System Dynamics - Credit Card
|Foundations of Business|
Draw a cause-effect diagram showing the feedback loops in the system.
What are the likely causes of the oscillation?
Discuss possible ways of damping the oscillation.
There is a delay of several months between issuing a new card to a customer and discovering that this customer has not paid the bills.
Some banks are introducing the notion of dynamic delinquency, whereby they can analyse the spending and repayment patterns and pick up the early warning signs of a customer who may be getting into financial difficulties. Such banks may be able to take on borderline customers at reduced risk.
If the system can respond more quickly, this might reduce the amplitude of the oscillation, but it might simply increase the frequency (and turbulence) of the oscillation.
In this particular example, the cause-effect loops may be clearer if you think about ratios rather than absolute numbers. It is not the amount of bad debt that is the driver, but the ratio of bad debt to good debt.
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