A framework to improve churn prediction performance in retail banking

João B. G. Brito (), Guilherme B. Bucco (), Rodrigo Heldt (), João L. Becker (), Cleo S. Silveira (), Fernando B. Luce () and Michel J. Anzanello ()
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João B. G. Brito: Universidade Federal do Rio Grande do Sul
Guilherme B. Bucco: Universidade Federal do Rio Grande do Sul
Rodrigo Heldt: Universidade Federal do Rio Grande do Sul
João L. Becker: Fundação Getulio Vargas
Cleo S. Silveira: Universidade Federal do Rio Grande do Sul
Fernando B. Luce: Universidade Federal do Rio Grande do Sul
Michel J. Anzanello: Universidade Federal do Rio Grande do Sul

Financial Innovation, 2024, vol. 10, issue 1, 1-29

Abstract: Abstract Managing customer retention is critical to a company’s profitability and firm value. However, predicting customer churn is challenging. The extant research on the topic mainly focuses on the type of model developed to predict churn, devoting little or no effort to data preparation methods. These methods directly impact the identification of patterns, increasing the model’s predictive performance. We addressed this problem by (1) employing feature engineering methods to generate a set of potential predictor features suitable for the banking industry and (2) preprocessing the majority and minority classes to improve the learning of the classification model pattern. The framework encompasses state-of-the-art data preprocessing methods: (1) feature engineering with recency, frequency, and monetary value concepts to address the imbalanced dataset issue, (2) oversampling using the adaptive synthetic sampling algorithm, and (3) undersampling using NEASMISS algorithm. After data preprocessing, we use XGBoost and elastic net methods for churn prediction. We validated the proposed framework with a dataset of more than 3 million customers and about 170 million transactions. The framework outperformed alternative methods reported in the literature in terms of precision-recall area under curve, accuracy, recall, and specificity. From a practical perspective, the framework provides managers with valuable information to predict customer churn and develop strategies for customer retention in the banking industry.

Keywords: Customer churn prediction; Imbalanced dataset treatment; Feature engineering; RFM (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1186/s40854-023-00558-3

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