Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
Which Strategy Impacts Consumer Short-Term Finance More?
−Comparing Balance Transfer and Cash Back Offers
Yan Yuan* and Toshiyuki Sueyoshi†
This research investigates efficiency differences between two important
strategic approaches that credit card companies use to attract customers.
One of the two strategies is a balance transfer check offer. The other strategy
is a cash back offer. This study analyzes the two approaches in terms of their
influences on consumers’ short-term finance. The proposed research consists
of the three stages. The first stage is related to consumers’ choice on offers.
The second stage estimates the offer’s overall and monthly effects on
payment, spending, and change of debt in order to capture consumers’
dynamic finance conditions. This stage focuses mainly on the promotional
interest rate and fixed interest rate parameters in the balance transfer offer.
The last stage uses counterfactual analysis to estimate the effects of the
balance transfer offer and cash back offers compared with the control, nonpromotional finance conditions. Finally, through comparing the effects of two
offers to consumers’ short-term finance, this study implies the policy for credit
card companies. They should send out more balance transfer offers rather
than cash back offers because the balance transfer offer is more effective in
giving a strategic impact to consumers’ short-term finance. (JEL Classification:
G11, G21, L11, L53)
Keywords: Balance Transfer, Short-Term finance, Consumers' Choices, Credit Card
Field of Research: Empirical Industrial Organization in Economics
1. Introduction
Every credit card company tries to offer good terms in many forms to attract more customers
and encourage existing customers to borrow more. This research is interested in the
balance transfer (BT) offer effect to consumers and attempts to compare the two types of
offers (i.e., BT offer or cash back) in a credit card market. This study is different from the
other contributions in terms of the three concerns. First, the BT is one special offer which is
different from regular credit card offers. As a result of additional parameters, this study can
measure the decision making of consumers that have more options on credit cards. Second,
consumers’ behavior is related to their choices. This study divides the analysis into
examining consumers’ choices and examining consumers’ behavior. Finally, this study
attempts to investigate which strategy is more effective on impacting consumers’ finance
conditions. No research has examined this type of offers by credit card companies.
Consequently, it is expected that the empirical results obtained this study will be able to
*
Dr. Yan Yuan: Assistant Professor, Management Department, New Mexico Institute of Mining and
Technology, 801 Leroy Place, Socorro, NM, 87801 (e-mail: yyuan@nmt.edu).
†
Dr. Toshiyuki Sueyoshi: Full Professor, Management Department, New Mexico Institute of Mining and
Technology, 801 Leroy Place, Socorro, NM, 87801 (e-mail: toshi@nmt.edu).
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Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
guide credit card companies in preparing business rules and further improving their
profitability measures.
2. Literature Review
Rationality of Consumers' Contract Choices in Various Industry Activities: Miravete (2003)
studied mistakes of consumers when they subscribed to telephone calling plans. Later,
Chintagunta and Narayanan (2007) developed a structural model of the plan choice and
usage decisions of consumers to explain their uncertainty regarding mean usage levels,
future usage levels and different rates of learning in two plans. Agarwal and Souleles (2006)
assessed consumers’ rationality by using a data set on credit card experiment. Della Vigna
and Malmendier (2006) analyzed a data set from three U.S. health clubs to find how
consumers selected from a menu of contracts among gyms.
Usage and Response of Consumers in Credit Card Market: Gross and Souleles (2002)
analyzed how consumer debt responded to changes in credit supply. They found that an
increase in credit limits generated immediate and significant rises in debt, which was
inconsistent with Permanent-Income Hypothesis (PIH). Agarwal, Liu and Souleles (2007)
examined how consumers responded to the 2001 federal income tax rebate, which was
regarded as the "lumpy" increase. They suggested that on average, consumers initially
saved some amount of their income tax rebates and used it to increase their credit card
payments, so paying debt down. Soon afterwards, consumers’ spending was increased. It is
widely known that the use of tax rebates is important economic behavior for every
household. After they started the interesting point of “lumpy” tax rebates, Gross et al. (2012)
studied how the 2001 and 2008 tax rebates affected consumer bankruptcy filings.
Motivation of Consumers and Other Intents to Any Offer: Back to 1991, Ausubel pointed that
the failure of the competitive model appeared to be partly attributable to consumers making
credit card choices without taking account of a very high probability that they would pay
interest on their outstanding balances. Calem and Mester (1995) analyzed consumer
behavior and found the explanation of stickiness on the credit card and interest rates to be
imperfect competition in the credit card market. Gordy (2006) also discussed that the
adverse selection of a credit card explained persistence of credit card interest rates at
relatively high levels. Elaydi and Harrison (2010) examined different motivations behind a
careful choice. Scholnick, Massoud and Saunders (2013) found that low income individuals
made financial mistakes when their decisions were and rare.
3. Research Issue and Data
The BT offer is essentially an additional loan extended to existing consumers at an interest
rate that is much lower than the usual “purchase” rate” for accruing on the customer's credit
card during a promotional period. The BT offers made by the company varied in four
parameters: by fixed-for-life rate (FFL) (%), by promotional rate (PR) (%), by the one-time
BT fee, and by promotional duration (PD) (months). Each offer is represented by a BT-offerID. The BT offer procedure is listed in figure 1.
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Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
Figure 1: BT offer procedure
Note: (a) BT stands for Balance Transfer. PR stands for Promotional Rate (%). FFL stands for Fixed-For-Life
rate (%). PD stands for Promotional Duration (months). (b) If a consumer decides to accept the offer, fee listed
in contract should be paid and two different options are available. PR is usually lower than FFL. However, the
PR option is limited in PD. After determining PD, a consumer should pay regular purchase rate around 12% to
20%. On the other hand, the consumer can enjoy FFL without period limitation. The consumer can choose
both options only if the sum of borrowed balances is within his credit limit.
The randomized dataset was obtained from RBS bank, starting in January 2005. Six months
later, this credit card company gave different BT check offers to existing customers and then
kept track of their performance for eight months until February 2006. Besides the historical
(before offer receipt) and performance (after the campaign) datasets, a response dataset is
available, indicating whether the consumer accepts the offer or not. If the BT offer is
accepted, how much they borrow from the bank through different types of checks and so on.
The dataset has not only the account information at the firm level but is also linked with the
Equifax bureau for every corresponding month.
This study separates the data set into three offer groups (A, B and C) for controlling for PD
and for a one-time BT fee. How BT groups are created is shown in figure 2.
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Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
Figure 2: BT offer groups
Note: BT stands for Balance Transfer. PR stands for Promotional Rate (%). FFL stands for Fixed-For-Life rate
(%). PD stands for Promotional Duration (months). (a) The short-term finance (payment, spending and ∆debt)
are not significantly impacted by PD and Fee. ∆debt represents the difference of debt between every two
months. Debt is a stock variable that is accumulated balance after BT campaign. Thus, ∆debt is the new debt
level in every month, which is used as a dependent variable in this study. Therefore, two interest rates are key
parameters for this study. (b) Consumers tend to behave according to different lengths of PD, especially at the
end of PD. Thus the BT offer with PD = 6 months and PD = 12 months are separated in this study. (c) The
offers with PD = 12 months only contain fee = $60 or $75. The offers with PD = 6 months contain fee = $0 or
$60 or $75. Then, the offers with PD = 6 months and Fee = $0 is separated out in order to compare effect of
offer at the same level of fee. (d) Comparing to the baseline group A, Group B contains offers that have longer
PD with the same fee. Group C contains offers that have fewer fees with the same PD. Therefore, Groups B
and C are better than Group A in terms of offers for consumers.



To capture an expansionary impact of the offer, this research is interested in the response of
spending, payments and debt, all of which serve as dependent variables. Meanwhile, the
debt contains three types of debt in this study:
The specific Credit Card Company (CCC) balance, which is the debt for the credit card
company.
The Equifax (EFX) balance, which is the aggregate debt for all banks.
The Protected Balance (PB), which is the debt carrying a high interest rate and may earn
more profit for the credit card company.
4. Empirical Specification
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Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
The objective of this research is to explain randomized offers to track how the short-term
finance of consumers is impacted by the BT offer in terms of  debt, spending and payment.
The important parameters are FFL and PR in the offer. Controlling for PD, this study
estimates the model that has the following form:
Yi = α+β0Ri +β1Xi + εi
(1)
where the outcome variable Yi represents either the payments Pi or spending Si in account i
in month t or the change of the amount of debt (ΔDebti ) , including a change of CCC balance
(ΔCCCi ) , a change of the EFX balance (ΔEFXi ) and a change of PB balance (ΔPBi ) at the
end of month t. Here,  stands for a change. Ri, representing contract parameters which
includes PR, FFL and maximized fee. Xi stands for consumer characteristics that consists of
payments, purchase spending, cash advance, finance charge, fee, the total number of
specific bank credit cards, the total number of all open bank credit cards, the behavior score
from the bank, the FICO score from Equifax bureau, the credit limit of the bank cards, the
total credit limit of all bank credit cards, the protected balance, the utilization ratio of specific
bank credit cards, and the utilization ratio of all credit cards. All of such characteristics are
averaged among 6-months of historical data before the campaign. Additionally, the outcome
variables estimated are on average.
The coefficient β0 measures the response of the outcome variable to the offer receipt. Thus,
this study checks the total effect and the monthly effect after campaign for t = 1-8 and
examine what happens when we increase the PR or FFL rate by 1%.
5. Results
5.1 Results Regarding Consumers’ Choices
Overall, the good consumers with good credit records take advantage of the PR offer, and
the constrained consumers choose the FFL offer in order to enjoy the low interest rate
comparing to regular purchase rate. Consumers who choose both offers have good credit
records but also high finance charges.
5.2 Results Regarding Baseline Offer (A)
Consumers do not use the check to consume but to pay off existing debt that carries a
higher interest rate. The payoff behavior of the PR offer at the end of PD is intuitive, but
spending using the credit card of the study bank is not obvious.
5.3 Results Regarding 12-Month Promotional Duration Offer (B)
Comparing to baseline offer, the path of  CCC balance is smoother. However, the effect of
FFL is not as significant as it is in the baseline offer. Second, a good change is that the
spending effect is smoother and more statistically significant than the baseline offer. During
the PD, the customers tend to purchase more even with a PR increase. Although the end of
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Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
promotion is not reflected, the declining trend may predict the coefficient back to 0. If so,
most of the customers pay off the debt at the end of the promotion. Last, with the extended
PD, more customers respond to PR offer and take full advantage of the offer.
5.4 Results Regarding 6-Month Promotional Duration & 0 Maximized fee Offer (C)
Compared to the baseline offer with higher maximized BT fee, the large difference comes
from  EFX balance. Consumers borrow less in the examined bank with the increase of FFL,
but tend to borrow more in other banks. The PR change does not make an impact on the
consumers' response in the study bank, but does decrease aggregate debt-in other words,
consumption. The PR increase is a negative sign to consumers and leads them to borrow
less from banks.
6. Policy Implication
An important business issue is which strategy between BT offer and cash-back offer is more
efficient to motivate consumers and change their short-term finance. Agarwal et al. (2007)
examined how consumers responded to the 2001 federal income tax rebates using credit
card data from one major issuer. They gave $500 rebate on average to existing customers.
To compare the effects of two offers, this study calculates the total cost of every offer group.
Considering cost of the bank is the London Interbank Offered Rate (LIBOR) and the average
LIBOR rate from 2005 to 2006 is around 5%. Then, we can define the cost of BT offer in
every month is as follows:
(5%-PR)  promobal (5%-FFL)  fixbal
cost =
+
(2)
t
12
12
where Cost t is the cost for every month t. promobal and fixbal stand for the BT amount of
the consumers using PR check and FFL check separately. Therefore, the total cost of the
RBS bank becomes
14
total cost =  cost t
(3)
t=7
To measure the effect, this study conducts counterfactual analysis to measure a standard
level of payment, spending and  debt consumers make on average without taking up any
promotion. The zero total cost describes a scenario in which a credit card company does not
give out any promotion. Then, this study considers the counterfactual outcome variables as
the standard and compares two effects from the BT offer and cash back offers.
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Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
Table 1 summarizes the comparison results on BT and cash-back offers at $500 cost.
Payment
Total
cost=0
Group
A
(PD=6,
Fee>0)
Group
B
(PD=12,
Fee>0)
Group
C
(PD=6,
Fee=0)
$500
Cash
back
Standard
 CCC Bal.
Spending
 EFX Bal.
 PB Bal.
Coef.
SD
Coef.
SD
Coef.
SD
Coef.
SD
Coef.
SD
2771.72
3059.33
512.34
940.6
1705.39
1367.38
2372.62
1557.19
135.81
148.04
285.63
6.08
*
2.22
0.13
-469.34
-8.85
***
-419.10
-2.25
-48.35
-3.18
-146.46
-5.73
*
-2.83
-0.29
281.83
9.78
***
193.95
1.90
11.42
1.38
55.69
0.58
-44.23
-1.13
*
-33.54
-0.29
183.32
0.45
-32.33
-0.96
-44.31
-0.55
46.98
1.45
***
-15.60
-0.16
-190.65
-0.56
33.19
1.19
92.96
1.90
10.81
0.56
-146.83
-2.70
179.78
0.95
-31.19
-2.06
7.08
0.50
31.80
0.79
-262.48
-1.86
18.23
1.63
61.7
68.9
FFL
PR
FFL
PR
FFL
PR
TR
-202.51
48.7
-5.59
***
54.5
27.5
***
23.3
Note:
(a) This table reports the changes of payment, spending, change of balance caused by $500 cost of credit
card company in different groups of BT offer and direct one-time cash back compared to the control
group which does not contains any promotion. The magnitude of impacted dependent variables from
BT offer is higher than the magnitude from one-time cash back based on the standard control. PD
stands for promotional duration.  CCC Bal,  EFX Bal.,  PB Bal. stand for the change of balance in
RBS bank, the change of balance in Equifax bureau and the changed protected balance.
(b) In group A, Δdebt of BT offer is six times of Δdebt of cash back and the payment effect of BT offer is
twice larger than cash back.
(c) In group B, the payment effect is almost the same between BT offer and cash back. The effect of
 EFX balance is almost seven times the effect from cash back. Therefore, the longer PD stimulates
the consumers' purchase, and consumers accumulate a higher balance.
(d) In group C, the payment and  CCC balance,  EFX balance effects are much greater than the effect
from cash back. Thus, consumers are stimulated more by giving them a BT offer rather than giving
them cash back.
7. Conclusion
This study used a unique randomized dataset of credit card accounts to analyze customers'
short-term finance behavior in response to BT offers. We first estimated consumers' choices
based on a multinomial choice model, so finding that the two interest rates gave the largest
impact on consumers’ choices. Then, we estimated the total effect and monthly effects of
payment, spending,  CCC balance,  EFX balance and  PB balance.
The findings of this study are summarized as follows: In the baseline offer group (A), the
offer significantly impacts customers' behavior in the specific bank. As for the 12-month
promotion duration group (B), the paths of coefficients are smoother, and the effects for
spending and  PB balance become more significant. Consumers may take advantage of
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Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
the PR offer, consume more, and then accumulate more debt. On the other hand,
consumers pay off the high-interest debt with an increased FFL rate. They can also use
other banks' offers to pay off the debt in the study bank. The last offer group (C) with the 6month duration and zero fees implies that customers decrease their aggregate debt levels
with an increased PR and increase their aggregate debt levels with an increased FFL rate.
Finally, from a policy perspective, this study has implemented counterfactual analysis to
compare payment, spending, and  Debt effects of two offers controlling the total cost at the
same level based on a control group - one standard finance condition of consumers without
any promotion. This study finds that credit card companies should stimulate consumers'
short-term finance by offering a BT offer rather than a cash-back offer.
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Proceedings of Annual Tokyo Business Research Conference
15 - 16 December 2014, Waseda University, Tokyo, japan, ISBN: 978-1-922069-67-2
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