European Journal of Operational Research 183 (2007) 1513–1520

www.elsevier.com/locate/ejor

To ask or not to ask, that is the question

Hsin-Vonn Seow *, Lyn C. Thomas
School of Management, University of Southampton, Highfield SO17 1BJ, UK

Received 1 January 2005; accepted 1 August 2006

Available online 22 January 2007

Abstract

Applicants for credit have to provide information for the risk assessment process. In the current conditions of a satu-
rated consumer lending market, and hence falling ‘‘take’’ rates, can such information be used to assess the probability of a
customer accepting the offer?
With the advent of internet broking pages, which allow borrowers to ‘‘apply’’ to a number of different companies at the
same time, this ‘‘take’’ problem will increase. In some mortgage markets, it is quite common for more than 50% of those
offered credit to reject it. In some cases, this is because the sale falls through but often it is because a relatively better retai-
ler has offered a more suitable product to the borrower.
Lenders do not want to make the application process too complicated, and with the growth in adaptive marketing chan-
nels like the Internet and the telephone, they can make the questions they ask depend on the previous answers. We inves-
tigate how one could develop such ‘‘adaptive’’ application forms; which would assess acceptance probabilities.
Ó 2006 Elsevier B.V. All rights reserved.

Keywords: Data mining; Classification trees; Question selection

1. Introduction This competition among the different banking

The personal financial market is becoming a
buyer’s market rather than a lender’s market [6],
as customers can choose between a number of com-
peting products. New organizations like internet
brokers mean that the customer is able to apply to
a number of financial institutions. They can choose
to take the offer that appeals most to their needs and
hence lenders need to try and make appropriate
offers.
*
Corresponding author. Tel.: +44 23 8059 3557; fax: +44 23
8059 3844.
E-mail addresses: yseow@yahoo.com (H.-V. Seow), L.Tho-
mas@soton.ac.uk (L.C. Thomas).
and financial institutions means that ‘‘take’’ – the
probability a customer will accept the product
offered – is now a major problem in personal
finance. One way of maximizing the ‘‘take’’ of offers
is by customizing the product offered for each cus-
tomer. There have been several areas where Opera-
tional Research approaches are useful in this
process of customization as is indicated in Murthi
and Sarkar 5. Such research focuses on the follow-
ing question: What offer, acceptable to a lender,
should be made to each population segment so
as to maximise the chance it will be taken. Thus
there are two problems here – how to segment
the population and which offer to make to each
segment.

0377-2217/$ - see front matter Ó 2006 Elsevier B.V. All rights reserved.
doi:10.1016/j.ejor.2006.08.061
1514 H.-V. Seow, L.C. Thomas / European Journal of Operational Research 183 (2007) 1513–1520
The telephone and the internet are increasingly
being used in personal financial services as ways of
applying for products. Such channels of communica-
tion are both private and interactive and thus allow
different variants of a product to be offered to differ-
ent customers in real time. Of course before any
offers can be made, some information on the cus-
tomer has to be collected and compared with infor-
mation on what offers previous customers accepted
or rejected, see for example [7]. This is done by ask-
ing the customer some questions, and to ensure that
the customer is not put off by the application pro-
cess, it is important that the number of questions
posed is kept to a minimum. In the case of loan prod-
ucts, like credit cards, the customer will be expecting
to answer some questions as part of the credit scor-
ing risk assessment requirements, but they will not
want to answer too many questions in total.
The interactive nature of the new application
channels means that the questions asked can depend
of the responses to earlier questions. So the exercise
is akin to an ‘‘adaptive questionnaire’’. Bearing in
mind that only a limited number of questions are
to be asked, it is important to identify which ques-
tions will result in the most relevant data to be
collected.
So, which questions should be asked? Then what
variant of the product should be offered in the light
of the responses to the questions asked? In this
paper, we propose using classification and regression
trees (CART) to answer these two questions. Section
2 reviews classification trees and Section 3 describes
TAROT, a way of modifying that methodology so as
to answer these questions. Section 4 gives an exam-
ple of this approach to acceptance scoring using data
from a Fantasy Student bank account and some con-
clusions are drawn in section 5.
2. Classification and regression trees (CART)
Classification trees developed by Breiman et al.
[2] remains a powerful classification tool, especially
with the new advances like random forests in its use
[1]. In classification one has a set of data, where
each data point consists of the values (the attri-
butes) of a number of characteristics variables
together with the value of a target variable, which
is often binary. The aim is to identify which combi-
nations of attributes lead to the different target out-
comes. It is used widely in many areas apart from
credit scoring and marketing [8]. In health for exam-
ple, CART analysis is being used to decide on treat-
ment that is both cost conscious and appropriate in
the treatment of diabetic retinopathy [3], and to
detect possible complications for pregnancies [4].
The strength of classification trees is that they
deal well with interactions among the characteristics
that are being used to classify. They identify what
are the significant characteristics in the data and
what combinations of the attributes of these charac-
teristics give the best forecasts of the outcomes of
the target variable. To construct a tree, one starts
by splitting the population in the data set into two
subpopulations which are as different as possible
in the frequency of the outcomes of the target vari-
able. This is done by looking at each characteristic
in turn and identifying which split of its attributes
is optimal in differentiating between the outcomes
of the target variable and then choosing the charac-
teristic which has the best optimal split. This process
is then repeated on the daughter subpopulations so
formed and subsequently on their daughter subpop-
ulations until one ends up with subpopulations
which meet some end node conditions. Data that
satisfies the conditions that make up each end node
are then classified as having the target outcome
which is in a majority in that end node. Note that
one can easily modify classification trees so that at
a particular node the search is only over a subset
of the characteristics. This property will be
exploited in the next section to develop a methodol-
ogy that allows one to segment the population and
choose the best offers for each segment.
3. TAROT – Top application characteristics
remainder offer characteristics tree
The classification tree that is proposed consists of
segmenting the population using the characteristics
of the applicants and then classifying the offer char-
acteristics so as to decide which offer to make to
each segment in order to maximise the ‘‘take’’ prob-
ability. We refer to such a tree as TAROT (top
application characteristics remainder offer charac-
teristics tree).
A sample of previous offers, the characteristics of
the applicants who were made offers and the take/
not take decisions of the applicants to those offers
is used to build the tree. The target variable is
whether the offer is accepted by the applicant. If
one built a classification tree without any constraint
then it is likely that there will be offer characteristics
O1 which are higher up the tree than applicant char-
acteristics A1 when one is trying to identify the
 H.-V. Seow, L.C. Thomas / European Journal of Operational Research 183 (2007) 1513–1520
accepting group. From this, one can say very little.
One cannot say that O1 is the best offer to make to
someone with A1 characteristics as there might be
something else that appeals to that segment more
but is less attractive to the whole population. All
the tree indicates is the difference between having
O1 in the offer or not having it in, is greater on
the whole population that any other offer.
A (m, n)-TAROT assumes that there is a maxi-
mum of m levels of applicant characteristics and n
levels of offer characteristics in the tree. Such a tree
would lead to an offer process where one uses at
most m questions in order to segment the popula-
tion and there are at most n features of the product
that will be varied from the standard as part of the
offer. It is necessary to define a standard value for
each of the features of the offer (usually the least
expensive to the lender) and it is assumed that this
is what is offered if that offer characteristic does
not occur in the tree. Fig. 1 is an example of a
(1, 1)-TAROT in the context of a student current
account application, where the question is on the
course the student is undertaking. If the student is
taking Arts or Other, then the offer will include free
(i.e., no fee) foreign exchange purchases, while if
they were taking Economics or Education, they
should be extended an offer for a credit card.
The difficulty in using a classification tree in the
normal way, even with the first level split being
forced to be an application characteristic is that
these splits are made without considering that there
may be a bias in the take/not take decision because
different offers were made to different applicants. So
we need to restrict this bias in some way even if we
cannot remove it entirely. Thus we try to identify
what are the most important features of the offer
Fig. 1. An example of a (1, 1)-TAROT.
1515
in terms of the take/not take decision and look at
what happens if these types of offers are made. This
will restrict the number in the sample who will be
considered at each step but the usual policy of defin-
ing a node as an end node of the tree if there are
insufficient cases should prevent analysis being done
on too small samples. One can use the following
iterative methodology to build the TAROT tree.
We do not assume it has an optimal segmentation
and subsequent offers in any sense but it is a good
compromise between finding ‘‘locally optimal’’ solu-
tions and offsetting the bias that occurs in such
‘‘local optimal’’ solutions because they do not rec-
ognise that the data consists of different offers to
the different customers.
3.1. Building TAROT
(a) Build an ‘‘up to m-level offer characteristic
only tree’’ on take/not take decision. From
this, one can identify the combination of fea-
tures that gives the highest acceptance rate
and which has been offered to sufficient
applicants.
(b) Use this highest offer combination at the top
of a tree and add a last level of the best split
of the application characteristics.
(c) Now take this best ‘‘bottom level’’ application
characteristic split and force it in at the top of
a classification tree and allow up to m lower
levels of offer characteristics splits.
(d) Take the branch of the m-level offer charac-
teristics splits that lead to the highest accep-
tance rate and is applied to a sufficiently
large proportion of the population – one
branch from each of the subsets arising from
1516 H.-V. Seow, L.C. Thomas / European Journal of Operational Research 183 (2007) 1513–1520
the application characteristic splits – and add
a bottom level application characteristic split.
The choice of what percentage of the popula-
tion ‘‘is sufficiently large’’ is a parameter of
the methodology.
(e) Force in these ‘‘bottom level’’ application
splits below the current application levels in
the tree and then allow up to m levels of offer
characteristic splits.
(f) Repeat steps (d) and (e) until the n levels of
application characteristics have been intro-
duced or the characteristic split in (d) is not
significant.
When the tree is completed the top level applica-
tion splits give the segmentation of the application
population, while the lower level offer splits describe
the different changes that have to be made to the
standard offer for each of these segments. The phi-
losophy in the tree is, at each stage, to concentrate
on the offers with the highest acceptance rates when
deciding which further segmentation of the applica-
tion characteristic to make.
Taking into account the requirements of the
algorithm, there was a need for a statistical software
package that had the ability to force splits on sub-
sets of the variables. SAS 9.1.3. has Enterprise
Miner 4.3 that allows the user to experiment with
forced variables in the classification trees and is very
user friendly and presents results well in the forms
of charts and graphs. There is a choice of splitting
rules to choose from consisting of features like
chi-squared test and entropy to show how one var-
iable is more significant than another.
4. Using TAROT on fantasy student account data
To the best of our knowledge, there is no publicly
available data on the offer strategies of the personal
financial sector (see [9]). So we utilise the data gath-
Table 1
A sample of the data from the fantasy student account
pkUserNumber Sex Status
1 Male Single
2 Male Divorced
6 Male Married
7 Female Single
8 Male Single
9 Female Other
10 Female Single
11 Female Single
12 Female Single
ered from a fantasy student account which was
started in 2001. This is a web based application form
of a fantasy student bank account which was made
available to the first year students at the University
of Southampton. There were 21 applicant character-
istics that can be obtained from this information.
They are sex, status, number of children (Num_Chil-
dren), number of credit cards (Num_Cards), whether
there is any income from wage, loan, or parental con-
tributions, other sources of income, place of educa-
tion (establishment), campus, course taken (course)
and interests: sport, travel, music, clubbing, cinema,
cars, Do-It-Yourself activities (DIY), gardening,
beer and country western (see Table 1).
The website then made the students an offer of a
specific account, where the offer characteristics of
overdraft limit, interest when in credit, commis-
sion-free travel money, and whether a credit card
was also offered varied from student to student.
The offer characteristics were chosen randomly in
25% of the cases and followed a decision tree which
was constructed to ensure a variety of offers was
being made in the other 75% of the cases. Further
details can be found in Thomas et al. [9].
After pre-processing the initial data, 300 entries
were used to build the classification tree. There is
no need for a validation sample since the tree is of
fixed size. We are aware that this is not a large sam-
ple and hence limit the TAROT by only building a
(2, 1)-TAROT.
As one might expect, the data is difficult to clas-
sify well since one is trying to predict a difficult tar-
get variable like acceptance, especially in the case of
the acceptance of a hypothetical product. Moreover
our aim is to establish a methodology for this type
of problem, not to derive the features since this data
is for a hypothetical, not a real product.
The results of building an unrestricted classifica-
tion tree on this data using all 25 applicants and offer
characteristic variables are given in Fig. 2. Note that
Num_Children Num_Cards Wage Loan
0 1 False True
0 3 True True
0 1 True False
0 6 True True
0 1 True True
0 0 True True
0 1 False True
0 0 False True
0 0 False True
 H.-V. Seow, L.C. Thomas / European Journal of Operational Research 183 (2007) 1513–1520
Fig. 2. Applicant and offer characteristics classification tree (with no ‘‘initial classification using applicant characteristic’’ rule).

1517
1518 H.-V. Seow, L.C. Thomas / European Journal of Operational Research 183 (2007) 1513–1520

this tree as indicated earlier does not help decide
which offer to make to which applicant segment as
one can have offer characteristics above applicant
ones. In that case of the same applicant characteristic
follows two offer characteristics, which offer should
you make to that group? For example, from Fig. 2,
should males with more than three credit cards be
given the free travel money (fee-free foreign
exchange) offer or not since they appear as the best
group under both the offer ‘‘fee-free’’ travel money
branch and under the not offer branch as well.
The initial step in a (m, n)-TAROT is to identify
which n-level offers give the best acceptance rate
on the whole population. The standard offer is to
offer an overdraft of £1000 and no further enhance-
ments like fee-free foreign exchange (travel money),
no credit card packaged with the account, no inter-
est when the account is in credit and no gift given on
opening the account. We build an offer-only tree to
see which of these features should be amended and
get the result as shown in Fig. 3 for the case n = 2.
Fig. 3 suggests that the best offer even at the n = 2
case is just to offer travel money (68% acceptance).
This is also the offer one would make if n = 1.
To build a (1, 1)-TAROT, we use this one-level
offer tree in Fig. 3 to identify travel money as the
important characteristic. We then look at those
who were offered travel money and find the split
on application characteristics that maximises the
difference in acceptance rate. This turns out to be
whether the course undertaken by the applicant,
whether it is Arts or Others, or Economics or Edu-
cation (see Fig. 4). We choose Course as the first
applicant split and place it at the top of the tree.
Then, we find the best offer only split for each of
the two subsets. This gives the (1, 1)-TAROT, dis-
played in Fig. 1, where free foreign exchange is
given to those who are studying Arts or Others
and an offer of credit cards to those studying Eco-
nomics or Education.
To obtain the (2, 1)-TAROT, repeat the analysis
for a (1, 1)-TAROT initially that is take the best
offer split from Fig. 3 which is TravelMoney. We
next split each of the subsets of the TravelMoney
splits on applicant characteristics (see Fig. 4). The
best applicant split chosen is Course. We ignore
the split from no travel money as it does not have
as high acceptance rate.
We then place the applicant variable Course at
the top of the tree. So for the branch leading from
studying Arts or Others, the offer characteristic of
giving fee-free travel money is the best offer split.

Fig. 3. Offer characteristics only classification tree.

Fig. 4. Finding the first applicant split for the (2, 1)-TAROT.
 H.-V. Seow, L.C. Thomas / European Journal of Operational Research 183 (2007) 1513–1520 1519

Then we find the best applicant split for this corre-
sponding subset is whether the applicant has two or
less credit cards.
As for the branch leading from the course taken
is Economics and Education, the offer characteristic
of a credit card has a higher acceptance rate. The
best applicant split corresponding to this is Wage
(whether the students earn wages or not) (see
Fig. 5). By placing both the Number of Cards and
the Wage splits under the Course split, we then
allow one level of any offer characteristic split for
the Number of Cards and Wage subsets. The result
is presented as a complete (2, 1)-TAROT shown in
Fig. 6.
This says that the best adjustment to the standard
offer for those who are studying Arts or Others and
have two or less credit cards is to offer fee-free foreign
exchange. For those in the same Course set but have
three or more credit cards, the best offer split will be
an overdraft of £1400. For those studying Economics

Fig. 5. Step (d) of (2, 1)-TAROT.

Fig. 6. (2, 1)-TAROT.

1520 H.-V. Seow, L.C. Thomas / European Journal of Operational Research 183 (2007) 1513–1520
or Education, who have a wage should be offered
interest of 1% when in credit, while those who do
not should be offered an offer that brings the optimal
amount of profit to the lender as they are predicted to
accept any offer extended to them.
In this tree we end up with subsets with small
numbers of applicants in them, which can lead to
over fitting. One way of increasing the size of the
data set is to build a regression model of the chance
of accepting an offer as a linear function of the offer
and applicant characteristics. This would allow esti-
mation of the probability of acceptance of any com-
bination of offer characteristics by any individual in
the application sample – not just whether they
accepted the one offer they were made. Clearly the
probabilities are only an approximation but at least
when there is a split on an offer characteristic, there
now would be no loss in population size. Cluster the
population into segments so that appropriate offers
can be made to each segment. Here appropriate
means the offers which are the highest acceptance
rate for that segment.
5. Conclusions
We have shown that the TAROT classification
trees can be used to advise on which offer to extend
to each cluster formed from a classification using
applicant characteristics. This paper shows the fea-
sibility of this approach to acceptance scoring.
Although not yet widely used, this idea of tailoring
an offer to increase the chance of acceptance is
becoming more important in selling financial prod-
ucts through the internet and telephone application
channels.
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