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Managing Credit Lines and Prices for Bank One Credit Cards

Bank One Card Services, Inc., 3 Christina Centre, Wilmington, Delaware 19801
Bank One Card Services, Inc., 2500 Westfield Drive, Elgin, Illinois 60123
Bank One Card Services, Inc., 3 Christina Centre, Wilmington, Delaware 19801
Bank One Card Services, Inc., 3 Christina Centre, Wilmington, Delaware 19801
Bank One Card Services, Inc., 3 Christina Centre, Wilmington, Delaware 19801
School of Business, University of Connecticut, Storrs, Connecticut 06269
margaret_trench{at}bankone.com
shane_pederson{at}bankone.com
ed_lau{at}bankone.com
lizhi_ma{at}bankone.com
stephanie_wang{at}bankone.com
suresh.nair{at}business.uconn.edu

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.

Key Words: Financial institutions: banks. Dynamic programming/optimal control: Markov; finite state.

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