Agent-based modelling of credit card promotions

Purpose Interest-free promotions are a prevalent strategy employed by credit card lenders to attract new customers, yet the research exploring their effects on both consumers and lenders remains relatively sparse. Selecting an optimal promotion strategy is intricate, involving the determination of an interest-free period duration and promotion-availability window, all within the context of market dynamics and complex consumer behaviour. The purpose of this study is to develop an agent-based model to assist with determining optimal promotion strategies. Design/methodology/approach In this paper, we introduce a novel agent-based model that facilitates the exploration of various credit card promotions under diverse market scenarios. Findings Our experiments reveal that, in the absence of competitor promotions, lender profit is maximised by an interest-free duration of approximately 12 months, while market share is maximised by offering the longest duration possible. In the context of concurrent interest-free promotions, we identify that the optimal lender strategy entails offering a more competitive interest-free period and a rapid response to competing promotional offers. Notably, a delay of three months in responding to a rival promotion corresponds to a 2.4% relative decline in income. Originality/value Our model consists of multiple lender and consumer agents that interact through a novel set of mechanisms based on well-studied consumer behaviours. Distinct from previous works, our model adopts a realistic billing cycle with a focus on interest charged to revolving accounts and supports a range of lender promotion strategies. It is calibrated to historical benchmarks and validated against both stylised facts and time-series data, ensuring a realistic reflection of market behaviour, which has been neglected in prior studies.