Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1998-01-23
2001-03-13
Stamber, Eric W. (Department: 2765)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S039000
Reexamination Certificate
active
06202053
ABSTRACT:
FIELD OF THE INVENTION
The invention relates to a method and apparatus for assessing the credit risk of bank card applicants. Specifically, the method and apparatus relate to developing a segmentation tree to group bank card applicants into similar sub-populations and then building a custom scorecard for each of the sub-populations.
BACKGROUND OF THE INVENTION
Individuals seeking bank cards from a financial institution typically fill out applications providing information and requesting a bank card. Financial institutions lend credit to individuals based on the information provided in the applications and their credit history. The financial institution reviews the application provided by the applicant and reviews the applicant's credit history. The goal of the financial institution is to asses the credit risk of each individual bank card applicant so they will not extend credit to an individual that is a poor credit risk.
To assess the credit risk of each individual, the financial institution will develop a score for each applicant based on certain information. The applicant receives points for each item of information analyzed by the financial institution. The amount of points awarded for each item, the items actually analyzed, and the scores necessary for approval vary from financial institution to financial institution.
In today's market, financial institutions are approving more and more bank cards and are experiencing increased competition from other financial institutions for the applicants. Financial institutions would generally grant the applicant a bank card provided the applicant has an acceptable source of income and is not 120 days or more past due with another account.
The decision to approve or deny the applicant's request for a bank card was based on a scoring system. The financial institution scored each bank card applicant based on source and level of income as well as whether the applicant was ever 120 days past due. The scoring system used to evaluate each applicant and the minimum score required for approval was applied uniformly by a financial institution to all its applicants. Each institution had a single scorecard and approval score with which to assess the credit risk of all its bank card applicants. The problem faced by many financial institutions is that a significant number of bank card applicants approved become 90 days past due in the first two years or even declare bankruptcy. The financial institution is faced with the choice of increasing the score required for approval or closely monitoring the approved applicant's use of the bank card. Increasing the score would result in declining a large number of the applicants. This choice would cause a lot of the potential customers to be driven to the financial institution's competitors. Monitoring the approved applicant's use would require an increase in the cost to the financial institution for maintaining the bank card.
SUMMARY OF THE INVENTION
In accordance with a broad, general feature of this invention, a method for assessing credit risk and apparatus adapted for performing the method are provided. The method involves developing a segmentation tree, building a custom scorecard for each segment developed by the segmentation tree, grouping applicants into sub-populations corresponding to each segment, and applying the custom scorecard to the applicants within the corresponding segment.
The apparatus includes a central processor with a data bank into which data is written and from which data is read, a work station for processing applications, and a communications link for providing access to central processors outside the financial institution.
The method lowers the risk of a financial institution approving a poor risk application. By developing custom scorecards for different sub-populations of applicants, a financial institution is able to more accurately assess the credit risk of each applicant. A custom scorecard takes into account information that has been determined to be the most relevant for the applicants in that sub-population. This allows the financial institution to use a scorecard designed for a particular group of applicants based on that groups tendency to be a poor credit risk.
Use of an automated system to implement the generation of the custom scorecards and scoring the applications further lowers the cost to the financial institution of assessing credit risk. Automation of the credit risk assessment allows the financial institution to quickly, effectively, and inexpensively process a large number of applications. Automation also allows accurate assessment of each application generating reliable uniformity to the process. The method and apparatus lower the risk and cost to the financial institution in approving or denying bank card applications.
Other objects and features of the invention will become apparent as the description proceeds, especially when taken in conjunction with the accompanying drawings illustrating the invention, of which there are seven sheets and three embodiments.
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Christiansen James
Fatnani Sangita
Kolhatkar Jayashree Santosh
Srinivasan Krishnakumar
First USA Bank, NA
Hunton & Williams
Kazimi Hani M.
Stamber Eric W.
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