The credit card industry has extensive research, such as what you will find at Mercator Advisory Group’s site, where research takes a practical look at emerging payment trends. At the Federal Reserve Bank, you will often find scholarly works on credit policy issues, the topic of today’s content, cited by the Brookings Institute in their weekly news wrap.
Deep into this discourse on pricing dynamics is the conclusion that the CARD Act reduced market competition for credit cards, which also kept pricing at a higher level.
- The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 limited companies’ abilities to raise interest rates on outstanding balances on consumer credit cards, potentially reducing the incentive for companies to compete by lowering rates.
- Geng Li of the Federal Reserve Board and Yiwei Dou and Joshua Ronen of New York University find that, following passage of the CARD Act, competition declined significantly in the market for consumer credit cards relative to the market for small business credit cards, which were not subject to the Act.
- They show that before the CARD Act, credit card companies lowered interest rates on their cards by about ½ percentage point for every one percentage point that a competitor lowered rates; after the Act, that response fell to about 1/8 percentage point.
- The authors find that overall, the CARD Act led to higher and more varied interest rates on consumer credit cards relative to cards that were exempt from the law. The findings suggest that regulations aimed at consumer protection can have unintended effects on market competition.
The full article is available at this Federal Reserve Bank link, and although some of the advanced calculus might be a bit intimidating, there are some interesting conclusions. One very interesting part of the study is data from Mintel, which is a long-established company that studies credit card solicitations.
- Once receiving envelopes from responding consumers, the Mintel database records essentially all information on the forwarded credit mail offers. This allows us to study not only whether a consumer receives any credit offers, but also terms of the contracts offered.
- For example, the data include information about the price of credit—the so-called “go-to” interest rate, which is the regular non-promotional interest rate for purchases.
- We focus on the six largest credit card issuers of the country—Citibank, Chase, Bank of America, Capital One, Discover, and American Express.
- These issuers accounted for about 90% of the personal card offer mail volume in 2016.
In the Fed study, a comparison and contrast are made with small business cards. This was a novel approach since consumer cards were the subject of the CARD Act, and small business cards were not.
- We use all of these offers in the baseline analysis and assess the sensitivity of our results to using only counties with both consumer and small business card offers and only counties with at least three offers in robustness tests.
- We also check whether the primary results are robust to constructing the sample with the unit of observations at the issuer-MSA-year and the issuer-MSA-quarter levels.
And to jump right to the conclusion, the report says:
- We find a significant decline in the responsiveness of an issuer to competitors’ changes in interest rates, but not in other credit card terms that are unrelated to repricing.
- Consistent with our prediction, the decline is driven by an issuer’s responsiveness to competitors’ decreases as opposed to increases in interest rates.
- The decline cannot be explained by pre-existing divergent trends and becomes stronger for counties with more subprime borrowers.
- We also show an increase in price dispersion and markups for issuances after the Act, suggesting adverse effects on consumers.
- Together, the results highlight an unintended consequence of the CARD Act (i.e., reduced competition among credit card issuers) and contribute toward a more comprehensive and balanced evaluation of the costs and benefits of the regulation.
My pithy summary is this: The CARD Act did remove some predatory fee pricing issues in the U.S. credit card market, but as the Fed indicates, it may have stifled growth by smaller issuers, and as a result, may have increased net credit card interest rates.
I am going to read this report again on a long business trip next week. If you’d like to talk about it, let me know.
Overview by Brian Riley, Director, Credit Advisory Service at MeAdvisoryAvisory Group