The CFPB's Flawed Credit Card Rate Analysis
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Competition benefits consumers, not just through lower prices and better quality, but also by protecting them against fraudulent practices. Clear-eyed government regulation can promote competition and consumer protection by stomping out fraudulent and deceptive practices as well as facilitating the flow of accurate, easy-to-understand information. But what happens when the government is the source of bad information and uses that to promote specious claims that competition has “failed”? In the case of the Consumer Financial Protection Bureau, another round of misleading economic analysis is being used to justify further intrusions on market competition that could confuse consumers and lead to worse regulation.

Early this spring the CFPB released a short report blaring that credit cards issued by “small issuers” such as neighborhood credit unions and community banks carry lower Purchase Annual Percentage Rates (APR) than those issued by “large issuers” such as Citibank, Bank of America, and others. Having supposedly “demonstrated” this claim the CFPB went on to assert that “lack of competition likely contributes to higher rates” at the largest credit card companies.

The CFPB’s focus on competition policy as part of its overall consumer financial protection mission is long overdue and was a centerpiece of the Report of the CFPB Taskforce on Federal Consumer Law released in 2021. But to ensure that competition policy helps consumers it is necessary to ground it in sound economic analysis. By this score the CPFB’s claims about credit card interest rates fail because they ignore basic economics.

Consider first the CFPB’s claim that APRs of cards offered by “small issuers” are lower than those for “large issuers.” This conclusion is based on a classic “apples-to-oranges” comparison—the group of “small” issuers includes a large number of credit unions, which fundamentally differ from large international banks in several important ways. First, small credit unions are non-profit membership organizations that cannot serve the general public but are limited to customers with a common bond, such as a shared employer. Any profits earned are reinvested in the enterprise and used to subsidize operations, including credit cards. This common bond and access to subsidized products also leads members to be more conscientious about remaining current on obligations. As a result of these subsidies and other differences, credit union costs tend to be lower across the board compared to banks.

Moreover, banks—especially large banks—operate under significantly heavier regulatory burdens such as the global Basel capital requirements. These capital rules increase the costs of retail banking, particularly for lower-income customers. Costs for banks are also higher for an additional reason—large banks typically offer greater services than credit unions, including superior online and app experience, extended customer service hours, and a massively larger branch network, all of which increase costs but in exchange for a superior customer service experience. Finally, larger issuers are much more likely to offer cards with valuable reward programs, higher credit limits, co-branded cards with retailers, and specialized credit builder and other cards, which increase the costs associated with card offerings and may attract a different profile of customer from credit unions.

A study by the Consumer Bankers Association found that for those with Poor Credit (who pay the highest interest rates) merely removing credit unions from the CFPB’s sample of card issuers reduced the measured APR differential from 7.9 percentage points to 2.2 percentage points, a 70 percent reduction. Analysis by former Federal Reserve economist Paul Calem for the Bank Policy Institute confirmed the distortions caused by including credit unions in the analysis.

Contrary to the claim that there is a “lack of competition” in the credit card industry, the reality is that large banks compete fiercely, offering different card products to different customers with different benefits and cost structures. Measuring the degree of competition in the credit card industry solely by reference to median APR is nonsense. Only about half of American households with credit cards revolve a balance. Interest rates are irrelevant to those who pay their credit card bill in full every month. Unsurprisingly, those who do revolve their balances are far more likely to be aware of their APR and shop for a card on that margin than those who do not carry a balance. Non-revolvers focus on benefits such as cash back, frequent flyer miles, free checked bags, and other perks. Thus, CFPB analysis should have focused on differences in the rates paid for accounts assessed interest, not the median for all accounts (including those who do not pay interest).

According to one estimate there are “more than 640 individual credit card products and nearly 4,000 banks today” that compete with a wide variety of products with different features in addition to upstart competitors offering comparable products such as buy-now-pay-later that enable payments over time with no finance charge. According to Experian, the average American household carries 3.9 credit cards. In addition, credit card companies compete for your business literally every time you make a purchase at the grocery store, restaurant, or online. No other industry presents 4 immediate options every single time you make a purchase. Characterizing this market as suffering a “lack of competition” defies common sense and reality.

We are also aware of no economic theory that would explain why a market with an anticompetitive structure would maintain persistent differences in pricing based solely on size. If the market really lacked competition, as alleged by the CFPB, why would not smaller issuers raise their APRs to a rate comparable with large issuers and increase their profits? That they do not implies that credit card issuers, whether large or small, are constrained by the forces of market competition and that persistent APR differences are more likely explained by underlying cost and other fundamentals or mere statistical artifacts.

Competition policy matters for credit cards just like every other consumer finance market. But getting competition policy right means getting the underlying understanding of relevant market dynamics right. By that test the CFPB’s APR study is a failure.


Todd Zywicki is George Mason University Foundation Professor of Law at Antonin Scalia Law School, Nonresident Scholar of the International Center for Law & Economics, and former Chair of the CFPB Taskforce on Federal Consumer Financial Law (2020-21). Julian Morris is a Senior Scholar at the International Center for Law and Economics.

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