Essays on Consumer Credit Card Profitability




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This dissertation evaluates credit card customers' profitability for financial institutions and the effect of promotional low-interest-rate offers on customers' borrowing behavior. First, I study the indirect causal effects of the introductory promotional interest rates on the profitability of credit card customers. The introductory promotional interest rate offers are intended to encourage credit card customers to transfer balances from other credit cards and generate profit for the bank (direct effect). However, the promotional interest rates can also change the customer spending behavior and influence the bank revenue from other channels, such as fees, interest on the retail balance, interest on regular cash advances, and interchange income (indirect effect). My research shows that these indirect revenues could be substantial relative to the interest directly paid on the debt with promotional rates. Thus, not accounting for these indirect effects may lead to severe miscalculations on the effectiveness of promotional interest rate offers. In the next chapter, a latent class model has been developed to identify two latent segments among the current customers of a credit card company: Needy customers and opportunistic customers. We find that these two groups have different borrowing behavior. Furthermore, the results indicate that the credit companies may considerably boost their profit by targeting their future promotional offers, such as credit card checks, to this group of customers. The proposed model provides a valuable tool for credit card institutions to identify their needy customers during the first six months of their account opening. Default risk is another important factor that can impact the expected profitability of credit card customers. According to the credit card literature, those credit card customers who borrow more and generate more revenue for the bank could impose a higher default risk level to the bank. Thus, in the last chapter, I propose a risk-adjusted lifetime value (RA-LTV) model to quantify credit card customers' net value while accounting for the default risk that they can impose on the credit card company. The proposed RA-LTV model can estimate the long-term value of credit card customers. The model could be used to reduce the loss from risky customers.



Credit cards, Interest rates, Financial services industry, Credit