Method and system for enhancing credit line management, price management and other discretionary levels setting for financial accounts

• US 7,720,761 B2
• Filed: 05/21/2003
• Issued: 05/18/2010
• Est. Priority Date: 11/18/2002
• Status: Active Grant

• Current Assignee: JP Morgan Chase Bank, N.A. (JP Morgan Chase & Co)
• Original Assignee: JP Morgan Chase Bank, N.A. (JP Morgan Chase & Co)
• Inventors: Nair, Suresh K., Ma, Lizhi, Lau, Tak Wing (Edward), Pederson, Shane P., Trench, Margaret S., Wang, Hui (Stephanie)
• Primary Examiner(s): Poinvil; Frantzy
• Assistant Examiner(s): GRAHAM, CLEMENT B
• Application Number:
  US10/442,043
• Publication Number:
  US 20040111363A1
• Time in Patent Office: 2,554 Days
• Field of Search: 705 35- 44, 705/34
• US Class Current: 705/42
• CPC Class Codes: G06Q 20/10 specially adapted for electronic funds transfer [EFT] systems; specially adapted for home banking systems
• CPC Class Codes: G06Q 20/108 Remote banking, e.g. home banking
• CPC Class Codes: G06Q 20/403 Solvency checks
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof

Abstract

A method and system is disclosed for enabling the accurate determination of price points (APRs), credit limits, and other discretionary levels for each cardholder that maximize Net Present Value (NPV) for the portfolio, given constraints on quantities such as risk of default. In accordance with one embodiment, the present invention uses a Markov Decision Process (MDP) methodology to generate a simplified transition matrix representative of the potential state transitions for account holders. This model applies account level historical information on purchases, payments, profitability and delinquency risk to make these decisions. In addition, a data structure is disclosed constructed to implement a transition matrix computationally in different sizes.

Claims

1. A computer implemented method for managing financial accounts by changing at least one control variable including at least one of a credit line and an annual percentage rate, the method comprising the steps of:

collecting and storing in one or more storage devices account data for a plurality of financial accounts, where the account data are associated with a plurality of variables;

establishing at least one control variable and at least one behavior variable based on the plurality of variables;

determining by a data processor, a plurality of interval breakpoints for the at least one control variable and the at least one behavior variable;

defining a plurality of account states based on the at least one control variable, the at least one behavior variable and the plurality of interval breakpoints;

forming a transition matrix based at least in part on the account data and the plurality of account states;

generating a Markov Decision Process (MDP) model based at least in part on the transition matrix;

using the Markov Decision Process model to determine a change in the at least one control variable resulting in a desired effect on the plurality of account states; and

changing at least one of the credit line and the annual percentage rate for the financial accounts based on the determined change.

2. The method according to claim 1, where the account data comprise time-series data on a least one of:

(a) credit bureau variables;

(b) credit bureau scores; and

(c) financial account performance.

3. The method according to claim 1, here the desired effect is associated with at least one of the financial accounts'"'"':

(a) net cash flow (NCF);

(b) balance migration;

or

(c) risk of credit losses.

4. The method according to claim 1, further comprising the steps of:

performing a regression tree analysis on the plurality of variables;

establishing the at least one behavior variable based on the regression tree analysis; and

determining the plurality of interval breakpoints for each of the at least one behavior variable based on the regression tree analysis.

5. the method according to claim 1, further comprising the steps of

applying business rules to an output of the Markov Decision Process model;

and

generating a policy lookup table based on the business rules and the output of the Markov Decision Process model.

6. The method according to claim 1, further comprising simplifying the transition matrix based on one or more of the following techniques:

(a) creating a rectangular transition matrix with rows for the at least one control variable and the at least one behavioral variable, and columns for the at least one behavior variable only;

(b) combining at least one row of a transition matrix with an adjoining row, where the at least one row is characterized with low-frequency transitions;

(c) combining at least one column of a transition matrix with an adjoining column, where the at least one column is characterized with low-frequency transitions; and

(d) re-indexing a transition matrix to correctly capture all past and future account transitions.

7. The method according to claim 1, further comprising validating and supplementing the output of the Markov Decision Process model through a Monte Carlo simulation, where the Monte Carlo simulation is based at least partially on the account data.

8. The method of claim 1, wherein a Portfolio Control and Optimization model is represented as:

9. A computer readable medium for causing a processor to manage financial accounts by changing at least one control variable including at least one of a credit line and an annual percentage rate, the computer readable medium comprising one or more instructions for performing the following:

collecting account data for a plurality of financial accounts, where the account data are associated with a plurality of variables;

establishing the at least one control variable and at least one behavior variable based on the plurality of variables;

determining a plurality of interval breakpoints for the at least one control variable and the at least one behavior variable;

defining a plurality of account states based at least in part on the at least one control variable, the at least one behavior variable and the plurality of interval breakpoints;

forming a transition matrix based at least in part on the account data and the plurality of account states;

generating a Markov Decision Process (MDP) model based at least in part on the transition matrix;

using the Markov Decision Process model to determine a change in the at least one control variable resulting in a desired effect on the plurality of account states; and

changing at least one of the credit line and the annual percentage rate for the financial accounts based on the determined change.

10. The computer readable medium according to claim 9, where the account data comprise time-series data on at least one of:

(a) credit bureau variables;

(b) credit bureau scores; and

(c) financial account performance.

11. The computer readable medium according to claim 9, where the desired effect is associated with at least one of the financial accounts'"'"';

(a) net cash flow (NCF);

(b) balance migration;

or

(c) risk of credit losses.

12. The computer readable medium according to claim 9, further comprising instructions for:

performing a regression tree analysis on the plurality of variables;

establishing the at least one behavior variable based on the regression tree analysis; and

determining the plurality of interval breakpoints for each of the at least one behavior variable based on the regression tree analysis.

13. The computer readable medium according to claim 9, further comprising instructions for:

applying business rules to an output of the Markov Decision Process model; and

generating a policy lookup table based on the business rules and the output of the Markov Decision Process model.

14. The computer readable medium according to claim 9, further comprising at least one instruction for simplifying the transition matrix comprising one or more of the following:

(a) creating a rectangular transition matrix with rows for the at least one control variable and the at least one behavior variable, and columns for the at least one behavior variable only;

(b) combining at least one row of a transition matrix with an adjoining row, where the at least one row is characterized with low frequency transitions;

(c) combining at least one column of a transition matrix with an adjoining column, where the at least one column is characterized with low-frequency transitions; and

(d) re-indexing a transition matrix to correctly capture all past and future account transitions.

15. The computer readable medium according to claim 9, further comprising an instruction for validating and supplementing the output of the Markov Decision Process model through a Monte Carlo simulation, where the Monte Carlo simulation is based at least partially on the account data.

16. A computer implemented system for managing financial accounts by changing at least one control variable including at least one of a credit line and an annual percentage rate, the method, the system comprising

a data collection module for collecting account data for a plurality of financial accounts, where the account data are associated with a plurality of variables;

an establishment module for establishing the at least one control variable and at least one behavior variable based on the plurality of variables;

a determination module for determining a plurality of interval breakpoints for the at least one control variable and the at least one behavior variable;

a definition module for defining a plurality of account states based at least in part on the at least one control variable, the at least one behavior variable and the plurality of interval breakpoints;

a formation module for forming a transition matrix based at least in part on the account data and the plurality of account states;

a generation module for generating a Markov Decision Process (MDP) model based at least in part on the transition matrix; and

a decision module for using the Markov Decision Process model to determine a change in the at least one control variable resulting in a desired effect on each of the plurality of account states and for changing at least one of the credit line and the annual percentage rate for the financial accounts based on the determined change.

17. The system according to claim 16, where the account data comprise time-series data on at least one of:

(a) credit bureau variables;

(b) credit bureau scores; and

(c) financial account performance.

18. The system according to claim 16, where the desired effect is associated with at least one of the financial accounts'"'"':

(a) net cash flow (NCF);

(b) balance migration;

or

(c) risk of credit losses.

19. the system according to claim 16, further comprising:

an analysis module for performing a regression tree analysis on the plurality of variables;

an establishment module for establishing the at least one behavior variable based on the regression tree analysis; and

a determination module for determining the plurality of interval breakpoints for each of the at least one behavior variable based on the regression tree analysis.

20. The system according to claim 16, further comprising:

a rule module for applying business rules to an output of the Markov Decision Process model; and

a generation module for generating a policy lookup table based on the business rules and output of the Markov Decision Process model.

21. The system according to claim 16, further comprising a simplification module for simplifying the transition matrix based on one or more of the following techniques:

(a) creating a rectangular transition matrix with row for the at least one control variable and the at least one behavior variable, and columns For the at least one behavior variable only;

(b) combining at least one row of a transition matrix with an adjoining row, where the at least one row is characterized with low-frequency transitions;

(c) combining at least one column of a transition matrix with an adjoining column, where the at least one column is characterized with low-frequency transitions; and

(d) re-indexing a transition matrix to correctly capture all past and future account transitions.

22. The system according to claim 16, further comprising a simulation module for validating and supplementing the output of the Markov Decision Process model through a Monte Carlo simulation, where the Monte Carlo simulation is based at least partially on the account data.

23. A computer implemented system for managing financial accounts by changing at least one control variable including at least one of a credit line and an annual percentage rate, the system comprising:

means for collecting account data for a plurality of financial accounts, where the account data are associated with a plurality of variables;

means for establishing the at least one control variable and at least one behavior variable based at least in part on the plurality of variables;

means for determining a plurality of interval breakpoints for the at least one control variable and the at least one behavior variable;

means for defining a plurality of account states based at least in part on the at least one control variable, the at least one behavior variable and the plurality of interval breakpoints;

means for forming a transition matrix based at least in part on the account data and the plurality of accounts states;

means for generating a Markov Decision Process (MDP) model based at least in part on the transition matrix;

means for using the Markov Decision Process model to determine a change in the at least one control variable resulting in desired effect on each of the plurality of account states; and

means for changing at least one of the credit line and the annual percentage rate for the financial accounts based on the determined change.

24. The system according to claim 23, where the account data comprising time-series data on at least one of:

(a) credit bureau variables;

(b) credit bureau scores; and

(c) financial account performance.

25. The system according to claim 23, where the desired effect is associated with at least one of the financial accounts:

(a) net cash flow (NCF);

(b)balance migration;

or

(c) risk of credit losses.

26. The system according to claim 23, further comprising:

means for performing a regression tree analysis on the plurality of variables;

means for establishing the at least one behavior variable based on the regression tree analysis; and

means for determining the plurality of interval breakpoints for each of the at least one behavior variable based on the regression tree analysis.

27. The system according to claim 23, further comprising:

means for applying business rules to an output of the Markov Decision Process model; and

means for generating a policy lookup table based on the business rules and the output of the Markov Decision Process model.

28. The system according to claim 23, further comprising means for simplifying the transition matrix based on one or more of the following techniques:

(a) creating a rectangular transition matrix with rows for the at least one control variable and the at least one behavior variable, and columns for the at least one behavior variable only;

(b) combining at least one row of a transition matrix with an adjoining row, where the at least one row is characterized with low-frequency transitions;

(c) combining at least one column of a transition matrix with an adjoining column, where the at least one column is characterized with low-frequency transitions; and

(d) re-indexing a transition matrix to correctly capture all past and future account transitions.

29. The system according to claim 23, further comprising means for validating and supplementing the output of the Markov Decision Process model through a Monte Carlo simulation, where the Monte Carlo simulation is based at least partially on the account data.