Designing win-win financial loan products for consumers and businesses

Abstract

With the many possible designs that a financial company can offer to a consumer (eg terms, price, quality, features), a company can identify win-win products for both the consumer and the company. A key to identifying win-win products is to explicitly integrate the consumer's preferences for price and quality with the company's preferences for profit and market share. This paper builds a model that identifies the set of win-win products by integrating the preferences of buyer and seller. For any product not in this set, there is at least one product in the set that is better for both buyer and seller. The company's preferences are then used to select the optimal offer from the win-win set. Our development logically derives the results by focusing on financial products (eg loans, mortgages, credit cards) to consumers in the multitrillion dollar retail credit business.

Keywords:

• financial products
• product design
• retail credit
• consumer preferences
• loan portfolios
• efficient frontiers
• negotiation

Acknowledgements

Much of the basic work on this model was supported by Fair Isaac Corporation, a provider of analytics and software for the financial services industry. An early version of the paper was presented at a Fair Isaac Conference in London in 2002 under the title ‘Improving Lender Offers Using Consumer Preferences’. As a result of the suggestions of several referees and colleagues, we were encouraged to rephrase the formulation in terms of a more general and wider variety of financial loan products. The work of Keeney in preparing this paper was supported in part by Grant DMI-0003298 from the National Science Foundation and by the Fuqua School of Business at Duke University.