By Jess Sharp
ABA Data Bank
In a recent publication, the Consumer Financial Protection Bureau makes several misleading claims about the state of competition in the credit card marketplace. Its analysis, which is based on the bureau’s survey of credit card terms, made three major claims:
- Large issuers charge far higher purchase APRs compared to small issuers.
- More than half of large issuers offer products with a maximum purchase APR over 30 percent.
- Large issuers are more likely to charge annual fees.
Based on these claims, the CFPB concluded that a “lack of competition likely contributes to higher rates at the largest credit card companies. ”In reality, the bureau’s findings hinge on a flawed methodology that fails to make apples-to-apples comparisons, leading to misleading results and false conclusions. When the study’s methodological flaws are corrected, the CFPB’s conclusion that the credit card market is anti-competitive is groundless.
Unpacking large versus small issuer differences
Most of the disparity in purchase APRs between the top 25 issuers (“large” in the CFPB analysis) and everyone else (“small” in the CFPB analysis) is the result of CFPB’s decision to identify the median credit card APR for large issuers and compare it to the median credit card APR offered by small issuers, in both cases across all cards on offer. There are two major problems with this approach.
First, because the top 25 issuers have far more cards on offer — 480 to be precise, compared to 152 among the remaining 115 issuers — using the median is not the best way to determine differences between large and small issuers. Instead, comparing the minimum APR offered by each issuer is more appropriate, as large issuers design cards for a wider range of consumers (including consumers who prefer high-APR cards that offer higher rewards because they rarely revolve credit). In short, focusing on the minimum APR offered by large issuers yields an apples-to-apples comparison to small issuers that, in most cases, only offer one card.
Second, more than half of the respondents in the small issuer group are credit unions, which have a fundamentally different system of rules and guardrails than banks, including tax-exempt status and less stringent regulatory and supervisory requirements. A better comparison would be to compare large banks that issue credit cards to small banks that issue credit cards and exclude credit unions from the analysis.
Fortunately, the CFPB survey allows for this comparison. As shown in Figure 1, when credit unions are removed and an apples-to-apples comparison is made, the APR discrepancy discussed in CFPB’s report largely disappears (and, in some cases, reverses).
Later in the report, the CFPB asserts that large issuers are more likely to offer products with annual fees and maximum purchase APRs over 30 percent, finding that nine of the 15 institutions that offer a credit card with a maximum purchase APR over 30% are large issuers. CFPB fails to mention, however, that large issuers tend to offer cards across a wider spectrum of credit tiers. Indeed, according to CFPB’s data, the median large institution offers seven cards, compared to just one card offered by the median small institution. Moreover, the average maximum APR for new accounts opened at large issuers is only 0.6 percentage points larger than at small issuers, a very small difference that likely reflects other card attributes, including but not limited to rewards benefits.
Finally, CFPB finds that, on average, large issuers charge annual fees more often and at a higher level compared to credit unions and other small issuers. This interpretation is misleading for several reasons. First, their analysis is heavily skewed by a small number of luxury rewards cards that offer lucrative benefits at relatively high prices; when these high-fee cards are removed from the average by using a median, the difference in fees disappears. Second, many consumers actively choose cards with annual fees — in some cases, cards with fees totaling hundreds or thousands of dollars — because these cards offer rewards and travel benefits. In survey after survey, consumers tell anyone who will listen that they are highly satisfied with their rewards cards. It is disappointing that the CFPB focuses solely on fees without discussing the myriad benefits these fee-based cards offer.
Conclusion
The CFPB’s claims of dramatic pricing differences between large and small credit card issuers may have grabbed a few headlines, but they simply don’t stand up to scrutiny. More importantly, the CFPB’s conclusion that there is a lack of competition in the credit card market is false. Consumers have the choice of thousands of institutions and credit card products, with each one varying across myriad value dimensions, including interest rates, fees, rewards and benefits, branch locations, mobile banking and customer service (just to name a few). In a sense, these credit cards are a bundle of different services — the CFPB has clearly ignored this basic aspect, one well understood by the customers who use and value these cards.
Indeed, the survey on which the CFPB’s analysis is based illustrates the immense number of credit card offerings available in the market today. Perhaps this is why the Department of Justice’s preferred measure of market concentration, the Herfindahl-Hirschman Index, shows that the credit card issuing industry does not meet the definition of a concentrated market, or even a moderately concentrated market (Figure 2). Perhaps CFPB Director Rohit Chopra and his former colleagues at the Federal Trade Commission should examine those markets instead and let U.S. consumers continue to enjoy the benefits offered by their credit cards.
