Designing and measuring effectiveness of Proactive(issuer) credit line increase programs
Once an issuer decides to set up proactive (issuer driven) line increase program there are various set of questions that needs to be answered. To break up into simple way these are basic questions
- Who should be eligible for line increase
- How much line increase should be given
- How do i measure that the decision made to give line increase was right
we have covered types of line increase in last article (link). however these questions remain same for all type of line increase, but the design and measurement of effectiveness may differ between channels.
Which customer should get a line increase?
The answer to this question has to be viewed from both risk and reward perspective. The way to optimize it to find the population which is most likely to engage and use this increased credit line and is less likely to default. Issuer may use various credit scores and customer behavior attributes to quantify risk and exclude high risk segments. from remaining population, issuer may deploy engagement level or statistical approaches like a reward model, Recent/Frequency/Monetary value mapping to break them into various segments which are more likely to engage and use the credit. Optimizing increase credit from both perspectives will give best results
How much line increase should be given?
Once the eligibility has been established, the next step is making decision on how much line increase should be given. There is no established rule of thumb on this question, but rather it should be driven from type of product and market it caters. If the credit product is targeted towards subprime or low engagement merchants line increase should be limited but meaningful, while if it is targeted towards prime customers with high income, the line increase should be good enough to cover high value purchases.
Lot of issuers tend to use a % increase over current line capped to a ceiling limit. For example, if my current credit limit is Rs 50,000, and issuer may give me 20% increase, which will be Rs 10,000 increase and new credit line will be Rs 60,000. However, if my current line is Rs 10,00,000, with a 20% increase line increase will be significant and issuer may want to apply a line increase ceiling of Rs 1,00,000 which means that my new line will only be Rs 11,00,000.
Another approach is engagement or reward model-based line assignment. Higher utilized and engaged customer are given higher lines, however issuer needs to be cautious with this approach as high utilization on cards may lead to customer becoming overleveraged and being pushed to default. A possible solution to this approach is debt to income ratio analysis where line increase is also assessed against customers leverage, and overleverage customers can be disqualified for line increase. The approach can be pictorially represented as below.
Issuer can also test various line increase amount through A/B testing and may optimize based on post CLI performance.
How do i measure that the decision made to give line increase was right?
The decision to give CLI is based on historical and coincident customer performance which cannot always accurately predict future. In spite of most conservative approach some customers will eventually default. Issuer should assume certain amount of risk which is acceptable. On a flip side engaged customers may get disengaged over time due to other competitive offers. Keeping all these aspects in mind, issuer should make reasonable benchmarks based on learning from past for incremental sales and default expectations post CLI. From customer standpoint, CLI is considered as a positive outcome, however the impact will eventually fade off so maximum impact will be observed during first few days post which it will become more of a usual behavior. While engagement will be more short term, defaults will happen over longer term. Hence issuer must design benchmarks keeping these things in mind. If issuer decides to do A/B testing or two competing approaches, they should compare both against benchmark and finally adopt once with better performance. Issuers should also take into consideration cost of capital for increase approach while doing a full profitability analysis.
On a final note, issuers should also try stress testing PCLI program for sustainability in adverse economic scenarios and should ensure that program remains robust and profitable. Line increase should also be communicated to customers preferably bundled with product benefit or marketing offers which will ensure higher engagement and success for the line increase.
We will cover reactive (customer initiated) line increase management in a next article
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