There are many decision points in the life-cycle
of a consumer loan, and many potential decisions at each of these
Some of the decision points are:
- Including a prospect in a marketing promotion
- Approving/ underwriting a loan application
- Extending additional credit to an existing
- 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?
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.
(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.
VALANTEX for more information, or to request a proposal