Felix Salmon

Credit card chart of the day

By Felix Salmon
September 15, 2009

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.

8 comments so far | RSS Comments RSS

> 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.

Why would interest be different (ie higher) for credit cards than for other forms of unsecured consumer debt?

Posted by q | Report as abusive

To q: the interest rate for credit cards are usually double the rates for unsecured loans. That’s why bank (before the crisis) would be only too happy to front people credit cards, but asking for an unsecured loan was like pulling teeth. Banks were making lots and lots of money on credit cards (and overdraft balances) because they generally charge punitive interest in the range of 20-30%. Even the biggest gouge of a loan has a max 10% rate.

Credit cards are important tools in our society – I mean can you imagine bringing a couple grand in cash when you wanna buy a TV or some such big ticket item, or worse yet, having to go to a bank and sit down with a loan officer and sign terms for a loan to buy one – but banks have become predatory with them because they made so much money. Like every other aspect of the crisis, it’s greed unchecked that led to excess that spun into crap and then into worthless paper. A new system for credit cards needs to be developed, and the first thing to abolish is the cash advance, and the second thing is to set a item limit based on creditworthiness – i.e. excellent credit, you can spend max $5000 at a time; poor credit, maybe max $500. Used to be the credit limits on cards used to set that limit, but every card I have somehow got it’s limit raised to $20k and my credit isn’t exactly spotless…

Posted by the Shah | Report as abusive

neat how your pie graph sections are color coded to match the credit card company logo’s color!>!

Posted by dvictr | Report as abusive

It’s not at all clear to me that the chart above shows that credit card companies have the ability to set prices or don’t compete with one another. Most mature industries look either the same or more concentrated – GM and Toyota typically have around 20% U.S. share, Verizon and AT&T basically split the desirable part of the U.S. phone market in half, etc. And in those industries, people compete on price and financing terms.

Interest rates are so high on credit cards because no consumer purposefully treats credit cards as long-term loans. Of course, some fraction of consumers (the profitable ones for CC companies) DO wind up mistakenly treating their credit card as a long-term loan, either because they can’t do basic math, can’t control their spending even in the face of personal financial woes, or experience an inevitable problem in their lives that gives them no financial recourse but to carry a CC balance.

But nobody goes out and rationally thinks “Gee, I’m going to go out and get a 25% loan, go over my limit, miss some payments, and wind up in debt until I go bankrupt”. Rational people get insurance, mortgages, car loans and student loans at decent prices. For what legitimate purpose would someone ordinarily situated need to carry a CC balance? So when people look at CC offerings, they think “yeah, yeah, 28% interest – i’ll never pay that. OOOHH, I get 1% cash back while the issuer gets much higher interchange fees!” So CC companies market on miles, balance transfers, cash advances, and all the other irrelevant things that encourage you to run up a big balance. They know that some customers are going to default, but they’ve figured that they can get enough out of them before they do to make it worthwhile.

Posted by najdorf | Report as abusive

If you look close enough into the details for private label cards, that’s where you can really grease the wheels…use our card at our store only, and you’ll get XX back in credit or rebates. strictly a guess, the average US wallet or pocket book carries 2-4 per household.

If more folks actually use the card like it’s supposed to be treated, this would be less of an issue and banks would devote less capital to it. Obviously, when Citigroup & Bank of America decided to explicitly add subordination into their CC ABS trusts earlier in 2009 it appears quite the opposite…they are “in it to win it”

Posted by Griff | Report as abusive

FWIW, the four-firm concentration ratio (market share of the four largest issuers combined) is 68%, while the Herfindahl-Hirschman Index (sum of the squared market shares of all firms) is about 1480. The 4FCR indicates an oligopoly, while the HHI is somewhat ambiguous (and, using Department of Justice anti-trust guidelines wouldn’t necessarily rule out mergers of issuers).

The real issue may be not issuers, but card brands and the power of the brands to set terms and conditions of issue. All those issuers except American Express and Discover offer both Visa and MC….

Posted by Donald A. Coffin | Report as abusive

Your comment about lowering interest rates being the wrong incentive in a time when we wish to lower household debt looks to the wrong part of credit card transactions. The part of the credit card transaction which works as an incentive or disincentive is the upfront rate. But the place where real competition and regulation could have a positive impact is on the actual rates paid. People enter into credit card debt on the basis of the stated interest rate originally offered. The credit card companies game the system so that through unfair fees and “default” rates without declaring cardholders in actual default the actual rates earned by the companies vastly exceed the original nominal rates on the accounts. Further, the business model is to bring as many people as possible into the system using their cards so that a significant proportion will have outstanding balances which allow the companies to trap them in debt for a period of time enabling a form of “stadium” pricing until the debt is repaid. Simple transparency about the abuses in the system will not change these things as the moment at which the incentive of lower rates is confronted by consumers is not moment at which the highest rates and prices are imposed.

Posted by Robert Litwack | Report as abusive

I’d bet a chart of national deposit share looks pretty similar. IE, the heavyweight control a big %% of a pretty big pie. Not on a percentage base, of course, but the names: Chase, BAC, Wells Fargo, Citigroup.

4-5 years ago I’d thought consolidation was good / healthy indicator for ‘economies of scale’. Now…not so much.

Posted by Griff | Report as abusive

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