Does True Competition Among Credit Card Issuers Exist?

John B just left me an interesting comment on the subject of credit cards:

Your statement on banks needing to focus on competing, rather than pages of agate type is correct. but is there a substantially large enough market of major credit card issuers to sustain true competition? I don’t think so. And probably not in a more regulated environment.

It’s a good question, so I used the data here to chart the share of the credit card market held by the biggest issuers. The percentages aren’t of the total market, just of the top 15 issuers, but it’s close enough:

It’s pretty clear from this chart that between them, the big credit card issuers absolutely have the ability to set prices. It’s also clear just by looking at their marketing materials that none of them is particularly interested in competing with the others by reducing the maximum interest rate that they charge.

In most contexts, a chart like the one above would I think bespeak a competitive market. But in credit cards, I’m not so sure. On the other hand, do we want credit cards to be highly competitive? I’m not sure that we do: what we really want is for credit cards to be transparent.

At the margin, if the card issuers bring down their interest rates, that will only result in even more people borrowing even more money on their credit cards. But doing so is nearly always the worst possible way of borrowing money, except for maybe going to the loan shark down the street. Ideally we want the whole credit-card market to shrink, and for banks to go back to offering personal loans.

Comments

[Angry Banker:]

Why does everyone say credit cards are not transparent? Read the disclosures that came with your card and everything you need to know is there. Problem is, most people are to lazy to read all the fine print (or in too much of a hurry to go out and max out their cards), and then after they make a late payment they get pissed off when the card company raises their rate or charges them a big late fee. But I guarantee you that the conditions that cause that rate increase or late fee are spelled out in the contract. And its not the credit card companies' fault that there is so much fine print. It's lawyers and consumer advocate groups that have caused the terms and conditions to become so voluminous.

Sep 16 10:13 AM

[Hanoch:]

I do not see how the author concludes that it is "clear" that the credit card companies don't compete. Given the number of issuers, and the incessant battle for market share, I don't see how that is possible.

Moreover, the statement that "we want the whole credit-card market to shrink" strikes me as odd. Who is this "we"? This is a market economy in which decisions are made by individuals, not some collective "we". If I feel a credit card suits my purposes, then I use it; if not, then I don't. I don't need some policy wonk making decisions for me.

Sep 17 08:26 AM

[buoy:]

Gosh...how many more do you think we need?

Sep 17 08:33 AM

[martyg:]

credit card companies compete? what a joke. next try writing some fluff about attila the hun. in concert, they all raised their rates while borrowing money from the government for next to zero.

as far as transparency is concerned, i'm certain that mr angry banker can read the journal of medicine and start performing brain surgery.

as far as the credit card companies shrinking, only people strung out on debt for survival should be paying usurious interest rates. like smoking cigarettes, the public should be weaned off credit cards. it's painful for a while but healthy in the long run.

disclosure: reformed credit card junkie. been clean for almost
2 1/2 years and only use debit cards.

Sep 17 10:59 AM

[It Figures:]

The most transparent and objective measure of competition in an industry is the profitability of the participants. Sustained above average profitability is a sign of lack of competition - think drug companies in the '80's and '90's, or MSFT a decade ago.

Given that most credit card issuers are losing money right now, and have for the last year or so, it is hard to characterize the sector as lacking competition in any economic sense.

Folks would benefit from trying to separate their personal "beefs" with these companies from their economic/investment analysis

Sep 17 03:06 PM

[MudEngineer:]

The fact that most credit card companies are losing money right now has much more to do with their stupidity on who they gave credit cards to and the fact that currently about 10% of their poorly chosen customers are defaulting on their credit card debts. Some due to unemployment and some due to greatly excessive debt load.

Their losses are not due to excessive competition!


On Sep 17 03:06 PM It Figures wrote:

> The most transparent and objective measure of competition in an industry
> is the profitability of the participants. Sustained above average
> profitability is a sign of lack of competition - think drug companies
> in the '80's and '90's, or MSFT a decade ago.
>
> Given that most credit card issuers are losing money right now,
> and have for the last year or so, it is hard to characterize the
> sector as lacking competition in any economic sense.
>
> Folks would benefit from trying to separate their personal "beefs"
> with these companies from their economic/investment analysis

Sep 18 03:51 PM