Statistical Modelling 5 (2005), 145–158
Measuring customer quality in retail banking
David J. Hand
Department of Mathematics,
Imperial College London,
London SW7 2AZ
UK
eMail:
d.j.hand@imperial.ac.uk
Martin J. Crowder
Department of Mathematics,
Imperial College London,
London SW7 2AZ
UK
eMail:
m.crowder@imperial.ac.uk
Abstract:
The retail banking sector makes heavy use of statistical models to predict
various aspects of customer behaviour. These models are built using data
from earlier customers, but have several weaknesses. An alternative approach,
widely used in social measurement, but apparently not yet applied in the
retail banking sector, is to use latent-variable techniques to measure the
underlying key aspect of customer behaviour. This paper describes such a
model that separates the observed variables for a customer into primary
characteristics on the one hand, and indicators of previous behaviour on
the other, and links the two via a latent variable that we identify as
'customer quality'. We describe how to estimate the conditional distribution
of customer quality, given the observed values of primary characteristics
and past behaviour.
Keywords:
CREDIT CARDS; FINANCIAL DELINQUENCY; LATENT VARIABLES; LOAN DEFAULT;
PREDICTION; RANDOM EFFECTS; RETAIL BANKING; SCORECARDS
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