Method for minimizing overdraft charge-off

Abstract

A method for minimizing overdraft charge-off in a bank account includes:(a) identifying a plurality of factors that can result in a bank account charge-off;(b) building a case history database of bank account holder information based upon a plurality of data elements associated with each of the plurality of factors;(c) creating numeric and / or categorical representations of the bank account holder information for each of the bank accounts in the case history database;(d) tabulating the numeric and / or categorical representations and the data elements for the bank accounts in the case history database;(e) combining certain ones of the numeric and / or categorical representations to separate the bank accounts in the case history database into a plurality of risk groups, each risk group having an associated probability of charge-off; and(f) optimizing, for each of the plurality of risk groups, a bank profit, by setting overdraft limits.

Description

TECHNICAL FIELD OF THE INVENTION[0001]The present invention relates to the processing of banking transactions, and more particularly to a method for minimizing overdraft charge-off.BACKGROUND OF THE INVENTION[0002]When a bank customer attempts to make a check card purchase, withdraw funds from an ATM or make a teller withdrawal, their bank must determine whether the customer has sufficient balances to cover the item, and, if not, whether to authorize the purchase or withdrawal into an overdrawn position or decline the transaction. Similarly, when one or more bank customer checks (or other returnable items) are processed in the nightly posting batch run, the bank must determine whether to pay or return each item that, if posted, would overdraw the customer's account. Each day any given bank may make millions of such authorization / decline and pay / return decisions. Each day the banking community as a whole makes trillions of such decisions. From a customer service perspective, banks wo...

AI Technical Summary

Benefits of technology

"The present invention is a method for reducing overdraft charges in a bank account. The method involves identifying factors that can lead to a charge-off, creating a database of information about the bank account holder, and categorizing the information into risk groups based on their likelihood of charge-off. The method then optimizes the bank's profit by setting overdraft limits for each risk group. This approach helps to minimize the likelihood of charge-off and increase the bank's profit."

Problems solved by technology

Declines and returns are embarrassing to customers.

Indeed, at a typical bank, between 4% to 8% of those accounts allowed to overdraw will never fully repay leaving the bank to charge off the negative balance and absorb the loss.

Such precise foreknowledge is, of course, impossible.

While there are a variety of software systems and methodologies on the market that address the “overdraft” problem, none function to ascertain either the probability of charge-off or the probability of cure (i.e. the probability that an account with a negative balance will pay back what is owed returning to a positive balance.

Few of these software systems and methodologies offer objective justification for the inclusion of a particular quantity; none shows how these quantities relate to charge-off and cure behavior.

In fact, demonstrating such a relationship is not easy because of the time spans involved.

Without such data, one may appeal to intuition, but one cannot bring the power of data mining to bear to assess whether one's intuition is correct.

Since the revenues still far outweigh charge-offs, overdrafts are still a very profitable business, but it is clear that the current software systems and methodologies employed to control losses through the setting of overdraft limits are deficient.

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