How Competitive Is the Credit Card Market?

ABA Economic Analysis

The charge card market is extremely competitive, especially amongst card companies however likewise amongst payment networks based upon numerous various metrics. Industry competitors keeps rates low, promotes development, and provides customers the power to select the card that works finest for them.

In a landmark U.S. Supreme Court case validating the “two-sided market” as an essential structure for examining the charge card market, the Court discovered that the charge card market did not have any trademarks of a noncompetitive sector. In reality, there are at least 4 celebrations associated with many charge card deals. 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 charge card network utilizes its brand name to interact to the consumer where their card will be accepted, and different processors can contribute in guaranteeing information reaches the best location.

The card brand names (or “networks”) serve as intermediaries, balancing and linking the requirements of everybody in the deal through developed guidelines, so that deals occur in a split second. There are really 2 vibrant markets that banks serve (companies market cards to customers and industrial cardholders and getting banks offer card approval services to processors and card-accepting companies). In the middle are the card brand names, working to draw in both releasing banks and merchants to their network.

These unique sectors of the worth chain offer considerable area to innovate and complete. Over the previous ten years, 13 companies have actually remained in the leading 10, 32 companies have actually remained in the leading 20, 80 companies have actually remained in the leading 50, and 163 companies have actually remained in the leading 100. This motion over the last years, consisting of amongst the biggest companies, is a sign of a competitive market. New card approval options like, Toast and Square have actually produced alternatives for sellers, contending strongly with the conventional merchant processor community. All of this modification has actually occurred without federal government intervention, showing that the structures of the card market foster instead of hinder development which the market is versatile, instead of protective of incumbents.

Figure 1: The Herfindahl-Hirschman Market Concentration Index, 2017. Source: Census Bureau. Click image to increase the size of.

A typical, usually accepted procedure of market concentration is the Herfindahl-Hirschman Market Concentration Index. The U.S. Department of Justice utilizes the HHI to evaluate market concentration when, for instance, a merger may impact market competitors. According to DOJ, markets in which the HHI is in between 1,500 and 2,500 points are thought about “moderately concentrated,” while markets where the HHI is greater than 2,500 points are thought about “highly concentrated.”

As displayed in Figure 1, neither the charge card releasing market nor the monetary deals processing, reserve and clearinghouse activities market—that includes charge card, monetary deal processing and electronic monetary payment and funds transfer services—satisfy DOJ’s limit of a focused market. Indeed, numerous other markets that rely greatly on charge card (for instance, outlet store, book shops, cordless providers and automobile leasing) are considerably more focused.

Figure 2: Top 50 Firms’ Share of Total Market Revenue. Source: Census Bureau. Click image to increase the size of.

As displayed in Figure 2, the leading 50 charge card companies represent almost all the charge card market in both 2012 and 2017. For a nationwide market where guidelines offer guardrails that standardize some (however far from all) item functions, this is not unexpected. In contrast to domestic airlines, for example, the card issuance market has much more significant gamers. There are likewise countless card-issuing banks in the United States, much more than in similarly-sized foreign nations, and barriers to releasing cards are essentially nil for controlled lending institutions. Again, card issuance alternatives for customers compare well to looking for countless airline companies offering tickets. Of course these are various items, which is why it makes good sense to explore the particularities of each market (like the card market being a two-sided market) prior to leaping to any conclusions. The truth that the card market is not really focused is shown by the HHI ratings in Figure 1.



A news media journalist always on the go, I've been published in major publications including VICE, The Atlantic, and TIME.

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