NOT considered

Approve or Decline decision based solely on
risk
Minimize bad rates
High

Risk

Low

High

Cut of
Decline

Approve

Credit Score

Before we move ahead

Few Credit Card Jargons

Bad Rate / Charge-Of rate Ratio of number of customers defaulting on credit cards
to the total number of customers.

Credit /FICO score

A score representing thecreditworthinessof a person.

Objective

Primary - Develop and test a methodology to

model revenue.

Use revenue models along with risk models for

acquisition decisions.

Challenges in modelling revenue /

profit
1.

Revenue is highly correlated with risk

2.

Structural Change / Population drift

Methodology

Modeling problem Predict cumulative spends during first 2 years of accounts

life

Independent variables
Credit bureau data
Account application data

Training data
A sample data set of 300,000 credit card accounts

Segmentation
Segments based on credit bureau scores.
Multiple spend models.

Model details - I

Log(Spend) used as response variable

Modeling equation
log(Spend) = + 1 X1 + 2 X2 + 3 X 3 +......
where , 1, are regression parameters

Model details - II

Independent variables (X1 , X2 , ...)

Binning approach used
Increases model stability
Easier implementation
Capture non-linear relationships

Correlated with spend but uncorrelated with Risk

Examples
Applicants monthly income
[$0-$2500] , [$2500-$5000] ,..

Age of oldest revolving trade in months

[0-71] , [71-999]

Challenges
1.

Revenue is highly correlated with risk

2.

Structural Change / Population drift

Challenges addressed!
Revenue is highly correlated with risk

1.

2.

Creating risk segments based on bureau score

Structural Change / Population drift

Challenges addressed!
Revenue is highly correlated with risk

1.

Creating risk segments based on bureau score

Structural Change / Population drift

2.

Leveraging binning approach for independent

variables

Results

Models rank order spend.

Example - Model for

segment FICO (720-760)
Spend shows a positive
slope.
Charge-of line is
approximately horizontal.

Higher mean spend with

same bad rate.

FICO Only
FICO and
Spend score

Approval
rate(%)
90%
83%

Bad
Rate
Mean
(%) Spend ($)
1.60% 15,032
1.60%

16,617

Conclusion

Use risk model in conjunction with a

revenue model

Advantages
Easily communicated
Easily implemented in systems
Track able and easily recalibrated.

Limitations
A single credit card portfolio
considered