Measuring customer quality in retail banking

Measuring customer quality in retail banking

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Article ID: iaor20061282
Country: Netherlands
Volume: 5
Issue: 2
Start Page Number: 145
End Page Number: 158
Publication Date: Apr 2005
Journal: Statistical Modelling
Authors: ,
Keywords: credit risk
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.

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