Essays on a two-sided market: credit card market in Turkey

Abstract

The credit card markets are subject to many debates in all over the world caused by their two-sided complex structure. Turkish credit card market also involves many controversial issues which originates several regulations in the market such as credit card interest rate regulation in 2006. While two sided markets have externalities, making the market complex, such regulations may have unexpected effects on the unregulated parts of the market. This thesis aims to shed light on the link between the non-interest and interest revenues of banks in the credit card market as it examines the effects of the credit card interest rate regulation in the Turkish credit card market in 2006. In the first essay, we present a comprehensive survey of the literature on bank revenues in the credit card market. Investigating the existing empirical and theoretical studies, we conclude that although the large theoretical literature on credit cards is quite beneficial to understand the complex market mechanism, it is insufficient for policy recommendations since the results of theoretical models are quite sensitive to assumptions about the market. On the other hand, empirical studies carry vital importance to check the results of theoretical studies, to quantify the abstract calculations of theoretical models and to detect unexpected externalities in a specific market. In the second essay, we empirically investigate the effects of a regulation in one part of two-sided credit card market to the other side. Concentrating on the Turkey experience, the article monitors the effects of credit card interest rate regulation in 2006 on non-interest revenues of banks in the market. The results indicate that the regulation on interest rates changed the banks attitude about non-interest revenues, and induced banks to consider their costs more when deciding their non-interest income strategies. In the third essay, we analyze the relationship between the interest and non-interest revenues of banks. Using the available data for Turkey case we investigate the nature of the relationship between the two revenue types. Besides, we check evidence for the effect of the credit card interest rate regulation in 2006. Our results indicate that the interest rate regulation caused banks to shift their focus from regulated interest revenues to non-interest revenues. Moreover, the results detect that interest revenues has a negative effect on non-interest revenues. We argue that this result is due to the banks’ tendency to compete in non-interest revenues and the banks’ action to compensate their lost incomes from the regulated interest revenue. Looking at the results, we suggest careful consideration of the possible effects of a potential regulatory action to the unregulated parts of a credit card market when a regulatory action is planned.