Customer Life Time Value (CLTV) have two important aspects which make this metric substantially different and important for the organizations. First it is at a customer level or customer centric and second encapsulates long term value of the customers.
In a retail banking scenario, the customer may have different number of relationships and also may add different level of value.
Overall Customer Life Time Value (CLTV) for a customer will be
CLTV = CLTVBank account + CLTVCredit Card +CLTVMortgage +CLTVInsurance + CLTVother relationship
Customer Life Time Value for Mortgage
In CLTV computation, we can define income and cost streams.
- Interest income
- Cost of Fund
- Acquisition or Marketing Cost
- Servicing Cost
- Credit Cost
- Only mortgage loan income is considered
- Acquisition cost is allocated in the first month
- Net Interest Margin (NIM) is constant at 1.7% across loan and period
- Mortgage loan is assumed to have only 3 stage and not part payment or payment misses
- Servicing Cost is allocated uniformly to all mortgage loan accounts and remain constant over a period
- Constant discounting factor of 8%
- Probability of a mortgage loan to be active (99%), default (0.01%) and prepayment (0.99%)
Advanced Statistical Techniques should be used to estimate and predict probability of default and prepay at a mortgage loan level and over the terms of the loan.