Credit Card Pricing: The CARD Act and Beyond [INTERVIEW]

January 23, 2012

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    PYMNTS.com: Give our readers an overview of our most recent study and its main argument.

    OREN BAR-GILL (NYU School of Law): Our study “Credit Card Pricing: The CARD Act and Beyond” (forthcoming in the Cornell Law Review) begins by reconsidering different theories of credit card pricing – the rational-choice, risk-based pricing theory and the behavioral economics, salience-based pricing theory. We ask how the CARD Act can be expected to affect credit card pricing under each theory. We then empirically test these predictions using the Fed’s Terms of Credit Card Plans data and hand-coded data from card agreements that issuers submitted to the Fed.

    PYMNTS.com: What are some of your key findings?

    BAR-GILL: We find that back-end prices directly targeted by the CARD Act, specifically late fees and over-limit fees, went down. We did not find meaningful changes in prices that were not directly targeted by the Act.

    The CARD Act’s restrictions on back-end pricing hurt issuers’ revenues. Theory suggests that, in a competitive market, if regulation prevents issuers from covering costs through one price dimension, they would have to increase other unregulated prices. We do not detect such increases. This could be because of data limitations. But if analysis using better data confirms that unregulated prices did not increase to compensate for reductions in regulated prices, this may be an indication that issuers have some market power (perhaps resulting from switching costs). With market power, restrictions on one price dimension need not lead to increases in other price dimensions, at least not under the behavioral-economics theory.

    PYMNTS.com: Based on your conclusions, what are some of the suggestions you would offer regulators?

    BAR-GILL: Our results indicate that the CARD Act succeeded in curbing a few practices, but that the broad pattern of low front-end prices and high back-end prices remains. If these results hold up and if we believe that this pricing pattern is a result of salience-based pricing under the behavioral-economics theory, then additional regulatory steps should be considered. (If credit card pricing is an example of efficient risk-based pricing, we should not be concerned about the observed pricing pattern.) We tentatively consider two regulatory strategies: (1) Enhanced disclosure mandates, and (2) Strengthening existing restrictions on interest rate increases at the end of an introductory (promotional) period.

    View Oren Bar-Gill’s bio


    ACH Same-Day Q2 Volume Increases 15% to Nearly $1T

    The ACH Network says it has seen “significant” gains in same-day payments since last year.

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      Those transactions were up 15% during the second quarter compared to last year, helping drive overall growth of 5%, the payments network that underpins most U.S. payroll, bill pay and B2B invoices said Monday (July 21).

      “The continued robust growth of Same Day ACH shows how it is serving payments use cases for consumers, businesses, government agencies and other organizations,” Jane Larimer, president and CEO of Nacha, which operates the ACH network, said in a news release provided to PYMNTS. “As we enter the second half of the year, we expect to see this trend continue.”

      In all, ACH Network growth continued during the quarter, with 8.7 billion payments valued at $23.3 trillion, respective increases of 5% and 7.9% year over year. The network saw 336.4 million same-day payments, moving $980.3 billion in value, up 15% and 22% respectively. During the first half of this year, Same Day ACH handled 662.4 million payments valued at almost $1.9 trillion.

      “Business-to-business ACH volume grew apace, with more than 2 billion payments, up 10.6% from the same period in 2024,” the release added. “Claim payments to healthcare providers grew by 9.9% to 138.2 million payments.”

      The report follows a quarter in which the volume of Same Day ACH payments climbed 19.1% year over year to reach 326 million, with the value of those payments increasing 24.8%.

      In related news, PYMNTS explored the “speed-and-security paradox” surrounding faster payments in a recent conversation with Bill Wardwell, senior vice president of payments, treasury and supplier services at spend management platform Coupa, and Katie Elliott, senior risk and fraud officer at B2B payments network Bottomline.

      “I know it seems counterintuitive, but I’m going to say it: Slowing down is the best practice for faster payments,” Elliott said.

      She said her remedy is to introduce friction into high-risk moments like vendor onboarding or a change to routing instructions, while allowing an already vetted payment to proceed across real-time payment or same-day ACH rails. When urgency is not part of the equation, business email compromise schemes that rely on fear and deadlines lose their potency.

      The hidden enemy is fragmentation, Wardwell added. Pointing to a soon-to-be-published Coupa survey, he said that nearly 80% of the companies that suffered payment fraud were using multiple payment workflow systems.