January 23, 2012
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.
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