The Impact of Forward-Looking Metrics on Employee Decision-Making: The Case of

Customer Lifetime Value1

Pablo Casas-Arce, Arizona State University, casas.arce@gmail.com

F. Ass Martnez-Jerez, University of Notre Dame, asismartinez@nd.edu

V.G. Narayanan, Harvard Business School, vg@hbs.edu

May 1, 2016

1
We thank Dehesilla de Garcinarro, Bob Gibbons, Ranjani Krishnan, Ken Merchant, Krishna Palepu, Eddie Riedl,
Jos M. Vidal-Sanz, and seminar participants at the AAA Annual Meeting, Arizona State University, Baruch
College, Boston University, Cherry Blossom Conference at George Washington University, Drexel University,
EARIE Annual Conference, GMARS, Harvard Accounting and Management Brown Bag, Harvard IMO
Conference, IESE, JEI Madrid 2010, London School of Economics, McGill University, Management Accounting
Section Conference, Miami International Accounting Conference, Southern Methodist University, Stanford
University, Universidad Autnoma de Barcelona, Universidad Carlos III, Universitat Pompeu Fabra, Universit
Paris Dauphine, University of Maryland, University of Notre Dame, and University of Wisconsin-Madison for
helpful comments. All errors are our own.

Electronic copy available at: http://ssrn.com/abstract=2785561

 The Impact of Forward-Looking Metrics on Employee Decision-Making: The Case of

Customer Lifetime Value

Abstract:

This paper analyzes the effects of forward-looking metrics on employee decision-making. We

use data from a bank that started providing branch managers with the customer lifetime value

(CLV)an estimate of the future value of the customer relationshipof mortgage applicants.

The data allows us to gauge the effects of enriching the employees information set in an

environment where explicit incentives and decision rights remained unchanged. On average,

customer value increased 5 percent after the metrics introduction. The metrics availability

resulted in a significant shift in attention toward more profitable client segments and some

improvement in cross-selling. However, the use of CLV did not negatively impact pricing or

default risk, as the literature predicts. Finally, branch managers with shorter tenure displayed a

stronger response, consistent with information substituting for experience.

Keywords: Forward-looking metrics; customer lifetime value (CLV); employee decision-

making; cross-selling; decision aids.

Electronic copy available at: http://ssrn.com/abstract=2785561

I. Introduction
The goal of a management accounting system is to provide information to facilitate

managerial decision-making and control. The accounting literature has extensively studied the

control aspect of accounting information. For example, prior research in contracting has focused

on how the properties of performance measures influence their use in managerial contracts.

However, surprisingly little research focuses on how managers use new accounting information

to improve their effort choices when there is no change to their incentive contracts. In this paper,

we analyze whether the provision of a new forward-looking performance metriccustomer

lifetime value (CLV)can influence managerial behavior in a manner consistent with long-term

value creation. Importantly, we study a situation where the introduction of the new metric is not

accompanied by any change in explicit incentives or decision rights.

It is well known that the use of profits as a metric of employee performance may induce a

short-term orientation in employee decision-making (Prendergast 1999). To overcome this

orientation, firms use various approaches such as stock-based compensation or subjective

performance evaluation systems. Although these alternate systems can improve employee effort

allocations, they have limitations such as uncontrollability or arbitrariness (Ittner et al. 1997,

2003). Another way to overcome short-term bias is to use nonfinancial performance metrics such

as customer satisfaction or forward-looking measures that summarize the financial impact of a

decision over a longer horizon, such as customer lifetime value (CLV)an estimate of the future

value of the customer relationship. Research in the area of forward-looking measures has

predominantly focused on when and how these measures should be included in managerial

incentive contracts (Feltham and Xie 1994; Prendergast 1999; Moers 2006). The question of

whether forward-looking metrics can impact employee decision-making and improve future

profits even when they are not explicitly included in incentive contracts has not been explored.

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For instance, employees may modify effort allocations when CLV or customer satisfaction

information reveals the likely impact of the effort on future sales.

We build an analytical model that predicts that CLV will improve revenue performance

and contribute to a more profitable product mix. The model further predicts that these changes

will be more pronounced for novice employees, who have more limited information than

seasoned employees. We test these predictions using field and archival data from a mid-sized

southern European bank that had recently introduced a mortgage simulator as a decision aid for

branch managers. The mortgage simulator helped managers visualize the CLV of a mortgage

applicant, and enabled managers to better gauge the trade-offs between the value derived from

the mortgage and the value of simultaneous and potential future sales of banking products.

Results indicate that following the introduction of CLV, the ex-post realized value of the

customers purchasing a mortgage increased by 5 percent. This increase in value creation was

achieved via an increase in the share of mortgage sales in attractive customer segments. Results

also indicate an increase in cross-selling (the number of additional products sold with the

mortgage). Additionally, and contrary to theoretical predictions (Klemperer 1987), we found that

managers neither gave excessive price concessions to more attractive customers nor relaxed their

credit risk considerations once CLV became available. Finally, and consistent with CLV acting

as a substitute for experience, results show that the impact of this change in the information set

was more noticeable in the decisions of branch managers with shorter tenure.

We contribute to the accounting literature in the following ways. First, we show that

forward-looking metrics can improve decision-making, even without a change in the explicit

incentive compensation system. Research in accounting has primarily studied the usefulness of a

performance metric based on its ability to improve incentive contracting. The use of the

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performance metric to help the employee determine how best to allocate effort to improve

decision-making (the planning function, or attention getting and problem solving in Simon et

al.s [1954] terminology) has been largely ignored. Aside from scant experimental evidence

(e.g., Fudge and Lodish 1977), most of the research in this area is affected by the impossibility of

separating the impact of changes in the information set from the effect of simultaneous

modifications in incentives. We contribute to this literature by documenting that changes in the

information set alonewithout adjustments to decision rights or the incentive systemmay

change the behavior of decentralized decision-makers.

Second, we contribute to the decision aids literature by showing how information

processing varies with experience. Consistent with the notion that formal information systems

act as substitutes for experience, giving less experienced managers access to knowledge that they

would otherwise only acquire over time, we find that novice managers underperform seasoned

ones, but they catch up to their experienced peers in response to CLV availability.

Third, we introduce evidence about an important performance metricCLV. In the

marketing literature, CLV is linked to the idea of the firm as a portfolio of customers (Gupta et

al. 2004). As a performance metric, CLV enables firms to concentrate on acquiring customers

that create more value or on increasing the value of existing customers through loyalty or cross-

selling (Blattberg and Deighton 1996). Most of the literature has focused on models to better

estimate CLV (Villanueva and Hanssens 2007), its link to the firms financial value (Gupta et al.

2004), or the relationship between non-financial performance and the sustainability of customer

relations (Ittner and Larcker 1998). However, there is very little research on how managers use

CLV in decision-making; a rare example is Ryalss (2005) qualitative study. We complement

this literature by analyzing how CLV affects the sales decisions of customer-facing employees.

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 Our paper also contributes to the information economics literature on organization design

by studying the role of centrally provided information in coordinating decentralized decision-

making. The rationale for decentralizing decision rights is to enable local decision-makers to

incorporate information that is available to them but not to centralized units (Hayek 1945). Some

of this information is soft information, i.e. information acquired through customer interactions

that is difficult to verify and communicate. The information economics literature has examined

how to harden this information so it can be transferred to and used by other agents (Stein 2002;

Liberti and Mian 2009; Campbell, Erkens and Lumiotti 2014). In contrast, our research focuses

on how the firm may help the local decision-maker use the hard information she captures. CLV

increases the value of local information for the local decision-maker by integrating the collective

sales experience of decentralized agents. In a sense, it processes the customer information

captured by the local agent and helps her develop more attractive customer relationships. In this

way CLV may enable the decentralization of decisions and increase the productivity of the firm

(Brynolfsson and Hitt 2000; Bresnahan et al. 2000; Cremer, Garicano and Pratt 2002). In our site

we observe that branch managers with access to CLV make decisions that are more consistent

with the intended bank strategy relative to those who do not have access to this tool.

Finally, our paper contributes to the literature in organizational economics, where some

researchers caution that, in competitive environments, the promise of a customers future value

that CLV represents may lead to overinvestment in customer acquisition and thus to value

destruction (Villanueva et al. 2007). Our paper shows that, contrary to theoretical predictions,

employees need not destroy firm value by trying to please customers with a race to the bottom

in pricing when they are informed of the lifetime value implications of their decisions.

II. Institutional Background

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The Bank and the Mortgage Market

Our study focuses on a mid-sized commercial bank based in a southern European country

where the banking sector is relatively concentrated (the five largest banks accounted for 45

percent of the total lending market during our period of study). The national economy where the

bank operates grew significantly during the 1990s and early 2000s, leading to higher home

ownership rates. Mortgages became progressively more important for banks lending portfolios,

increasing from 12.4 percent of total lending in 1970 to 50 percent by 2002. One reason why

financial institutions focused on mortgages was their perceived value as a loyalty-building

product, as prepayment transactions in this market were rare and refinancing was almost

nonexistent. In the early 2000s, most of the mortgages sold in this market had extended terms

(over 20 years) and adjustable interest rates.

In 2002, our bank had over 300 branches. The typical branch was located in an urban area

and had four employees (a branch manager, two account managers, and a teller). The bank held

total assets of more than 22 billion and total customer funds of nearly 19 billion. It was known

in the industry for its highly educated workforce (over 60 percent college graduates) and

sophisticated technology. Employee turnover, at 5 percent, was the lowest in the industry.

Incentive Compensation

Branch managers compensation included both a fixed and a variable component. The

variable component, typically 2025 percent of base salary, was relatively high for the banking

industry at the time. Variable compensation was calculated mostly based on the financial

performance of the branch; a minor proportion (about 25 percent) was linked to non-financial

measures such as customer satisfaction and managerial ability. Financial performance was

5
measured by the branchs residual income, or the net income less a capital charge.2

Overall, in the words of the CEO, the banks compensation system was designed to

encourage branch managers to treat the branch as their entrepreneurial venture. The branch

manager was responsible for value creation and enjoyed a high level of discretion with regard to

hiring decisions, customer credit approval, and product pricing. As one branch manager recalled,

in spite of the risk-adjusted suggested rate that the transactional system automatically provided,

he could even decide to sell a mortgage at a loss. At the branch, only the branch manager

commercialized and approved mortgages.

The banks central office was responsible for providing managers with the tools to

achieve their goals. The mortgage simulator was one such tool.

The Mortgage Simulator

In April 2002, the bank introduced an Excel-based mortgage simulator for branch

managers to use at the moment of sale to estimate the prospective borrowers CLV.3 The head of

the retail network expressed the reasons behind this initiative: We wanted to put branch

managers on a level playing field with the customers. I was convinced that the customers with

the best negotiating skills got the best prices, regardless of their attractiveness to the bank. The

simulator enabled branch managers to confront the trade-offs when they made an offer.

The simulator generated a suggested interest rate along with a list of products for cross-

selling based on the customers segment and past behavior. It also analyzed the potential impact

of mortgage characteristics, price adjustments and additional product purchases on the

2
The structure of the variable compensation was the same for all branch managers. The key performance indicators
included in the compensation contract as well as their weights in the bonus formula were also common to all branch
managers. The compensation system did not change during the period of the study.
3
The simulator was installed in the branches overnight, and a memo was sent to branch managers with instructions
for its use (no in-person training of branch managers was required). Although managers accessed the mortgage
simulator and the transactional system from the same computer, the two applications were not fully integrated. As
one manager recalled, you had to use the simulator before the transactional system, but you could sell a mortgage
without using the output of the simulator.

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customers estimated lifetime value. Thus, CLV was not the average value for the customers

segmenta metric that retail banks commonly use to estimate customer attractivenessbut an

individualized estimate that incorporated customer characteristics and actual purchase behavior

(see Table 1) (Hogan et al. 2002). The bank did not store data on simulations performed, or

whether the output of the simulator was used in a specific transaction. Information on accepted

mortgage offers was observable only in the transactional system.

The simulator assisted in value creation in two important ways. First, it helped improve

the estimation of customer value by improving the algorithms and the inputs used to compute it.

Before CLV provision, managers likely had some expectations about existing customers value

and potential products to cross-sell based on personal heuristics and subjective judgment. The

simulator provided a convenient calibration of CLV and a systematic analytical tool that made

inferences based on the collective experience of branch managers at the bank. This method was

far superior to using idiosyncratic and selective individual information, which was potentially

subject to biases such as availability, base rate fallacy, anchoring, etc. The simulator identified

the segment affiliation of the new customers, information that was previously unavailable.

Furthermore, it increased the accuracy of the segment information for existing customers by

using all the information captured at the time of the mortgage sale (e.g., income) to update the

segment. One branch manager explained: Cost accounting gave us a good idea of a customers

value, but we couldnt see it until the end of the month. The simulator gave us a value assessment

instantaneously, at the time of the mortgage sale.

Second, the simulator allowed managers to understand the value implications of focusing

their efforts on different segments, i.e., the problem-solving value of accounting (Simon et al.

1954). Before CLV provision, managers based their commercial efforts, product offerings and

7
price adjustments on their subjective assessment of the impact that these actions would have on

long-term profitability. The simulator helped branch managers make consistent informed

decisions. Finally, CLV increased the attention of branch managers on the customer segment,

consistent with the attention-getting value of accounting (Simon et al. 1954).

Nonetheless, many aspects of the mortgage sale still relied on the managers judgment.

For instance, branches captured many clients through word of mouth, something that the

simulator did not factor in; also, the simulator suggested questions to ask but did not tell [a

manager] how much more likely a customer would be to make a purchase if [she] gave him a

certain price concession. Branch managers maintained the freedom to set the interest rate

independent of the simulators suggestion and to tailor the list of cross-selling products; they

had full pricing discretion, but the simulator gave [them] a baseline reference.

III. Motivation of the Empirical Analysis

Accounting information has three distinct roles (Simon et al. 1954): attention-getting,

problem-solving, and scorekeeping. CLV information at the bank we study serves primarily the

first two roles. Managers selling a mortgage had to decide which customers merited more

attention, how much effort (time) should be expended to sell additional products, and how large

a discount was justified to gain a mortgage sale. This section develops a model to gain some

intuition about CLV information as a tool for attention-getting and problem-solving.4 The model

allows us to derive hypotheses that we test in the empirical section. We also address the

possibility that CLV information had an indirect effect on scorekeeping. Appendix A provides

4
Our characterization of the branch managers decision is consistent with the literature on salesforce compensation
that uses an agency theoretical perspective in which the firm chooses a compensation plan to affect the salespersons
behavior. This literature formulates the salesperson problem as the optimal allocation of her/his selling time when
the sales of a product depend on that allocation and on the uncertainty of the sales environment (Basu et al. 1985). In
our model we take the compensation plan as a given and focus on the salespersons decision, assuming that the
manager captures the benefits of his or her actions.

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formal proofs of the hypotheses.

A simple model of the use of customer information

Consider a branch manager (decision-maker: DM) who must choose how much effort to

exert when serving a customer. We denote by ! the effort toward the mortgage sale, which has

a cost of ! . We omit agency problems by assuming that the manager captures the benefits

of his or her actions (later, we discuss how incentives would alter our hypotheses). We let the

expected value obtained from the customer be ! , = ! , where {, } is the

type of customer that the seller faces, (! ) represents the probability of selling the mortgage,

which we assume is increasing in ! , and measures the value obtained when selling the

mortgage and acquiring the customer.5 captures the fact that some customers are more likely to

be loyal to the bank or are more open to being cross-sold, and therefore can potentially generate

a higher CLV. The higher proclivity to cross-buying reflects a customers wish to consolidate her

finances in one bank and/or her potential for buying more banking products. Because high-value

customers purchase bigger, more profitable mortgages and acquire more products, putting effort

into attracting such customers yields higher expected values. We further assume that the DMs

problem is concave and yields a unique solution.

We assume that the DM cannot observe the realization of on his own (perhaps because

it is costly to acquire the information). He believes that = with probability , and = with

probability 1 . As one manager put it, before the simulator you were a bit blindfolded, you

relied on intuition. However, when the simulator becomes available, the DM perfectly observes

the type of customer . We denote by the information available to the DM at the time of the

5
The model can accommodate more general functional forms for ! , , for instance, by allowing the probability
of a mortgage sale to depend on . We only require complementarity between ! and , so that (! , )/! >
(! , )/! that is, the marginal return to effort is higher for than for customers. This assumption is
immediately satisfied in the simpler specification we use.

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mortgage sale, and is the time period, with = 0 prior to the simulator and = 1 when the

CLV information becomes available. That is, = at = 0 and = at = 1.

The objective of the DM is therefore to solve:

max [ ! , | ] (! ).
!!

!
Because of the complementarity between ! and , we can show that the optimal effort !

! ! !
satisfies ! > ! > ! . That is, effort is highest when the DM knows that the customer

is of type . When the DM is uncertain about the type, so that = , he expects an average

customer, and consequently exerts average effort. Effort is lowest when he knows the customer

to be of a low-value type. Field interviews confirmed this intuition. As one manager explained:

We did not look down on any client, but if the customer was a C [low value] and we knew there

was no possibility of getting more business from him. . . we might give him good service but not

spend the whole morning with him. Another manager noted: The simulator helped us make

better-tailored offers and identify which customers to make offers to in the first place. Thus, as a

result of this effort reallocation, when the DM observes , the probability of selling a mortgage

increases for profitable client segments and decreases for those less profitable.

H1: The proportion of mortgages sold to the most attractive segments will increase after CLV is

provided to branch managers.

The previous paragraphs suggest that CLV helps branch managers by building a decision

rule based on the statistical inference made from past mortgage sales that is superior to the

decision heuristics branch managers develop from their experience (Dawes et al. 1989; Grove

and Meehl 1996). However, the value of the new decision rule is not homogeneous for all DMs.

It is reasonable to expect that over time branch managers develop knowledge from past

experience that leads to better decision heuristics (Libby 1995; Libby and Luft 1993). Novice

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managers often lack the procedural knowledge of more experienced employees, and therefore

will profit more from a system that facilitates the use of expert knowledge (Bonner and Walker

1994), such as the mapping of customer information to precise measures of lifetime value. As a

decision aid, CLV would hence be more valuable for novice managers, because it may substitute

for the learning that occurs through experience.6

To capture how the effects of CLV information differ across managers in a parsimonious

way, we consider two types of employees: seasoned employees, who observe the realization of

with probability prior to CLV provision, and novice employees, who do not. Therefore, q

captures the effect of experience. Before CLV information is provided, novice employees exert
!
average effort with all types of customers, ! . On the other hand, when facing a high-type

customer, seasoned employees exert high effort with probability (when they observe ), and

average effort (as novice employees) with probability 1 . On average, they put in more effort

! ! !
than novice employees when serving those customers as ! + 1 ! > ! . But the

! ! !
opposite occurs when faced with a low-type customer, as ! + 1 ! < ! . When

CLV information becomes available, both novice and seasoned employees start perfectly
!
tailoring their effort to the type of customer they face, ! , and hence all achieve the same

level of performance. As a result, our second hypothesis states:

H2: Shorter tenure branch managers will, on average, perform worse than longer tenure

6
We can reach a similar prediction of seasoned managers displaying less change (improvement) in their decision-
making if their confidence in the value of their experience leads them to disregard CLV. Several behavioral studies
have documented that the reliance on decision aids decreases with the level of confidence of the decision-maker
(Arkes et al. 1986; Whitecotton 1996). If the higher confidence of more experienced managers does reflect higher
knowledge or skill, then the effects would be consistent with our hypothesis H2. However, if the higher confidence
of more experienced decision-makers does not reflect actual skill (in fact, Arkes et al. [1986] and Ashton [1990] find
that more confident subjects perform worse than less confident ones), we would expect to see seasoned managers
show no performance advantage over novice managers prior to CLV provision and perform worse than novice
managers after CLV. The prediction would be different if branch managers regard the CLV system as a tool for
headquarters to appropriate their investment in building relationships with customers. In that case, the provision of
CLV reduces the incentive for relationship building as managers cannot appropriate the rents generated. As a result,
branch managers performance would deteriorate after CLV.

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managers before the simulator. After the simulator, they will respond more strongly to CLV

information and converge with the value creation levels of their more experienced colleagues.

Our predictions are based on the assumption that branch managers respond to the new

information content of the simulator by using it to maximize branch performance, on which their

variable compensation is based. Alternatively, CLV estimations may also signal what kind of

performance will be rewarded by top management, either through the bonus or the probability of

promotion. If managers infer a change in the bonus plan,7 all branch managersregardless of

their tenureshould change their behavior in a similar manner. If the simulator changes implicit

incentives by signaling a change in the promotion criteria, then junior employees (who have

stronger career concerns) should respond more strongly to the information provided (Holmstrom

1999). However, they should also perform better before the simulator was introduced because

they would be more motivated in the first place. Testing H2 will provide evidence on the

relevance of the information content of CLV, relative to this alternative theory.

As noted above, one of the sources of higher customer value is the likelihood of being

cross-sold. To look at the effects on cross-selling in more detail, we extend the model by

allowing effort both on mortgage sale, ! , and cross-selling, !" . The effort toward cross-selling

represents the additional effort the DM exerts to create value in the customer relationship

through additional sales. We denote the value obtained from the customer as ! , !" , =

! !" , . We assume the DM chooses both ! and !" simultaneously, but the results

would be unchanged if cross-selling effort took place after the sale of the mortgage.

You can think of the cross-selling action as the choice of what products to offer the

client. The simulator helped managers increase cross-selling at all levels by suggesting products

the customers might like. When the manager has better information about the customers type,
7
This is unlikely in our setting, though, as bonuses are linked to branch profitability, rather than subjective factors.

12
and the products they are likely to buy, he can tailor the offer to their specific preferences,

increasing customer profitability. This is consistent with managers praise for the value of the

mortgage simulator: The simulator gave you clues. As a function of income and of the questions

that it suggested, it helped you design the financial solution the customer needed at any given

time with the products the bank offered. Thus the following hypothesis:

H3: After CLV is provided to branch managers, the average number of products sold along with

a mortgage will increase for all customers.

The hypotheses we have developed so far have a counterpart in terms of the value created

by the branch managers. Measuring value creation provides an additional consistency test and

helps us assess the relative importance of the effects discussed earlier. Moreover, in the spirit of

a variance analysis, we can decompose the change in average value after the simulator into the

effects of the change in segment composition of the mortgage portfolio (the between-segment

effect from H1) and the increase in value for the average customer holding the segment

composition constant (the within-segment effect from H3).

H4: After CLV is provided to branch managers, the average value per customer will increase.

Some scholars have used theoretical models to argue that salespeople receiving CLV may

destroy firm value by providing excessive discounts to clients they hope will be valuable in the

future (Klemperer 1987; Villanueva et al. 2007). Our model can be extended to accommodate a

branch manager decision space ampler than discretion of effort on customer service, including

price discretion or tolerance for credit risk. Our model predictions with respect to price (or

equivalently to credit risk) are ambiguous, as a decrease in price would increase the probability

of selling the mortgage but would also decrease CLV. However, our model predicts that,

regardless of its effect on mortgage prices or customer credit risk, CLV introduction will not lead

13
to a decrease in customer value. Thus, based on the insights of our model, and in contrast to the

predictions of previous work, we include the following additional hypotheses:

H5: After CLV is provided to branch managers, the change in the average price of a mortgage

sold will not decrease the average value per customer.

H6: After CLV is provided to branch managers, the change in the average default risk of a

mortgage sold will not decrease the average value per customer.

In the next sections we analyze whether the behavior of branch managers in our site

changed in the aforementioned ways post-CLV provision.

IV. Sample and Data Description

Sample description

To assess the effects of providing branch managers with CLV, we obtained data on the

banks transactions for a two-year window around the introduction of the mortgage simulator.

The data contains information on all customers who purchased a mortgage between April 2001

and April 2003.8 The window is close enough to the time of implementation to minimize the

impact of other changes in the economy, industry, or the bank itself; it is long enough to ensure

that branch managers had enough time to internalize the tool in their decision-making.

Because the bank did not exclude any branches from the simulator as a control, a major

challenge of the empirical analysis is to disentangle the changes caused by the simulator from

other sources of change at this bank or in the market as a whole. To partially address this

concern, we collected data on the banks internet banking clients who purchased a mortgage and

on the set of clients who bought personal loans through the branches during this period. Neither

of these sets constitutes a perfect control, but each has its own advantages.

8
We excluded the subrogation market, in which mortgages were awarded to the developer of a set of units and
automatically transmitted to the buyer without branch input.

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 Internet mortgages make a good control group for most of our analyses. Internet

customers received automatic offers from the bank according to pre-established algorithms and

decided to accept or decline the offer based on its perceived attractiveness. Thus, any change in

the banks strategy, its product offering, or a shift in the competitive environment that altered the

relative attractiveness of the banks mortgage offerings should be felt by this group of customers.

In contrast with the branch channel, the internet channel was not affected by changes in the sales

effort of the customer-facing employees and was not included in CLV implementation.

To test H3 (cross-selling), internet mortgages are a less powerful control. This is because,

during the early 2000s, customers in this market were beginning to use the internet channel as

the main (rather than complementary) channel of the banking relationship. The resulting upward

trend in the average number of products sold to internet customers is fundamentally different

from the normal trend of cross-selling to branch customers. In contrast, the set of customers who

purchased personal loans presents a relatively accurate picture of how the market landscape and

the banks strategy impacted the average customers consumption of financial products during

the period of interest. Thus, personal loan customers could be especially useful when testing H3.

Personal loans are less relevant than mortgages as customer acquisition tools, and they comprise

very different lending products, making them potentially less informative as controls for the

remaining hypotheses. However, we include both control sets in all tests for robustness.

Table 2A shows the descriptive statistics for brick-and-mortar and internet clients who

purchased a mortgage at some point during the observation period, whereas Table 2B compares

branch customers who purchased a mortgage to personal loan clients. The socio-demographic

characteristics of the branch managers can be found in Table 2C. Table 2A shows that mortgages

of internet customers pre-CLV have a similar size, around 95,000, to those of branch customers,

15
although the latter increase post-CLV. The internet mortgages generally have higher value-to-

loan ratios than branch mortgages (159 percent vs. 151 percent), consistent with the bank

requiring more collateral to mitigate the possibility of fraud. In addition, internet mortgages have

lower spreads (43 vs. 53 basis points), reflecting the lower cost of serving these customers. The

table also shows that internet and branch mortgage customers have similar potential annual

profitability (slightly higher for branch customers post-CLV).9 Branch customers, however,

show deeper relationships with the bank. On average, they have been with the bank for longer

than internet customers (17 vs. 6.4 months),10 hold more products (6.7 vs. 5.9), have a larger

balance of deposits (6,505 vs. 3,255), and a slightly larger loan (106K vs. 96K), although

the latter is mainly driven by the mortgage amount. In contrast, as shown in Table 2B, personal

loan customers have lower potential profitability than branch mortgage customers (756 vs.

970) but have longer histories with the bank (51 vs. 17 months) and hold more products (8.0 vs.

6.7), although with generally lower balances.

These summary statistics suggest that in our analysis the relevant comparison should be

not so much the levels but the changes in the levels of attributes between the branch mortgages

and the control samples pre- and post-CLV provision.

To complement the main sample data, we obtained from the banks risk management

department the registry of mortgage approval decisions. This set provides valuable, although

often incomplete, information on the mortgage applications received by the bank, the banks

decision to approve or reject the application, and whether the approved application is finally

accepted by the customer and formalized in a mortgage contract. While the product data in this

9
The bank defined potential as the reasonable target profitability for a customer given her current product holdings
and personal characteristics. Current product holdings is the single most important determinant of potential.
10
This difference is mostly driven by the different composition of new and existing customers for internet and
branch mortgages.

16
data set is fairly complete, data pertaining to the customer applying for the mortgage is less

comprehensive. Detailed customer information is only available for the subset of individuals

who were already bank customers at the time of the application or who subsequently became

customers of the bank, even if they did not purchase the mortgage.

In order to provide additional controls, we also collected information on the mortgage

market and the local economic conditions in which the branches operated. The controls include

the national average interest rates for mortgages, measures of the size of the mortgage market (at

the province level), and socioeconomic measures of the municipality, such as population,

unemployment rate, and banking intensity (see Appendix B for definitions and sources).

V. Results

Impact of CLV Availability on the Targeting of Customers for Mortgage Sales (H1; H2)

In this section we analyze whether CLV influenced managers to focus their effort on

customers with higher ex-ante potential value. The increase observed in the potential profitability

of mortgage customers (Table 2A) supports this idea. However, the banks calculation of

potential profitability is heavily influenced by the products held (for example, a customer with a

larger mortgage has a higher potential profitability than an otherwise equal customer with a

smaller mortgage or none at all). Thus, it is impossible to tell whether the increase in potential

profitability is caused by selling to customers with higher ex-ante attractiveness or by selling

more profitable combinations of products to customers with similar ex-ante attractiveness. An

ex-ante measure of attractiveness is needed to test the targeting hypothesis.

Ideally, we would analyze the impact of CLV by studying all the simulations produced

by managers. Unfortunately, the banks system did not store the CLVs that managers viewed

during the mortgage sale process as they input different scenarios (e.g. mortgage characteristics,

17
products sold, etc.) or the CLV predicted at the negotiations outcome. A reasonable ex-ante

indicator of CLV is the customer segment, with more attractive segments generating a higher

CLV. The bank segments its customers as a function of income, wealth, age, and other socio-

demographic factors (e.g. occupation, family status) believed to influence the consumption of

financial products. At an aggregate level it distinguishes four main segments. In ascending order

of attractiveness, these groups are D, C, B, and A. Figure 1 shows that the ex-post realization of

customer value is consistent with this ranking of ex-ante attractiveness. Because we do know the

segment each customer belonged to at the time of the mortgage sale, we use segment

identification to perform the analyses in this section.

By using the simulator, branch managers obtain an instant assessment of the segment

classification for new customers and an updated assessment for existing ones. The main purpose

of the simulator is to facilitate branch managers understanding of the profit implications of

mortgage characteristics, customers segment membership and financial consumption behavior

(Banker et al. 2000).

Per H1 we would expect the weight of more attractive segments in the distribution of

mortgage sales to increase post-CLV introduction. Table 3 compares the weight of each of the

four main segments in the portfolios of mortgages sold pre- and post-CLV introduction. In the

mortgages sold to branch customers post-CLV, we see an increase in the share of customers in

segment A (from 26 percent to 34 percent) and a decrease in customers in other segments

(especially segment C). The chi-square test clearly rejects the possibility that both sets of

mortgages were extracted from the same population. This evidence is consistent with CLV

influencing branch managers commercial efforts to pursue more attractive customers. If the

observed results were due to a bank-wide strategy shift or a change in customers appreciation of

18
the banks products, we would observe the same segment evolution in our control sets of internet

mortgages and personal loans. However, the trend in the mortgages sold by the branches

contrasts with the relative stability in segment composition of the internet mortgages, where the

weight of segment A drops by 2 percent post-CLV, and that of the personal loans, where the

weight of segment A increases by only 3.9 percent. Thus, the proportion of branch mortgages

sold to segment A increases by a significant 10 percent relative to the internet sample or 3.8

percent relative to the personal loans. This seems to rule out a shift in the overall composition of

the banks customers or a change in the banks strategy as the cause of the observed trends.11

In Table 4, we provide multivariate evidence corroborating this shift in segment

composition in an ordered logit framework. The first two columns establish the baseline of the

segment composition for the branch mortgages without any control set. The odds that a given

mortgage is sold to a customer in a higher segment (e.g., segment A vs. segments B, C, or D)

increases by a significant 45 percent after the provision of CLV. If we include controls for the

mortgage market and for economic conditions, the odds of the customer belonging to a higher

segment are still significantly (13 percent) higher after the provision of CLV. Columns 3 to 8

compare the changes in the odds of the customer belonging to a given segment pre- and post-

CLV availability using internet mortgages as a control, while columns 9 to 14 use personal loan

customers as the control group. The interaction between CLV availability and branch mortgages

shows that after CLV provision, the odds of a branch mortgage buyer belonging to a higher

segment increased 1.5 times more than the odds of internet mortgage buyers and 1.1 times more

11
CLV is potentially more useful for branch managers when they are dealing with new clients, as they presumably
have better information about the profitability of customers they already serve. Results (available from the authors
upon request) suggest that this is indeed the case. However, the difference in the CLV effect (11.1 percent vs. 7.5
percent) is not large.

19
than the odds of personal loan buyers.12 Note that the odds ratios for the interaction variable are

always statistically significant except for model 9, which has a p-value of 10.6 percent.

Columns 68 and 1214 in Table 4 show that the trend toward selling to more attractive

segments after CLV provision is more pronounced for novice branch managers (the experience

dummy variable is defined based on tenure at the time of the mortgage sale). Although we

cannot rule out the presence of career concerns and implicit incentives, the odds ratio on the

seasoned manager indicator shows that prior to CLV provision a seasoned manager was more

likely to sell a mortgage to a high-segment customer than a novice manager, and this disparity

reduces after CLV is provided. This is consistent with CLV acting as a substitute for experience

and benefiting novice managers more because of the information processing it entails (H2).13

Finally, Table 5 provides further evidence that changes in the banks strategy or the

competitive environment are not likely to drive the results. It combines data from our main

sample with the data on mortgage applications that the bank rejected or that the customer, after

being approved, declined to buy.14 Column 1 presents a logit model that assesses the likelihood

of a mortgage application being approved as a function of the applicants customer segment

12
The interpretation of the odds ratio on the interaction variables is complex. To build the intuition, we use the
numbers in model 3. The logit coefficients (which are the natural logarithms of the odds ratios reported in Table 5)
for Post-CLV and Post-CLV*Branch are -0.013 and 0.388 respectively. Suppose we have two equations measuring
the likelihood of segment classification, one for internet mortgages and another for branch mortgages. The
coefficient on the Post-CLV indicator would be -0.013 for the internet mortgage equation and 0.375 (-0.013 +
0.388) for the branch mortgage equation. These coefficients correspond to odds ratios of 0.987 and 1.455
respectively and have a straightforward interpretation: the odds of a given customer belonging to a higher segment
increased 1.455 times (decreased 0.987 times) after CLV was provided. The odds ratio of the interaction variable
1.474 reported in column 3 of Table 4 is simply the ratio of these two odds ratios (1.455/0.987).
13
We also analyzed whether the segment targeting effect varied as a function of the demographics of the target
market, the local competitive environment, or the business characteristics of the branch. Of all the variables
analyzed, only banking intensity and branch size show some statistical significance (and only when personal loans
are used as the control set). Moreover, the manager tenure effect, which is stronger, is not affected by the inclusion
of the additional variables. The results, which are available from the authors, suggest that the effects of experience
are not driven by differences in the location or characteristics of the branches.
14
The results of these analyses should be interpreted with caution, as the data available for mortgage applications
that did not result in a mortgage contract is often incomplete.

20
classification, before and after the provision of CLV.15 The lack of statistical significance of all

the post-CLV coefficientswith and without interaction with customer segmentsuggests that

the odds of a mortgage application being approved conditional on the customer segment did not

change after the provision of CLV. Thus, the data does not point to changes in the credit

approval policies of the bank favoring more attractive customers.16 Column 2 models the

likelihood of an approved mortgage being accepted by a customer. The odds of an approved

mortgage being accepted by the customer marginally decreased after the provision of CLV (odds

ratio of 0.62 with a p-value of 10.9 percent), but this change was consistent across all segments

(as suggested by the statistical insignificance of the odds ratios for the interactions between

segments and post-CLV). Customer behavior is, therefore, stable for the observation period,

suggesting that the results are not driven by changes in the competitive landscape of the market.

In summary, our evidence shows that after CLV was introduced the proportion of

mortgage buyers belonging to more attractive segments increased significantly. The evidence is

consistent with CLV provision influencing branch managers decisions, rather than bank-wide

strategic actions such as changes in the banks credit approval policies or customers preferences

causing this shift. Finally, the differential change in the behavior of branch managers as a

function of their tenure suggests that the provision of CLV acts as a substitute for experience.

Cross-selling (H3)

In this section we analyze whether CLV introduction resulted in an increase in the

average number of products sold to customers acquiring a mortgage. The banks tool encouraged

15
A mortgage application is initially submitted to the banks automated credit risk system, which approves or rejects
the mortgage. However, a branch manager, or the appropriate risk officer, may override the automated system and
approve a mortgage that is initially rejected. Analyses not tabulated indicate that the proportion of mortgage
applications approved after an override of the system did not change after the provision of CLV.
16
In field interviews, the bank managers denied any significant change in the banks credit risk strategy and
conjectured that if there were any significant change in the approval rates, this would have been the consequence of
a change in the credit risk profile of the applicants.

21
managers to cross-sell in two ways: by suggesting actions (products to sell) and by showing the

impact of those actions on current and future branch performance.

The results in Table 6 for branch mortgages show that, consistent with H3, there was a

significant increase (0.26) in the average number of products held by mortgage customers post-

CLV. If we disaggregate the effects for the different segments, we see that two-thirds of the 0.26

increase is explained by significant increases in cross-selling in all segments except for D; the

remaining third is explained by the shift in segment composition analyzed above. Results not

tabulated show that the increase is concentrated in new clients; cross-selling levels to existing

customers who purchased a mortgage are statistically indistinguishable pre- and post-CLV.17

As in the previous section, we explore whether this trend was induced by CLV provision

or whether it was the result of bank-wide strategic initiatives. The decreaseconsistent across all

segmentsin the average number of products sold to personal loan customers shown in Table 6

suggests that CLV availability induced this shift. Controlling for the change in the number of

products held by personal loan customers, the number of products held by a branch mortgage

customer post-CLV increased by a significant 0.35. However, controlling for the change in the

number of products held by internet mortgage customers, the number of products held by branch

mortgage customers post-CLV increased only by a small and statistically insignificant 0.06.

The results in Table 7 provide support for H3 using a Poisson regression framework.18

The first four models analyze changes in cross-selling in the branch mortgage sample alone.

Models 12 look at branch mortgages without any control and models 34 control for economic

conditions in the market of the branch. We observe that CLV introduction leads to a significant

increase in the average number of products held by mortgage purchasers andby comparing the

17
Results are available from the authors upon request.
18
For robustness, we also estimated the coefficients using OLS and a generalized Poisson regression (Consul and
Famoye 1992) and the results were essentially identical to those reported in Table 7.

22
coefficients on Post-CLV in columns 1 and 2that roughly one-third of that increase is

explained by changes in segment composition.19 The insignificant coefficients for the

interactions between Post-CLV and segment indicators suggest that the increase in cross-selling

induced by CLV provision is not meaningfully different across segments. We also tested whether

CLV introduction had a differential effect on managers as a function of their experience. In

results not tabulated, we found similar changes in cross-selling for seasoned and novice branch

managers. To discern whether the observed increase in cross-selling is the result of a bank-wide

strategic change or mainly induced by CLV provision, in models 56 we use personal loans as a

control set and in models 78 internet mortgages. The variable of interest is the interaction

between Post-CLV and branch mortgages. Its consistent positive and significant coefficient

across all specifications in the models using personal loans as the control set suggests that CLV

introduction led to higher cross-selling. However, in models 78 the coefficient on the

interaction variable is insignificant and its sign is not stable, suggesting that the increase in cross-

selling for branch mortgage customers is no different than that of internet mortgage clients.

To better understand these seemingly inconsistent results, we consider whether CLV

affected the kind of products sold. In an analysis not tabulated, we find that both branch and

internet mortgage customers hold slightly more product families post-CLV (3.77 vs. 3.61 for

branch customers and 2.97 vs. 2.80 for internet customers).20 However, while the increase in

branch customers product holdings is somewhat concentrated in products typically sold with the

mortgage (i.e., insurance), as one would expect after CLV introduction, for internet customers

the increase is concentrated in payment products (i.e., debit cards).

19
Notice that Post-CLV in column 1 measures the average treatment effect. By controlling for segment, column 2
strips out the effect on cross-selling due to changes in the segment composition. As a result, Post-CLV measures
only the changes in cross-selling within a segment.
20
A product family is defined as the set of products offered by the bank that satisfies similar financial needs. For
example, the different types of checking and savings accounts would form the transactional products family.

23
 Overall, these results suggest that CLV provision increased average cross-selling (H3). A

significant portion of this increase seems to be caused by the targeting of customers naturally

inclined to hold more financial products. However, these results are less certain than those

observed in the previous section with respect to shifts in segment composition, as the effects are

robust to controlling for personal loans but not for internet mortgages.

Value Creation Implications of CLV (H4)

Table 8 analyzes whether the realized CLV of customers who purchased a mortgage

increased after CLV introduction. We calculate the value created by a customer as the sum of his

or her monthly profitabilitydiscounted at an annual rate of 3 percentfor the four years

starting the sixth month after the mortgage sale. This allows us to focus on the long-term portion

of CLV (i.e., value created after the mortgage sale), potentially maximizing the difference in the

decision consequences of customer value and short-term profitability signals.

Results show that the average CLV rises from 2,698 to 2,851 for customers who

bought a mortgage pre- and post-CLV provision respectively. In other words, this tool resulted in

a significant 5.6 percent increase in average CLV. Moreover, 89 percent of this increase is

attributable to an increase in the proportion of mortgages sold to more attractive segments and 11

percent to an increase in value within the segment.21 As Figure 1 shows, D is the only segment

with an increase in realized customer value over 1 percent. The results suggest that decision-

makers in this environment find it easier to capture and develop ex-ante more profitable

customers than to change customer behavior.

Columns 2 and 3 of Table 8 repeat the analysis for seasoned and novice managers. The

larger average value of customers to whom seasoned managers sold mortgages pre-CLV (2,720

21
We performed similar decompositions for price and ex-post risk performance. However, the between- and within-
segment (as well as the total) effects are very small.

24
vs. 2,683 for novice managers) is consistent with more experience leading to higher-quality

decisions. All managers increase the average value of the clients they sell mortgages to, but the

increase is larger for novice managers than for seasoned ones (175 vs. 124 or 6.5 percent vs.

4.6 percent). Moreover, while all managers increase the average CLV by targeting customers in

more attractive segments, only novice managers show an increase within a segment, suggesting

that the simulators description of products to cross-sell is more informative to managers with

less experience. Although we cannot completely rule out the possibility that implicit incentives

are at play, the evidence is consistent with CLV acting as a substitute for experience.

Although this evidence is not consistent with managers destroying value through

excessive price discounts or risk-taking, given the predictions of the economics and marketing

literature we look directly at these issues next.

Pricing (H5)

In this section we analyze whether CLV altered the way branch managers priced

mortgages. One manager explained the extent of their pricing discretion: If we thought it was

justified by the money we could make [from the client] through other sources, such as products

or referrals, we could have offered mortgages at 0 percent interest. Because mortgages are not

a frequent purchase, and because refinancing is uncommon in our banks market (due to

adjustable rate mortgages), mortgages entail important switching costs for customers. This

creates a riskhigher than in other productsthat CLV may induce managers to overinvest in

customer acquisition through low prices (Klemperer 1987, Villanueva et al. 2007).

Similar to the conclusions of the previous section, the evidence in Table 2A does not

support the hypothesis of value destruction through excessive discounting. Rather than observing

a drop in spreads post-CLV, on average we see a small (1 basis point), but statistically

25
significant, increase; this is especially relevant if we consider the shift toward higher segments

analyzed above, which should have increased branch managers willingness to lower prices.22, 23

An alternative interpretation of this evidence is that managers simply ignored CLV when

setting mortgage prices. Mortgage prices usually reflect a combination of risk and commercial

considerations that lead to, for instance, offering lower rates to customers with more valuable

collateral (Manove et al. 2001) or who purchase more products (indeed, the third model of Table

9 shows that rates were lower for more valuable segments). If CLV alters managers beliefs

about the value implications of observable factors, this should be reflected in the weight

managers give these factors in the pricing of the mortgage. This is consistent with the bank

leaderships rationale for using CLV: we wanted the outcome of the sale process to be based on

objective factors, not on the negotiating skills of the customer.

In Table 9 we use a multivariate regression framework to analyze the mortgage pricing

model implicitly used by branch managers. Our variable of interest is the spread charged to

mortgage customers.24 For branches, the pricing model shows that managers gave greater

discounts to customers with larger mortgages (Capital) and higher coverage ratios (Value to

loan) but reduced the price breaks associated with cross-selling (Number of products) after CLV

introduction. Because mortgage size, coverage ratio, and cross-selling are inputs to the CLV

estimation that can be managed during the selling process, the results of this regression could be

interpreted as evidence that branch managers used CLV when making the mortgage pricing

decision. No such changes are observed in the internet mortgage pricing model. Moreover, the

22
When controlling for segment composition, the difference between pre- and post-CLV spreads for branch
mortgages remains around 1 basis point.
23
As observed in Table 9, there is a positive but insignificant increase in internet mortgage spreads. The increase in
branch mortgage spreads is larger albeit statistically indistinguishable from the change in internet mortgages.
24
The interest rate quoted for the mortgages in our sample was the sum of a reference interest rate (usually the Euro
Interbank Offered Rate, EURIBOR) and a spread, and was adjusted annually following the market changes in the
reference rate. Branch managers could not influence the reference rate but had complete discretion over the spread.

26
last two columns of Table 9 show weak evidence of novice managers relying more on CLV

information to price their mortgages, as evidenced by the higher significance of the coefficients

on the size of the mortgage (Capital) and the number of products cross-sold (Number of

products) after CLV introduction. This evidence is consistent with CLV being a decision aid that

substitutes for experience and helps novice managers to achieve a pricing outcome that is more

aligned with customer attractiveness and less influenced by a customers negotiation skills.

Thus, although branch managers did use CLV information to price mortgages, our data

does not support the theoretical prediction that CLV information leads managers to destroy

customer value through steep discounting.

Ex-post Risk Performance of the Mortgage Portfolios (H6)

Another possible consequence of CLV introduction is a change in the way branch

managers input risk in loan-making decisions. The risk assessment of any loan decision has two

components: the credit score calculated by the banks credit risk models and the subjective

estimation of the branch manager based on local information that is not codified in the banks

systems. If the focus on CLV increases the incentive to close certain sales, managers may

underweight local signals of higher credit risk, which could lead to defaults and workouts. The

trade-off between CLV and credit risk differs from the trade-off between CLV and price

analyzed above because the economic impact of bad credit materializes years after the mortgage

is signed. Thus, in this section we analyze whether CLV introduction results in an increase in the

realized credit risk of the mortgages that branch managers sold.

The bank has a credit classification system that flags problematic mortgages by indicating

the level of risk associated with the client. The quality of the classification is high because this

system determines both the amount of loan loss provisions and the level of capital required by

27
banking regulators. It identifies four levels of credit risk: (1) incidence, (2) tardy, (3) doubtful,

and (4) defaulted.25 A customer may remain in a given category for as long as the qualifying

conditions persist, evolve to a higher risk category, or return to the normal (non-risk) status if she

normalizes her payment standing. Although we cannot observe the risk of a mortgage at the time

of sale, it is sensible to assume that if branch managers react to CLV introduction by relaxing

their credit risk standards, we will observe a higher incidence of bad risk situations in the

mortgages sold post-CLV.

Table 10 summarizes the frequency of risky classifications for the mortgages sold pre-

and post-CLV through the branch and internet channels. To simplify the analysis, we compare

the frequency of risky classifications in the eight years following the mortgage contract.26 We

then focus on the frequency of what we call bad risk standings, or classifications at every level

above incidence (as the latter may reflect temporary or atypical oversight). Overall, the table

shows that risky classifications are infrequent, which is consistent with the banks conservative

approach to risk management. Moreover, CLV availability did not impact the frequency of risky

classifications. While the number of customers with a risky standing at any point in time in the

eight years after the mortgage sale increases from 6.3 percent pre-CLV to 6.8 percent post-CLV,

when the analysis is limited to bad risk situations the percentage falls from 0.7 to 0.6.

Furthermore, internet mortgages, which present a slight decrease in the frequency of risky

classifications (3.9 percent pre-CLV vs. 3.7 post-CLV), experience an increase when the analysis

is limited to bad risk situations, although the level remains very low (0.3 percent vs. 0.9 percent).

25
The banks risk documentation defines the risk classifications as: 1. Incidence: Clients with any payment delayed
for a period longer than 30 days. 2. Tardy: Clients with any payment delayed for longer than 90 days. 3. Doubtful:
The risk management department (or the branch manager) manually indicates a higher level of risk. Typically, this
situation applies to incidence clients or to clients who have requested a bankruptcy protection procedure. It also
includes tardy clients against whom the bank has initiated a judicial process of debt recovery. 4. Defaulted: Clients
with written-off balances over 300 who had previously been fully covered by loan loss provisions.
26
These are year-end observations in the year the mortgage is sold and the seven following years.

28
 In Table 11 we use a regression framework to analyze whether there is a change in the

way branch managers input risk in their lending decisions post-CLV. The dependent variables in

these analyses are an ordered ranking of the customers worst risk classification or indicator

variables for the presence of a risk or bad risk event in the eight-year period following the

mortgage contract. The explanatory variables are indicators of the mortgage sale taking place

through the branch channel, being made in the post-CLV period, and their interaction. The

positive and significant coefficient on the branch channel indicator is consistent with the higher

risk standards applied to internet mortgages. More important, the coefficient on the interaction

term shows no credit risk deterioration. If anything, its negative and significant value in the bad

risk events models suggests that branch managers raise their risk standards post-CLV. These

findings are robust to the inclusion of segment indicators in the regressions. The coefficients on

these indicators are consistent with less attractive segments having higher risk levels.

In summary, branch managers did not destroy customer value by relaxing risk standards.

Rather, they put more weight on the potential negative consequences of a default, as the

likelihood of a serious credit-risk classification for mortgages sold in the branches decreases vis-

-vis the control sample of internet mortgages. These analyses are very robust: they span a period

(eight years) long enough for any credit risk problem to surface. This period includes the peak of

the financial crisis, which should amplify any deterioration of the default risk.

VI. Conclusion

In this paper we analyze how the addition of forward-looking metrics to the employees

information set influences their decision-making behavior. At the mid-sized southern European

bank where we conducted our study, management developed a mortgage simulator that

calculated the expected value of a customer relationship (CLV) and the impact of mortgage

29
terms and cross-selling on this value. We analyze how this decision aid affected the behavior of

branch managers at the time of a mortgage sale.

We find evidence consistent with branch managers using CLV in their decisions even

though there is no corresponding change in their compensation system, which continues to link

rewards to short-term profitability. Branch managers increase their commercial focus on the

most attractive segments, increase cross-selling, and change their pricing model. This suggests

that the organization in our studywith a highly educated workforce and a CLV model

developed by its managementovercame the skepticism toward centrally estimated metrics

traditionally identified in the literature. Moreover, the decision changes observed result in an

average increase of over 5 percent in the value of mortgage customers. The results indicate that

forward-looking information can help align the long-term value creation strategy of an

organization with the short-term profit objectives of its employees and enables a decentralized

implementation of strategy. After the introduction of CLV, we observe deeper changes in the

decisions of novice managers as well as larger increases in the average customer value of their

sales, a result that is consistent with CLV acting as a substitute for experience. Finally, contrary

to predictions in the literature, our results show that CLV availability did not encourage

managers to attract valuable customers at the expense of making excessive price concessions or

increasing ex-post risk, suggesting that managers increased sales to more valuable customers by

providing better service.

Our contributions should be viewed in the context of our study, which was based on an

institution that offered freedom of action and responsibility for profitability and value-creation to

its decision-makers, invested in their human capital, and had low employee turnover. The same

result may not hold in environments with higher employee turnover or lower employee

30
sophistication. We leave for future research an exploration of the contingent factors that

influence the effectiveness of forward-looking metrics in affecting employee decision-making.

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33
 APPENDIX A. Proofs

We let the expected value obtained from the customer be

! , !" , = ! !" , . Assume that !" , is increasing in , so that !" , >

!" , for all !" . The share of mortgages sold to high-type customers at time is ! =

! !
!" !!
! ! ! !!! ! ! ! !
. The average value per customer in the mortgage portfolio is given by
!" !! !

! = ! ! + 1 ! ! , where we denote ! = !"

!
, for ease of

notation. We denote the change in the share of high-value customers by = ! ! , and the

change in value for a given customer type by = ! ! . Then, in the spirit of a

variance analysis, we can decompose the effect of the CLV information on average value as

follows: = ! ! + ! + 1 ! . The first term

represents the effects of the change in segment composition of the mortgage portfolio, while the

second term measures the increase in value for the average customer (holding the segment

composition constant). The following result shows that both these effects are positive:

PROPOSITION 1. ! ! 0 and ! + 1 ! 0. As a result,

0.

Proof. The objective of the DM is to solve:

max [ ! !" , | ] (! ).
!! ,!!"

! !
The optimal effort choice, ! , and cross-selling actions, !" , satisfy the following first-

order conditions:
! ! !
[ ! !" , | ] = (! ),
! !
[ ! !" , | ] = 0.

34
Notice that at time = 1, because the manager knows , we have ! !" , = 0. Hence,
! ! !
!" , !" , , for all !" . In particular, we have that !" , !" , .

Therefore, it must be the case that ! + 1 ! 0. Moreover, !"

!
,

! ! !
!" , > !" , , where the first inequality follows from the optimality of !" ,

while the second follows from the monotonicity of . As a result, it follows from the first-order

! ! ! !
condition with respect to ! that ! < ! . Furthermore, ! = ! , as the

manager does not observe the customers type in period = 0. Therefore, we have that

! !
! !! ! !
! !! ! !
!" !! !
! !
> ! !
= 1. Notice that ! = ! ! ! !!! ! ! ! !
= ! ! /! ! ! !
,
! !! ! !! !" !! ! !! !!! ! !! !

which implies that ! > ! . Because ! > ! , it follows that ! ! > 0.

35
 APPENDIX B

Definitions and sources of control variables

In order to provide additional controls, we collected a list of variables that describe the

mortgage market and the general economic conditions in which the branches developed their

activities:

Mortgage interest rates: National average of the mortgage interest rates charged by
banks, savings banks, and credit cooperatives. Frequency: monthly. Source: Boletn
Estadstico del Banco de Espaa
(http://www.bde.es/bde/es/secciones/informes/boletines/Boletin_Estadist/)
Mortgage market size (number): Number of mortgages sold per province. Frequency:
monthly. Source: Instituto Nacional de Estadstica
(http://www.ine.es/jaxiT3/Tabla.htm?t=3201&L=0)
Mortgage market size (euros): Volume in euros of mortgages sold per province.
Frequency: monthly. Source: Instituto Nacional de Estadstica
(http://www.ine.es/jaxiT3/Tabla.htm?t=3201&L=0)
Banking intensity: Number of banking branches per 1,000 inhabitants per city.
Frequency: annual. Source: La Caixa. Anuario Econmico de Espaa
(http://www.anuarieco.lacaixa.comunicacions.com/java/X?cgi=caixa.le_DEM.pattern&)
Population: Number of inhabitants per city as of January 1st. Frequency: annual. Source:
La Caixa. Anuario Econmico de Espaa
(http://www.anuarieco.lacaixa.comunicacions.com/java/X?cgi=caixa.le_DEM.pattern&)
Unemployment rate: Percentage of city inhabitants registered as unemployed in the
National Employment Services as a percentage of the total population aged 1564.
Frequency: annual. Source: La Caixa. Anuario Econmico de Espaa
(http://www.anuarieco.lacaixa.comunicacions.com/java/X?cgi=caixa.le_DEM.pattern&)

36
 FIGURE 1

Average Customer Value per Segment Pre- and Post-CLV Availability ()

3,728 3,741

2,851
2,567 2,597 2,698

1,870 1,843
1,362 1,473

Segment A Segment B Segment C Segment D Average

Pre-CLV Post-CLV

This chart compares the value of customers who purchased a mortgage before and after the
availability of CLV. The value of a customer (CLV) is the sum of the discounted monthly
profitability calculated by the bank over the 48-month period starting the sixth month after the
sale of the mortgage. The discount rate used is 3 percent (inflation rate) because profitability
calculations include adjustments for risk. Profitability numbers are Winsorized at the top and
bottom 1 percent.

37
 TABLE 1
The Mortgage Simulators CLV Model
The mortgage simulator generates a suggestion of the appropriate mortgage price (spread over the Euribor rate), a checklist of products for cross-selling, and estimates of the customers lifetime
value. The CLV is calculated by adding the expected value of the mortgage and the expected value of other products the customer may buy. The estimated future volume of consumption of other
products is a function of the customer segment and the products held at the time the mortgage is signed. The horizon of these calculations is five years (despite the fact that actual churn is below 10
percent). Below is a list of the different products considered in the estimation of CLV and a basic description of the calculations performed to estimate their contribution to customer value.
Product Value calculation Comments
Mortgage NPV (financial margin + fees charged to the customer Prepayment risk estimated to decline over the life of the mortgage.
closing costs administrative costs bad debt expense; K-
equity mortgage business)
Homeowners f(value of the house; expected life of the mortgage)
insurance
Life insurance f(value of the mortgage; age of the customer) Increases with age until the effect of shorter remaining life expectancy
dominates in older customers.
Checking income level * age factor * employment factor Higher-income clients and older clients keep larger balances.
account administrative costs Self-employed clients are less valuable because their income level is less
certain.
Administrative costs are estimated for the average customer per segment
and fixed costs per account.
Payroll income level * age factor administrative costs Higher value than the employee checking account because automatic
account payroll deposit leads to higher balances and higher loyalty.
Credit card f(income level; risk level; gold/regular) Gold card generates twice the value of the regular card, but the client
must fulfill the income requirements.
Pension funds f(personal income tax regulations; age) Value decreases with age.
Certificate of f(income level; age) The use of the product increases with age. Older customers are more
deposit loyal to the bank, but also have a shorter time horizon.
Its use decreases with the financial sophistication of the consumer, for
which a good proxy is income level.
Investment f(income level; age; family status) It is assumed that the customer will invest most of his/her disposable
fund income after consumption in financial instruments.
Brokerage NPV of brokerage fees. Fees are f(income level; age; family Customers who own a brokerage account will own some investment
services status) funds.

38
 TABLE 2A
Descriptive Statistics: Branch and Internet Mortgages
Brick-and-mortar channel Internet channel p-value Branch-Internet
All Pre- Post- p-value All Pre- Post- p-value All Pre- Post-
CLV CLV Pre-Post CLV CLV Pre-Post CLV CLV
Number of clients 15,503 8,428 7,075 2,343 1,530 813
Average mortgage characteristics
Capital () 101,712 95,779 108,780 (0.000) 96,729 95,505 99,031 (0.041) (0.000) (0.082) (0.000)
Mortgage length (years) 23.5 23.1 24.1 (0.000) 22.3 22.0 22.8 (0.001) (0.000) (0.000) (0.000)
Value to loan ratio 151.5 151.6 151.4 (0.852) 159.1 158.7 159.7 (0.565) (0.000) (0.000) (0.000)
Spread (%) 0.53 0.52 0.53 (0.031) 0.43 0.43 0.43 (0.460) (0.000) (0.000) (0.000)
Average client characteristics
Number of products 6.65 6.53 6.79 (0.000) 5.86 5.79 5.99 (0.002) (0.000) (0.000) (0.000)
Tenure at the bank (months) 17.4 15.8 19.3 (0.000) 6.4 5.5 8.2 (0.000) (0.000) (0.000) (0.000)
Age 35.6 35.5 35.6 (0.284) 34.6 34.5 35.0 (0.099) (0.000) (0.000) (0.034)
Potential profitability () 970 926 999 (0.000) 962 947 974 (0.061) (0.450) (0.163) (0.050)
Loans 105,860 99,439 112,906 (0.000) 96,181 94,481 99,002 (0.011) (0.000) (0.000) (0.000)
Deposits 6,506 5,723 7,439 (0.000) 3,255 2,725 4,251 (0.000) (0.000) (0.000) (0.000)
Branch characteristics
Number of branches 351 337 329 - - - -
Number of mortgages 44.2 25.0 21.5 (0.049) - - - -
Average mortgage size () 102,780 96,810 108,790 (0.000) - - - -
This table contains the basic descriptive statistics of the sample and the internet mortgages control group. The sample is formed with all the
mortgages sold between April 2001 and April 2003. Internet mortgages are all those sold through the internet channel in the same period. Both sets
contain mortgages sold before and after the provision of CLV information. The table presents the mean of several variables related to mortgage,
client, and branch characteristics.

39
 TABLE 2B
Descriptive Statistics: Branch Mortgages and Personal Loans
Brick-and-mortar channel Brick-and-mortar channel p-value Mortgages-Loansa
mortgages personal loans
All Pre- Post- p-value All Pre- Post- p-value All Pre- Post-
CLV CLV Pre-Post CLV CLV Pre-Post CLV CLV
Number of clients 15,503 8,428 7,075 14,220 7,524 6,696
Average mortgage/loan characteristics
Capital () 101,712 95,779 108,780 (0.000) 10,393 10,115 10,705 (0.000) n/a n/a n/a
Mortgage length (years) 23.5 23.1 24.1 (0.000) 4.2 4.3 4.1 (0.002) n/a n/a n/a
Value to loan ratio 151.5 151.6 151.4 (0.852) - - - -
Spread (%) 0.53 0.52 0.53 (0.031) 0.77 0.62 0.94 (0.000) n/a n/a n/a
Average client characteristics
Number of products 6.65 6.53 6.79 (0.000) 8.02 8.06 7.97 (0.029) (0.000) (0.000) (0.000)
Tenure at the bank (months) 17.4 15.8 19.3 (0.000) 51.4 48.3 54.9 (0.000) (0.000) (0.000) (0.000)
Age 35.6 35.5 35.6 (0.284) 39.9 39.7 40.1 (0.016) (0.000) (0.000) (0.000)
Potential profitability () 970 926 999 (0.000) 756 742 766 (0.004) (0.000) (0.000) (0.000)
Loans 105,860 99,439 112,906 (0.000) 56,851 55,395 58,357 (0.001) (0.000) (0.000) (0.000)
Deposits 6,506 5,723 7,439 (0.000) 6,119 5,455 6,865 (0.000) (0.033) (0.274) (0.033)
Branch characteristics
Number of branches 351 337 329 354 335 338
Number of mortgages/loans 44.2 25.0 21.5 (0.049) 40.2 22.5 19.8 (0.033)
Average contract size () 102,780 96,810 108,790 (0.000) 10,224 10,000 10,555 (0.038)
This table contains the basic descriptive statistics of the sample and the personal loans control group. The sample is formed with all the mortgages
sold between April 2001 and April 2003. The personal loans control group is formed by a random sample of car and consumer financing loans sold
through the branches in the same period. Both sets contain contracts sold before and after the provision of CLV information. The table presents the
mean of several variables related to mortgage, loan, client, and branch characteristics.
a
p-values for the differences in mortgage/loan characteristics are not meaningful because of the different nature of these credit products.

40
 TABLE 2C
Descriptive Statistics: Branch Managers Characteristics

Mean Standard Deviation

Age 41.03 6.41

Tenure (years) 4.87 3.34

Marital status:
Married 86.7%
Single 4.7%
Separated 3.9%
Divorced 4.7%

Sex:
Male 83.5%
Female 16.5%

Highest level of education achieved:

High school 35.2%
Vocational school 4.5%
Associates degree (3 yrs. college) 21.8%
Bachelors degree 32.7%
Post-graduate degree 5.9%

This table contains the basic descriptive statistics of the branch managers at our research site. The group
includes the branch managers that were in office between April 2001 and April 2003.

41
 TABLE 3
Segment Composition of Mortgage and Personal Loan Customers

Chi-square
test of
Segment Segment Segment Segment homogeneity
A B C D Total (p-value)

All Branches 29.63% 50.05% 18.49% 1.83% 15,503

Pre-CLV 26.13% 50.81% 20.80% 2.27% 8,428 151.78
Post-CLV 33.81% 49.16% 15.73% 1.30% 7,075 (0.000)
Change Pre-Post 7.68% -1.65% -5.07% -0.97%

All Internet 32.52% 50.23% 16.35% 0.90% 2,343

Pre-CLV 33.33% 48.69% 16.73% 1.24% 1,530 9.25
Post-CLV 31.00% 53.14% 15.62% 0.25% 813 (0.026)
Change Pre-Post -2.33% 4.45% -1.11% -0.99%

All Personal Loans 23.12% 35.91% 29.78% 11.19% 14,220

Pre-CLV 21.29% 35.77% 31.31% 11.63% 7,524 38.6
Post-CLV 25.18% 36.07% 28.06% 10.69% 6,696 (0.000)
Change Pre-Post 3.89% 0.30% -3.25% -0.94%

Change Branches
Change Internet 10.02% -6.09% -3.96% 0.03%
(p-value) (0.000) (0.008) (0.020) (0.939)

Change Branches
Change Pnal Loans 3.79% -1.95% -1.82% 0.03%
(p-value) (0.000) (0.087) (0.065) (0.959)
This table analyzes the segment composition of customers who bought a mortgage or a
personal loan between April 2001 and April 2003. We provide the proportion of clients
belonging to a given segment in the portfolio of mortgages and personal loans sold during
that period. Segments are defined using criteria that combine income, wealth, age, and other
socio-demographic factors such as occupation and family status. The segments are listed in
order of decreasing attractiveness from A to D. The mortgage sample is divided between
branch and internet customers. We also distinguish between mortgages sold before and after
CLV introduction. The table reports the change in the fraction of customers of each
segment pre- and post-CLV. Change difference computes the difference between the before
and after change for branch and internet customers and for branch mortgage and personal
loan customers. The table also provides the total number of mortgages and personal loans
sold. The chi-square test of homogeneity compares the distribution of segments pre- and
post-CLV provision (the null hypothesis being that pre- and post-CLV observations come
from the same distribution).

42
 TABLE 4
Impact of CLV Information on the Segment Composition of Mortgage Customers: Ordered Logit
model 1 model 2 model 3 model 4 model 5 model 6 model 7 model 8 model 9 model 10 model 11 model 12 model 13 model 14
Post-CLV 1.454# 1.133# 0.987 0.986 0.771 0.987 0.986 0.779# 1.072* 1.109# 1.054 1.070* 1.110# 1.058
(0.044) (0.047) (0.078) (0.081) (0.072) (0.078) (0.081) (0.074) (0.042) (0.044) (0.066) (0.042) (0.044) (0.067)
Branch mortgages 0.712# 3.560 3.851 0.713# 0.420# 0.455# 1.958# 1.943# 1.942# 1.965# 1.859# 1.858#
(0.038) (4.267) (4.596) (0.040) (0.029) (0.033) (0.059) (0.060) (0.060) (0.068) (0.066) (0.065)
Post-CLV * Branch mortgages 1.474# 1.448# 1.433# 1.559# 1.552# 1.540# 1.074 1.095+ 1.097+ 1.121+ 1.148# 1.151#
(0.125) (0.128) (0.127) (0.142) (0.147) (0.146) (0.048) (0.049) (0.049) (0.060) (0.061) (0.062)
Seasoned branch manager 0.951 1.179# 1.166# 0.951 1.061 1.061
(0.041) (0.053) (0.052) (0.035) (0.040) (0.040)
Post-CLV*Seasoned branch manager 0.911 0.835# 0.834# 0.932 0.897* 0.895+
(0.058) (0.054) (0.054) (0.052) (0.050) (0.050)
Mortgage interest rates 0.000# 0.007+ 0.000# 0.006 0.006+ 0.000 # 0.004
(0.001) (0.015) (0.000) (0.031) (0.013) (0.000) (0.021)
Mortgage market size (number) 1.000# 1.000# 1.000 1.000 1.000# 1.000 1.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Mortgage market size (euros) 1.000# 1.000# 1.000 1.000 1.000+ 1.000 1.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Banking intensity 1.000 1.003# 1.003# 1.003# 1.003# 1.003# 1.003#
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Population 1.102# 1.112# 1.151# 1.151# 1.114# 1.154# 1.154#
(0.013) (0.009) (0.012) (0.012) (0.009) (0.012) (0.012)
Unemployment rate 0.848# 0.932# 0.922# 0.922# 0.933# 0.921# 0.921#
(0.014) (0.010) (0.015) (0.015) (0.010) (0.016) (0.016)
Time trend 1.021# 1.020# 1.008 1.007
(0.004) (0.004) (0.008) (0.008)

Control set Internet Internet Internet Internet Internet Internet Personal Personal Personal Personal Personal Personal
None None mortgages mortgages mortgages mortgages mortgages mortgages loans loans loans loans loans loans
Region fixed effects No No No Yes Yes No Yes Yes No Yes Yes No Yes Yes
Observations 15,503 15,474 17,846 17,846 17,846 16,790 16,790 16,790 29,667 29,667 29,667 28,625 28,625 28,625
Pseudo R-squared 0.004 0.029 0.004 0.037 0.038 0.005 0.038 0.038 0.033 0.043 0.043 0.032 0.042 0.042
# p<0.01, + p<0.05, * p<0.1
This table shows the effects of providing CLV information on the segment composition of customers that buy a mortgage between April 2001 and April 2003. The dependent variable is the segment of the
customer, ordered from A to D. Post-CLV is a dummy taking a value of 1 for the months following the implementation of the CLV. Branch mortgages is a dummy taking a value of 1 for branch customers and 0
for internet customers. The interaction of Post-CLV and Branch mortgages measures the effect of CLV. Seasoned branch manager is a dummy taking a value of 1 for branch managers with tenure above the
median and 0 otherwise, where tenure is measured at the time of the mortgage sale. The control variables Mortgage interest rates, Mortgage market size (number), Mortgage market size (euros), Banking
intensity, Population, and Unemployment rate are defined in Appendix B. We also include a time trend and region fixed effects in some of the regressions. Ordered logit regressions are used in all models and
odds ratios are reported. Robust standard errors are in parentheses.

43
 TABLE 5
Conversion of Mortgage Applications into Mortgage Loans

Mortgage Mortgage
application offer
approved accepted

Post-CLV 0.778 0.616

(0.150) (0.186)
Segment A 3.646# 5.625#
(0.540) (1.084)
Segment B 4.102# 5.500#
(0.600) (1.050)
Segment C 2.298# 3.055#
(0.352) (0.605)
Segment A * Post-CLV 1.150 1.136
(0.245) (0.354)
Segment B * Post-CLV 0.944 1.503
(0.200) (0.467)
Segment C * Post-CLV 0.946 1.539
(0.209) (0.493)
Constant 1.479# 0.420#
(0.195) (0.077)

Observations 10,109 8,168
Pseudo R-squared 0.025 0.025
# p<0.01, + p<0.05, * p<0.1
This table shows the impact of CLV provision on the odds of a mortgage application being
converted into a mortgage loan as a function of the customer segment of the applicant between
April 2001 and April 2003. This table only includes mortgage applications through the branches.
Using a logit framework, the first column models the banks decision to approve or deny the
mortgage application. The second column models the customers decision to accept or reject the
mortgage offered by the bank (i.e. only for mortgage applications approved by the bank). Post-
CLV is a dummy taking a value of 1 for the months following CLV introduction. Segments AC
are dummies describing the customer segment classification. Odds ratios are reported in this
table. Robust standard errors are in parentheses.

44
 TABLE 6
Cross-Selling to Mortgage Customers

All Segment A Segment B Segment C Segment D

segments
Branch mortgages
Pre-CLV 6.53 7.18 6.46 6.00 5.38
Post-CLV 6.79 7.31 6.67 6.18 5.48
Change Pre-Post 0.26 0.12 0.21 0.18 0.10
(p-value) (0.000) (0.071) (0.000) (0.009) (0.693)

Personal loans
Pre-CLV 8.06 9.04 8.38 7.63 6.43
Post-CLV 7.97 8.97 8.23 7.40 6.27
Change Pre-Post -0.09 -0.07 -0.16 -0.23 -0.16
(p-value) (0.029) (0.441) (0.010) (0.000) (0.155)

Internet mortgages
Pre-CLV 5.79 5.95 5.76 5.58 5.32
Post-CLV 5.99 6.11 5.89 6.09 6.00
Change Pre-Post 0.20 0.16 0.13 0.51 0.68
(p-value) (0.002) (0.218) (0.124) (0.002) (0.358)

Change Mortgages
Change Pnal Loans 0.35 0.19 0.37 0.41 0.25
(p-value) (0.000) (0.088) (0.000) (0.000) (0.342)

Change Branch
Mortgages Change
Internet Mortgages 0.06 -0.04 0.08 -0.32 -0.59
(p-value) (0.369) (0.807) (0.360) (0.058) (0.077)

This table analyzes the cross-selling per segment to customers who buy a mortgage
or a personal loan between April 2001 and April 2003. The sample is divided
between branch customers who bought a mortgage, those who bought a personal
loan, and internet customers who bought a mortgage. We distinguish between
mortgages and loans sold before and after CLV provision. The table also reports the
change in the average number of products held by customers of each segment before
and after CLV provision. Change Mortgages Change Personal Loans computes the
difference between the before and after change for branch customers who bought a
mortgage and those who bought a personal loan. Change Branch Mortgages
Change Internet Mortgages computes the difference between the before and after
change for branch customers and internet customers who bought a mortgage.

45
 TABLE 7
Impact of CLV Information on the Number of Products Purchased by Mortgage Customers
model 1 model 2 model 3 model 4 model 5 model 6 model 7 model 8
Post-CLV 0.040# 0.026# 0.023# 0.014 -0.011+ -0.020# 0.034# 0.034#
(0.005) (0.005) (0.005) (0.009) (0.005) (0.005) (0.011) (0.011)
Branch mortgages -0.211# -0.239# 0.120# 0.262#
(0.005) (0.005) (0.008) (0.039)
Post-CLV * Branch mortgages 0.050# 0.046# 0.006 -0.007
(0.007) (0.007) (0.012) (0.012)
Segment B -0.099# -0.101# -0.108# -0.091# -0.091#
(0.006) (0.006) (0.008) (0.004) (0.005)
Segment C -0.174# -0.182# -0.189# -0.181# -0.162#
(0.007) (0.007) (0.010) (0.005) (0.007)
Segment D -0.287# -0.298# -0.301# -0.342# -0.257#
(0.022) (0.022) (0.027) (0.009) (0.020)
Segment B * Post-CLV 0.014
(0.012)
Segment C * Post-CLV 0.014
(0.015)
Segment D * Post-CLV 0.003
(0.046)
Banking intensity -0.000# -0.000# 0.000
(0.000) (0.000) (0.000)
Population 0.006# 0.006# 0.004+
(0.002) (0.002) (0.002)
Unemployment rate 0.017# 0.016# 0.001
(0.002) (0.002) (0.002)
Constant 1.876# 1.967# 1.874# 1.879# 2.087# 2.154# 1.756# 1.735#
(0.003) (0.005) (0.025) (0.025) (0.003) (0.025) (0.007) (0.044)
Control set None None None None Personal Personal Internet Internet
loans loans mortgages mortgages
Region fixed effects No No No No No Yes No Yes
Observations 15,496 15,496 15,467 15,467 29,711 29,652 17,839 17,839
Pseudo R-squared 0.001 0.007 0.008 0.008 0.015 0.028 0.003 0.012
# p<0.01, + p<0.05, * p<0.1
This table shows the effects of CLV provision on the effort of branch managers to cross-sell to mortgage customers between April 2001
and April 2003. The dependent variable is the number of products held by mortgage or personal loan buyers at the bank. Post-CLV is a
dummy taking a value of 1 for the months following CLV implementation. Branch mortgages is a dummy taking a value of 1 for mortgage
customers and 0 for personal loan customers. The segment variables are dummy variables indicating the segment of the customer. The
control variables Banking intensity, Population, and Unemployment rate are defined in Appendix B. We also include region fixed effects
on some specifications. Columns 14 use the sample of branch mortgage customers. Columns 56 use the samples of branch mortgage and
personal loan customers. Columns 78 use the samples of branch and internet mortgage customers. Poisson regressions are used for all
models in the table. Robust standard errors are in parentheses.

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 TABLE 8
Change in Average Customer Value Pre- and Post-CLV Availability

Seasoned Novice
Total Bank Managers Managers
% % %

Average CLV pre-simulator 2,698 2,720 2,683

(a) Change in segment mix 136 89% 127 102% 156 89%
Average segment CLV pre-
simulator weighted at post-
simulator segment proportions 2,834 2,847 2,839
(b) Change in CLV within
segments 17 11% (3) -2% 19 11%
(c) Total change 153 100% 124 100% 176 100%
Average CLV post-simulator 2,851 2,844 2,859

The value of a customer (CLV) is the sum of the discounted monthly profitability
calculated by the bank over the 48-month period starting the sixth month after the sale
of the mortgage. The discount rate used is 3 percent (inflation rate) because
profitability calculations include adjustments for risk. Profitability numbers are
Winsorized at the top and bottom 1 percent. A Seasoned manager is a branch manager
with above-median experience (defined as tenure in the bank at the time of the
mortgage sale). A Novice manager is a branch manager with below-median
experience.

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 TABLE 9
Determinants of Mortgage Pricing
Seasoned Novice
Branch Internet Branch Internet branch branch
mortgages mortgages mortgages mortgages managers managers
base base pricing model pricing model pricing model pricing model

Post-CLV 0.952+ 0.606 5.588 1.365 10.450 -2.700

(0.434) (0.770) (5.154) (10.074) (7.671) (7.437)
Segment B 1.934* -1.552 1.378 1.958
(1.098) (2.615) (1.685) (1.542)
Segment C 3.258* -1.558 4.656* 2.243
(1.716) (4.036) (2.588) (2.420)
Segment D 5.479 -9.187 -0.541 8.820
(4.752) (10.497) (7.677) (6.059)
Capital 0.013 0.092# -0.003 0.032+
(0.012) (0.035) (0.020) (0.016)
Value to loan 0.003 0.002 0.002 0.004
(0.011) (0.021) (0.017) (0.014)
Mortgage length -0.021# -0.012 -0.018* -0.023#
(0.006) (0.013) (0.010) (0.009)
Age 0.079 0.200 0.100 0.031
(0.056) (0.124) (0.084) (0.080)
New customer -0.196 -0.238 0.311 -0.418
(1.036) (1.917) (1.575) (1.452)
Number of products -0.809# 0.095 -0.681* -0.953#
(0.229) (0.540) (0.362) (0.312)
Potential -3.284+ -14.271# -0.687 -5.471+
(1.668) (4.708) (2.386) (2.320)
Segment B * Post-CLV -0.930 -0.143 -0.681 -0.346
(1.325) (3.124) (1.961) (1.958)
Segment C * Post-CLV -1.475 4.993 -2.171 -2.405
(2.134) (4.744) (3.082) (3.224)
Segment D * Post-CLV -2.360 -8.857 1.523 -3.424
(6.093) (20.075) (9.397) (8.445)
Capital * Post-CLV -0.037+ -0.012 -0.023 -0.052#
(0.015) (0.042) (0.024) (0.020)
Value to loan * Post-CLV -0.028+ 0.006 -0.030 -0.030
(0.013) (0.026) (0.019) (0.019)
Mortgage length * Post-CLV -0.001 -0.011 -0.008 0.006
(0.008) (0.015) (0.012) (0.011)
Age * Post-CLV -0.003 -0.150 -0.029 0.108
(0.070) (0.151) (0.100) (0.105)
New customer * Post-CLV -0.758 -0.830 -0.953 -0.400
(1.246) (2.287) (1.828) (1.844)
Number of products * Post-CLV 0.604+ -0.017 0.599 0.700*
(0.279) (0.668) (0.424) (0.400)
Potential * Post-CLV 1.178 7.194 -1.836 3.561
(1.991) (5.870) (2.798) (2.849)
Constant 52.387# 42.824# 61.528# 45.177# 58.891# 63.972#
(0.320) (0.514) (4.209) (8.613) (6.492) (5.764)

Observations 15,503 2,343 11,840 1,413 5,831 5,181

Adjusted R-squared 0.000 -0.000 0.013 0.018 0.013 0.011
# p<0.01, + p<0.05, * p<0.1
This table shows the effects of CLV provision on the pricing decisions of branch managers regarding mortgages sold between April
2001 and April 2003. The dependent variable is the spread charged over the reference interest rate. Post-CLV is a dummy taking a value
of 1 for the months following CLV implementation. The segment variables are dummy variables indicating the segment of the customer.
Capital is the amount loaned. Value to loan is the ratio of the value of the property and the size of the loan. Mortgage length is the length
(in months) of the loan. Age is the age of the customer. New customer is a dummy that takes a value of 1 for customers new to the bank
at the time of the mortgage purchase, and 0 for existing customers. Number of products measures the number of products held by the
customer. Potential is the bank's measure of the potential profitability of the customer (in euros). A Seasoned manager is a branch
manager with above-median experience (defined as tenure in the bank at the time of the mortgage sale). A Novice manager is a branch
manager with below-median experience. Robust standard errors are in parentheses.

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 TABLE 10
Ex-post Risk of Mortgage Portfolios
Branch mortgages Internet mortgages
Pre-CLV Post-CLV All Pre-CLV Post-CLV All

Number % Number % Number % Number % Number % Number %

All risk events 987 894 1,881 107 79 186

Customers with a
risk event 528 6.3% 482 6.8% 1,010 6.5% 60 3.9% 30 3.7% 90 3.8%

Bad risk events 112 70 182 11 25 36

Customers with
bad risk events 62 0.7% 40 0.6% 102 0.7% 5 0.3% 7 0.9% 12 0.5%

Customers with
maximum risk
classification:
Normal 7,900 93.7% 6,593 93.2% 14,493 93.5% 1,470 96.1% 783 96.3% 2,253 96.2%
Incidence 466 5.5% 442 6.2% 908 5.9% 55 3.6% 23 2.8% 78 3.3%
Tardy 36 0.4% 17 0.2% 53 0.3% 0 0.0% 1 0.1% 1 0.0%
Doubtful 25 0.3% 21 0.3% 46 0.3% 5 0.3% 6 0.7% 11 0.5%
Defaulted 1 0.0% 2 0.0% 3 0.0% 0 0.0% 0 0.0% 0 0.0%

Total no. of
customers 8,428 100.0% 7,075 100.0% 15,503 100.0% 1,530 100.0% 813 100.0% 2,343 100.0%
This table analyzes the amount of ex-post risk suffered by the banks portfolios of mortgages sold between April 2001 and April 2003. It reports the number and fraction of mortgages that show a risk event
within an eight-year period after their sale. The risk classification contains five levels. Normal refers to non-problematic mortgages. An incidence occurs when a client delays payment for longer than 30 days.
Payment delays for longer than 90 days are classified as tardy. Doubtful indicates a higher level of risk, such as clients who have requested bankruptcy protection, or against whom the bank has initiated a
judicial process of debt recovery. Defaulted indicates clients with written-off balances over 300. All risk events include incidence, tardy, doubtful, and default. Bad risk events include only tardy, doubtful, and
default. The sample is divided between branch and internet customers. We also distinguish between mortgages sold before and after CLV provision.

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 TABLE 11
Impact of CLV Information on the Likelihood of a Future Risk Deterioration
Bad risk Bad risk Mora Bad risk Mora
Risk event event Risk event event maximum Risk event event maximum
(1) (2) (3) (4) (5) (6) (7) (8)

Branch channel 0.023# 0.004* 1.637# 2.260* 1.640# 1.549# 2.075 1.553#
(0.007) (0.002) (0.228) (1.053) (0.228) (0.216) (0.968) (0.217)
Post-CLV -0.002 0.005 0.939 2.649* 0.944 0.962 2.733* 0.969
(0.010) (0.003) (0.214) (1.555) (0.215) (0.220) (1.606) (0.221)
Branch channel * Post-CLV 0.008 -0.007* 1.165 0.290+ 1.156 1.211 0.307* 1.197
(0.011) (0.004) (0.276) (0.180) (0.274) (0.288) (0.191) (0.284)
Segment B 1.348# 1.904+ 1.350#
(0.107) (0.515) (0.108)
Segment C 1.886# 2.605# 1.887#
(0.174) (0.787) (0.174)
Segment D 5.299# 8.785# 5.340#
(0.839) (3.646) (0.844)
Constant 0.039# 0.003 0.041# 0.003# 0.299# 0.002#
(0.006) (0.002) (0.005) (0.001) (0.004) (0.001)

Ordered Ordered
Model class OLS OLS Logit Logit Logit Logit Logit Logit
Observations 17,846 17,846 17,846 17,846 17,846 17,846 17,846 17,846
Adjusted R-squared 0.001 0.000
Pseudo R-squared 0.004 0.004 0.003 0.017 0.022 0.016
# p<0.01, + p<0.05, * p<0.1
This table shows the effects of providing CLV information on the risk management of branch managers regarding mortgages sold between April 2001 and April 2003. The dependent variables are
Risk event, Bad risk event, and Mora maximum. Risk event is a dummy variable taking a value of 1 if the customer is classified as incidence, tardy, doubtful, or defaulted at any point within an
eight-year period after the purchase of the mortgage. Bad risk event is a dummy variable calculated in a similar way, but only taking a value of 1 if the customer is classified as tardy, doubtful, or
defaulted. Mora maximum is a rank ordered variable reflecting the worst risk classification received by the customer in the eight-year period after the purchase of the mortgage (0 = no risk
classification, 4 = defaulted). Branch channel is a dummy taking a value of 1 for branch customers and 0 for internet customers. Post-CLV is a dummy taking a value of 1 for the months post-
CLV. Branch channel * Post-CLV measures the effect of CLV. The segment variables are dummy variables indicating the segment of the customer. Columns 1 and 2 estimate an OLS model,
columns 34 and 67 use a logit model, and columns 5 and 8 an ordered logit. Odds ratios are reported in columns 28. Robust standard errors are in parentheses.

50