Managing Credit Lines and Prices for Bank One Credit Cards

Margaret S. Trench (), Shane P. Pederson (), Edward T. Lau (), Lizhi Ma (), Hui Wang () and Suresh K. Nair ()
Additional contact information
Margaret S. Trench: Bank One Card Services, Inc., 3 Christina Centre, Wilmington, Delaware 19801
Shane P. Pederson: Bank One Card Services, Inc., 2500 Westfield Drive, Elgin, Illinois 60123
Edward T. Lau: Bank One Card Services, Inc., 3 Christina Centre, Wilmington, Delaware 19801
Lizhi Ma: Bank One Card Services, Inc., 3 Christina Centre, Wilmington, Delaware 19801
Hui Wang: Bank One Card Services, Inc., 3 Christina Centre, Wilmington, Delaware 19801
Suresh K. Nair: School of Business, University of Connecticut, Storrs, Connecticut 06269

Interfaces, 2003, vol. 33, issue 5, 4-21

Abstract: We developed a method for managing the characteristics of a bank's card holder portfolio in an optimal manner. The annual percentage rate (APR) and credit line of an account influence card use and bank profitability. Consumers find low APRs and high credit lines attractive. However, low APRs may reduce bank profitability, while indiscriminate increases in credit lines increase the bank's exposure to credit loss. We designed the PORTICO (portfolio control and optimization) system using Markov decision processes (MDP) to select price points and credit lines for each card holder that maximize net present value (NPV) for the portfolio. PORTICO uses account-level historical information on purchases, payments, profitability, and delinquency risk to determine pricing and credit-line changes. In competitive benchmark tests over more than a year, the PORTICO model outperforms the bank's current method and may increase annual profits by over $75 million.

Keywords: Financial institutions: banks. Dynamic programming/optimal control: Markov; finite state. (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (15)

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