Essays on the competition and regulations in the Turkish credit card market

Abstract

The aim of this thesis is to analyze the price and non-price competition in the credit card market in Turkey. The level of credit card interest rates created an unabated debate in Turkey. While interest rates in consumer credit markets declined to competitive levels with the decrease in market interest rates in recent years, response of credit card rates to this decline is very slow. However, banks swiftly reflected the increase in the cost of funds during the 2000 and 2001 crises to credit card rates. The Central Bank started to put ceiling on credit card rates in 2006. Further regulations of credit card interest rates are on the agenda of the government. In order to design and implement an effective and efficient regulation, a rigorous analysis of the nature of competition in the market is necessary. Importance of credit cards in the economy and for the monetary transmission mechanism specifically is continuously increasing in recent years. Number of credit cards reached 37.3 million while credit card transactions comprised more than 23 percent of all private consumption spending in 2007. Therefore any incorrectly designed regulation may have economy wide adverse effects. In the first chapter, we analyze the price competition in the credit card market. System GMM regression is run on a dynamic panel data model and it is shown that credit card interest rates are economically insensitive to the changes in the cost of funds. This result is an indication of the lack of price competition in the market. In the second chapter, we investigate the non-price competition in the market. Banks create switching costs for their customers by providing non-price benefits. We divide non-price benefits into two groups: benefits from general banking services and benefits depending on the credit card usage. We argue that quality of general banking services and bank characteristics are at least as important as the non-price benefits of credit cards directly for credit card choice of customers. Our empirical analyses confirm that as the measures of both groups of non-price benefits increase, banks can charge higher credit card rates to their customers. Therefore, we conclude that competition in the credit card market is taking place on non-price aspects rather than interest rates.