There are many decision points in the life-cycle of a consumer loan, and many potential decisions at each of these points.

Some of the decision points are:

• Including a prospect in a marketing promotion
• Approving/ underwriting a loan application
• Extending additional credit to an existing customer
• Down payment required for a car (or other retail purchase) loan
• Authorizing a transaction request for an over-limit credit card account

Some decision points may entail a simple yes/no option.  Most include multiple options. Approving a credit card loan application is a yes/no decision, but this decision is in most cases paired with the decision of how large a credit line to approve.  A car loan down-payment requirement might have options ranging from 0 to 30%.

A single decision point can involve multiple dimensions.  The down-payment requirement on the car loan might be linked to the interest rate charged.

So What is Being Optimized?

A decision optimization model can be developed to optimize a number of desired results - including discounted cash flow (DCF), return on assets (ROA), return on equity (ROE), and other measures.  VALANTEX advice to clients is to optimize economic value.  While ROA and ROE are confined to a fixed accounting period, economic value considers all future accounting periods.  Economic value also explicitly accommodates the cost of capital - which DCF does not.

While predictive (scoring) models provide the probability of some behavior or event, optimization models provide the decision that optimizes the value realized to the organization.  This approach creates value for the business by quantifying the nature of the relationships between and among customer characteristics, product characteristics, and customer behaviors that drive revenue and expenses.

Contact VALANTEX for more information, or to request a proposal