ABA Economic Analysis
In a landmark U.S. Supreme Court case confirming the “two-sided market” as a fundamental framework for analyzing the credit card market, the Court found that the credit card market lacked any hallmarks of a noncompetitive sector. In fact, there are at least four parties involved in most credit card transactions. There are the cardholder, the cardholder’s bank (the “issuing bank”) that extends credit on the card, the merchant, and the merchant’s bank. A credit card network uses its brand to communicate to the customer where their card will be accepted, and various processors can play a role in ensuring data reaches the right place.
The card brands (or “networks”) act as intermediaries, balancing and connecting the needs of everyone in the transaction through established rules, so that transactions happen in a fraction of a second. There are actually two dynamic markets that banks serve (issuers market cards to consumers and commercial cardholders and acquiring banks provide card acceptance services to processors and card-accepting businesses). In the middle are the card brands, working to attract both issuing banks and merchants to their network.
These distinct segments of the value chain provide significant space to innovate and compete. Over the past 10 years, 13 issuers have been in the top 10, 32 issuers have been in the top 20, 80 issuers have been in the top 50, and 163 issuers have been in the top 100. This movement over the last decade, including among the largest issuers, is indicative of a competitive market. New card acceptance solutions like Checkout.com, Toast and Square have created options for retailers, competing aggressively with the traditional merchant processor ecosystem. All of this change has taken place without government intervention, demonstrating that the foundations of the card marketplace foster rather than inhibit innovation and that the marketplace is flexible, rather than protective of incumbents.
Figure 1: The Herfindahl-Hirschman Market Concentration Index, 2017. Source: Census Bureau. Click image to enlarge.
A common, generally accepted measure of market concentration is the Herfindahl-Hirschman Market Concentration Index. The U.S. Department of Justice uses the HHI to analyze market concentration when, for example, a merger might affect industry competition. According to DOJ, markets in which the HHI is between 1,500 and 2,500 points are considered “moderately concentrated,” while markets where the HHI is higher than 2,500 points are considered “highly concentrated.”
As shown in Figure 1, neither the credit card issuing industry nor the financial transactions processing, reserve and clearinghouse activities industry—which includes credit cards, financial transaction processing and electronic financial payment and funds transfer services—meet DOJ’s threshold of a concentrated market. Indeed, several other industries that rely heavily on credit cards (for example, department stores, bookstores, wireless carriers and passenger car rental) are significantly more concentrated.
Figure 2: Top 50 Firms’ Share of Total Market Revenue. Source: Census Bureau. Click image to enlarge.
As shown in Figure 2, the top 50 credit card issuers account for nearly all the credit card market in both 2012 and 2017. For a national marketplace where regulations provide guardrails that standardize some (but far from all) product features, this is not surprising. In comparison to domestic commercial airlines, for instance, the card issuance market has many more major players. There are also thousands of card-issuing financial institutions in the US, many more than in similarly-sized foreign countries, and barriers to issuing cards are virtually nil for regulated lenders. Again, card issuance options for consumers compare well to trying to find thousands of airlines selling tickets. Of course these are different products, which is why it makes sense to delve into the particularities of each market (like the card market being a two-sided market) before jumping to any conclusions. The reality that the card market is not actually concentrated is demonstrated by the HHI scores in Figure 1.
