The surge in credit card transactions and credit card debt, the high levels of credit card rates, merchant discounts and interchange fees, and the mounting profitability make competition and regulation in credit card markets very important issues for both researchers and policy makers all over the world. Turkey is not an exception in this respect. In ten years, the number of credit cards increased by 500 percent and reached 43 million in 2008, making Turkey the second country in Europe after the UK. Although there are currently 21 card issuing banks, 87 percent of the market is controlled by the six largest banks.
The credit card rates were extremely high till 2006. While the annual inflation and T-Bill rates were 10 and 19 percent, respectively, the monthly credit card rates of the two market leaders were 7.47 and 7.39 percent (which make about 130 percent effective annual rate) by the end of 2005. Due to the rising concerns over the high concentration, high and sticky credit card rates, and high profitability, credit card regulations were enacted in March 2006. With the mandate to regulate credit card rates, the Central Bank imposed a monthly interest rate cap of 5.75 percent on banks in May 2006, and gradually lowered that cap to 4.39 percent by the end of 2008. The regulations, however, had no stipulations for annual fees, merchant discounts and interchange fees. Consequently, banks responded to those regulations so as to increase their non-interest revenues. They started to charge annual fees to card holders, and although data is unavailable there is anecdotal evidence that they increased merchant discounts.
Credit cards combine credit services with payment services. Credit services relax consumers’ liquidity constraints, and thus enable them to smooth their consumption. Through their credit services, card issuers earn interest revenue from revolvers. Payment services, on the other hand, provide both customers and merchants with convenience, improved security and record keeping facility. Moreover, consumers benefit from the interest free grace period and merchants enjoy the boosted sales. In requital for these payment services, banks charge annual fees to consumers, and merchant discounts to merchants.
There are many explanations proposed as to why credit card rates and merchant discounts may be very high, and many arguments made about whether their regulation is warranted. To be able to correctly identify banks’ market power in credit card markets, both their interest revenues from credit services and non-interest revenues from payment services should be included in the analysis. Taking both parts into account is also essential to be able to design effective regulations, because regulating one part may have implications for the other part. As the Turkish case clearly demonstrates, banks can easily increase prices on the unregulated part. Shaffer and Thomas (2007) present the only study that examines competition in credit card markets by considering banks’ revenues from both credit services and payment services. Applying the well-known Panzar-Rosse method for the first time to credit card markets, they find that competition in the American credit card market is not perfect but monopolistic.
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The Role of Simultaneous Regulations of Credit Services and Payment Services on Competition
