EXECUTIVE SUMMARY

Part A:

Overview:

BigEast Bank is a traditional bank with various product lines: deposit accounts, credit
cards and customer loans. The bank has many customers carrying multiple product lines.
The prime concern of the bank is that their decision on a customer’s credit card
application might have affect on the entire customer relationship. Karen Singer, Vice
President of the customer deposits group is concerned about the current criteria followed
by the credit card group. The current criterion accepts or denies the credit card
applications solely on the credit worthiness of the customer giving no second thoughts to
the applying customer’s other relationships with the bank. Karen feels that high denial
rate may have some affects on the customer retention factor. She wanted to know the
following things:
• Are some of the profitable customers leaving the bank as a result of their credit
card application denial?
• Is the bank losing some of the prospect profitable customers on denying their
credit card applications?
• Should the bank change its current credit card application acceptance criteria?
She thought that having the knowledge about the above mentioned questions would
greatly help the bank in improving its customer retention and also to acquire more
profitable customers.

Dataset:

The dataset contains information about 5538 customers who have applied for the credit
card in the month of January. It contains variables like declined (decision on the
application. 1 means customer’s application is denied, 0 means accepted), defected
(whether the customer has left the bank after 8 months. 1 means customer has left the
bank, 0 means customer is still with the bank), profit, revenue, ODFeeRev (Overdraft
fees for returned items during Jan 2001), etc. The data is preliminarily observed before
carrying out the actual analysis.

Analysis:

The dataset is carefully observed for any unusual data values. To get the feel for data
summary statistics for dataset are carried out based on whether the customer’s application
has been accepted or not and also whether the customer has left the bank after September
2001 or not (APPENDIX A). From the statistics of both cases, it is understood that there
is wide variance in the data among the customers i.e. the data is highly skewed. One of
the most important things to do is to analyze whether there is any effect on customers
leaving the bank due to their credit card application denial. A frequency count analysis is
conducted on the variables declined and defected (APPENDIX B). Out of 4186
customers whose credit card application is denied 9.06% have left the bank whereas only
2.85% of 982 customers whose applications are accepted have left the bank.
Before coming to conclusion correlation analysis is carried out to know whether there is
any relationship between the defection of customers and them being denied credit card
(APPENDIX C). From the Pearson coefficient’s value i.e. 0.08766 it can be concluded
that though there is a relationship between them, it is very weak. To know whether there
are any other factors influencing the customer’s defection correlation analysis among
various variables is carried out against defection and it is understood that ODFeeRev and
FeeRev are the dominating factors among all others with Pearson coefficient values of
0.14841 and 0.12598 respectively (APPENDIX D). That is imposing fees upon the
customers in various forms is also influencing the customer’s defection.

Analysis is carried out in the direction to know if profitable customers are denied credit
cards. Summary statistics are calculated for the customers based on the decision of their
application (APPENDIX E). From the results, the mean customer profitability for denied
credit card customers (31.58) is noticeably greater than the mean customer profitability
for accepted credit card customers (23.4). To know if the above result is statistically
significant, a 2-sample t-test is conducted (APPENDIX F). From the p-value (<.0001) it
is concluded that the profitability for the denied credit card customers is greater than the
profitability for accepted credit card customers.

Digging further, to know what factors influence the customer profitability of the credit
card declined customers different variable selection methods in multiple regression are
employed with tolerance level of 5%. These methods are employed on all variables
except CID (obvious variable), revenue (as there is linear relationship among Revenue,
NetRev, FeeRev) and defected (as profit values will not be there for those who are not
there with the bank) with profit as dependent variable. All methods result in same model
selecting FeeRev, NetRev and Cost as the proper independent variable (APPENDIX G).
Multiple regression is rerun on the above selected independent variables with profit as
dependent variable. The results show that FeeRev (fees from monthly service charges,
overdraft fees etc.) is the most influential factor on the profit having highest standardized
estimate value of 0.988. FeeRev forms the major part of the profits which is not a
favorable sign for the bank as it may result in unhappy customers (APPENDIX H).

As a part of the analysis a model is constructed that predicts whether a customer will be
with the bank in 8 months time(Defected) using the declining of credit cards (declined),
number of accounts (Xsell), and his/her profitability (profit). First the model is obtained
using logistic regression and the significance of the independent variables is tested. All
the independent variables taken into consideration i.e. Xsell, profit, and declined are
within the 5% tolerance level. Using the above model of selected independent variables
logistic regression is rerun to predict the customer’s loyalty to the bank. From the results
the precedence of importance for independent variables is decided, from which Xsell is
the most important factor that influences the customer’s defection. It is negative which
means the customer is more likely to stay with the bank if he/she has more number of
accounts with the bank (APPENDIX I).
The analysis is taken further by limiting the customers to those who are profitable only.
Logistic regression is rerun on these profitable customers and the factors influencing their
defection are estimated. From the standardized estimate values the order of importance is
estimated. From the results it is concluded that the profitable customers who are declined
credit cards (Standardized estimate value for customers who had their credit cards
accepted= -0.6092, negative value means indicates an inverse relationship with the
dependent variable defected) are more likely to leave the bank (APPENDIX J).

Conclusion:

From the above analysis few points are noteworthy. They are:
• There is a very weak relationship between the credit card decision (Declined) and
customer defection (Defected).
• Customers for whom credit card are declined are certainly more profitable
• Fee revenue (FeeRev) forms the major part of the profitability of the declined
credit customers.
• The number of retailed deposit accounts (Xsell) influences the customer defection
the most. The more number of accounts customer has, the more is the chance that
he/she is going to stay with the bank.
These are the points that the bank should take into account while taking any decision.

Recommendations:

• The major share of the bank’s profits is from the fee revenue. This may result in
unhappy customers. To avoid this, the bank can’t reduce fee tariff as it may reduce
bank’s profits hence the bank has to introduce some incentives. If the customer
limits his/her overdrafts, etc to a certain amount then he/she may be eligible for
some rewards (Rewards depend on the profitability of the customer and also the
bank).
• The bank should definitely change its credit card acceptance criteria as some of
the profitable customer’s applications are denied and hence the chances of them
leaving the bank are also more. The credit card group should be given directions
to take customer’s other relationships with the bank into consideration like most
importantly number of accounts the customer has with the bank, his/her
profitability, etc. If the customer is profitable and if his/her credit worthiness is
poor the customer may be granted credit card but with less credit limit. This will
greatly help the bank.
• The customer should be encouraged to open more number of bank accounts as
this will improve the customer relationship and keeps the customers from leaving
the bank.
The above recommendations are made with customer centric view if followed would
definitely help the bank in gaining more profits as well more customer retention.
 APPENDICES
APPENDIX A:

Declined=1 means the customer’s application have been declined. Declined=0 means it’s
accepted. From the above figure, credit card declined customers are more profitable. The
profits are more due to the fees paid by them especially the overdraft fees (ODFeeRev).

Defected =1 means the customer has left the bank in 8 months time. From the above data
profitable customers (profit=49.52 for declined=1) have left the bank. And also fee
revenue of the customers who have left (54.88) is comfortably more the customers stayed
with the bank (28.39). The major share of revenue is from overdraft fee revenue
(ODFeeRev).
APPENDIX B:

The above figures show the number and percentages of the customers who left or stayed
with the bank when their credit cards are accepted or denied.

APPENDIX C:

The above figure shows that though there is a relationship between the declined and
defected it is very weak, it can be understood from the Pearson coefficient value that is
0.08766.

APPENDIX D:
Overdraft fee revenue (ODFeeRev) has considerably strong relation with defected with
Pearson coefficient value of 0.148941 followed by FeeRev (Pearson coefficient value of
0.12598).
APPENDIX E:

The profitability of declined credit card application customers (31.57) is more than the
accepted credit card application customers (23.40).

APPENDIX F:

Alternate Hypothesis (Ha): The mean profit of declined credit card application
customers is greater than the accepted credit card application customers.
Null Hypothesis (Ho): The mean profit of declined credit card application customers is
not greater than the accepted credit card application customers
Significance or tolerance level = 0.05 (5%)

P-value obtained=<.0001 which is less than the significance level (0.05) hence H0 is
rejected which implies that the declined credit card customers are more profitable.
APPENDIX G:

Multiple Regression:
Dependent Variable: Profit
The analysis is limited for declined credit card customers.

FeeRev, NetRev and Cost are the independent variables selected.

APPENDIX H:

Dependent Variable: Profit

Independent variables: Cost, NetRev, and FeeRev
Multiple Regression

From the above results the regression equation predicting the profit can be written as
follows:

Profit = -3.30877E-8 + Cost * 1+ NetRev * 1 + FeeRev * 1

Remember that the Cost values are given negative in the data set. The obtained equation
is logically correct. From the standardized estimates FeeRev has the highest precedence
of importance with value 0.98827 followed by NetRev and Cost respectively. The VIF
(Variation Influence) of all the independent variables are also under 10 indicating that
there is no multi collinearity among them.
APPENDIX I:

Logistic Regression:
Dependent variable: Defected
Independent variables: Profit, Xsell
Classification Variable: Declined

All the variables have same P-value <.0001 which is less than the significance level (5%).

The obtained logistic regression equation is as follows:

G = -2.2593 + 0.00423 * Profit – 0.4964 * Xsell – 0.5955 * Declined (for declined = 0)

G = ln (p/1-p) where ln is natural logarithm; p is the probability of ‘1’ for defected
variable.

As we can observe Xsell (number of accounts) has negative coefficient.

APPENDIX J:

Logistic Regression for only profitable customers

Dependent variable: Defected
Independent variables: Profit, Xsell
Classification Variable: Declined
All the variables have same P-value <.0001 which is less than the significance level (5%).
The obtained logistic regression equation is as follows:

G = -2.4165 + 0.00491 * Profit – 0.4843 * Xsell – 0.6092 * Declined (for declined = 0)

G = ln (p/1-p) where ln is natural logarithm; p is the probability of ‘1’ for defected
variable.

As we can observe Xsell (number of accounts) has negative coefficient

Thus analysis is carried out on the BigEast Bank.