# Competition in the Credit Card market



## Brendan Burgess (29 Jul 2007)

Here are some quotes from today's Sunday Business Post

"It is the lack of competition in the credit card market that really stands out"
"Any competitor trying to enter the Irish credit card market may find that hurdles are placed in its way"
 -Kathleen Barrington

"The Irish credit card market is clearly uncompetitive"
-Louise McBride 

"A price differential of between 9.5% and 19% in credit card interest should not exist in a competitive market"
- Mary O'Dea, Consumer Director, Financial Regulator

This flies in the face of the facts. Here is a list of credit card providers in the Irish market:

AIB
American Express
Bank of Ireland
EBS
First Active
GE Money
Halifax
MBNA
NIB 
One Direct 
Permanent tsb
Tesco
Ulster Bank

Halifax, NIB and permanent tsb all charge under 10%. 

There are no barriers to switching. 7% switched last year alone. If you assume that the 50% who clear their balance each month don't have any reason to switch, that means than the 7% is really about 14% of interest paying customers, which is quite high. 

Because three suppliers - AIB, Bank of Ireland and MBNA - account for 80% of the market, it is argued that the market is not competitive. But MBNA has 13.6% of the market and is a relatively new entrant to Ireland - I would guess it's here about 10 years. 

If you were an overseas credit card provider, would you want to enter the Irish market? 13 competitors. Half the customers pay off their balance in full. Unsecured lending. 

Irish consumers are well served by competition and I am astonished that well informed commentators continue to say the opposite in the face of all the evidence. 

Brendan


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## GeneralZod (29 Jul 2007)

It could also be argued that one of the principal barriers to competition is the government tax on credit cards which the providers can't be blamed for. This acts as a disincentive to customers switching (avoiding a duplicate tax levy is awkward) or holding multiple cards. 

I'd love to have such a churn barrier in my business area.


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## KalEl (29 Jul 2007)

GeneralZod said:


> It could also be argued that one of the principal barriers to competition is the government tax on credit cards which the providers can't be blamed for. This acts as a disincentive to customers switching (avoiding a duplicate tax levy is awkward) or holding multiple cards.


 
That's the salient point...the commonly held view is you get levied with two lots of €40 if you try and switch credit card providers.
Plus older people, as with most financial products, tend to stick with their bank (to their detriment!)


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## CCOVICH (29 Jul 2007)

Wouldn't the 'Financial Regulator' be better served warning people of the dangers of running up credit card debt rather then whining about non-issues?

Are credit card markets in other States any different?


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## KalEl (29 Jul 2007)

I agree...50%ish of people not clearing their balance every month is more worrying. I suppose her point is that in a healthy developed market a provider offering 19% would go out of business.


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## CCOVICH (29 Jul 2007)

The 19% rate is levied on those who don't qualify for the lower rates.  In some case, this may be due to their salary, in others, it could be down to credit history, so that the riskier the customer, the higher the rate.  Not much wrong with that.


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## GeneralZod (29 Jul 2007)

KalEl said:


> First money they've ever made from me I think!



They get a commission on everything you purchase with the card AFAIK.


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## KalEl (29 Jul 2007)

GeneralZod said:


> They get a commission on everything you purchase with the card AFAIK.


 
Do they? I didn't know that. Obviously the retailer's bank gets a percentage of all purchases but who pays MBNA for example?


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## GeneralZod (29 Jul 2007)

KalEl said:


> Do they? I didn't know that. Obviously the retailer's bank gets a percentage of all purchases but who pays MBNA for example?



AFAIK There's a separate payment called interchange between the retailer's acquiring bank and the card issuer for every transaction. [broken link removed].


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## KalEl (29 Jul 2007)

GeneralZod said:


> AFAIK There's a separate payment called interchange between the retailer's acquiring bank and the card issuer for every transaction. [broken link removed].


 
Interesting and makes sense too. So customers who clear their balance every month do yield something for the MBNA's of this world.
General Zod advising Kal El...peace in our time!


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## oysterman (29 Jul 2007)

KalEl said:


> hit with a €15 late fee by MBNA...bill was due on Tuesday, I paid it on Saturday via AIB and didn't clear until Wed. First money they've ever made from me I think!


If they never normally make anything from you then the respective rates of AIB and MBNA credit cards are irrelevant. Why not get an AIB card and cancel the MBNA? - then you'll never get hit again in such a situation (and AIB give you a cash turnover bonus, just in case it was some incentive being offered by MBNA that attracted you in the first place).


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## Brendan Burgess (29 Jul 2007)

This thread is to discuss competition in the Credit Card market. Please don't make off topic replies. Please don't start telling and responding to off topic anecdotes. Open a separate thread for them.

Brendan


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## Gulliver (29 Jul 2007)

The issue of Competition in the credit card market is tied up with the issues of competition in the general banking market.

The big issue is that it is virtually impossible to start a new bank to move into such profitable areas as credit cards - and that impossibility is created by the licensing process.  For a fuller discussion see  and click "competition"


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## oysterman (29 Jul 2007)

Brendan said:


> This thread is to discuss competition in the Credit Card market. Please don't make off topic replies. Please don't start telling and responding to off topic anecdotes. Open a separate thread for them.


I would have thought that MBNA's penchant for charging fees is absolutely a competitive issue in that the classic AAM position - "it's the rate, stupid" - is not strictly relevant in the case of credit cards.

However, apologies if I was part of the hijacking of the thread. It was done with the best of intentions.


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## CCOVICH (29 Jul 2007)

Gulliver said:


> T
> The big issue is that it is virtually impossible to start a new bank to move into such profitable areas as credit cards - and that impossibility is created by the licensing process.  For a fuller discussion see  and click "competition"



How did MBNA do it?


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## Brendan Burgess (29 Jul 2007)

Gulliver

There are 13 competitors in the market already. Three of them are offering very low rates. What more could a 14th competitor offer?


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## Brendan Burgess (29 Jul 2007)

In Thursday's Irish Independent Mary O'Dea, the Consumer Director of the Financial Regulator gave the quote of the week:

"Credit price differentials on cards should not exist". 

And in yesterday's Irish Times, the Consumer Correspondent Paul Cullen said in an article on grocery prices: 

"...The multiples are engaging in "me-too" pricing for their best-selling items, prompting questions about how much real competition is taking place". 

This is like throwing a suspected witch into water. If she floats, it's a sign that she is a witch and must be killed.


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## Murt10 (29 Jul 2007)

Jill Kerby has an article in todays Sunday Times hammering home the same point as Brendan. 

The article is entitled "Blames customers not the banks for the high CC charges". 

She argues that there is no lack of competition or cost information with credit cards and finishes off the article

"Mary O'Dea (Financial Regulator's Consumer Director) noted that half of us havn't a clue what interest rate we pay on our cards. It's lazy customers who deserve to have their knuckles rapped if they continue to pay the banks such exorbitant interest. O'Dea should direct the consumers to start looking at their own affairs".

It's not like it's rocket science. Go with the cheapest card. If you get a teaser rate for 6 months or a year, then move as soon as soon at the teaser rate expires. I think the banking sector call people who do this Rate Tarts. Quite a compliment when you consider the source.


Murt


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## ClubMan (29 Jul 2007)

In general people should not borrow medium/long term on their credit card since the rate will generally be higher than alternative unsecured or secured loans. Ideally people should use credit cards as a cashflow management tool and not a source of borrowing and so clear their balance before the "free" credit period expires and they incur interest costs. If they do this then all other things being equal (in particular other charges such as forex charges when travelling etc.) it doesn't really matter what the rate is on the card and it doesn't really matter who they go with. As for the Consumer Director claiming that people don't know the rate charged on their card - isn't it printed on every statement issued so if somebody doesn't know they are simply not reading their statements? Surely we don't need further regulation or market intereference to assist those who can't be bothered to perform even this basic task?


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## gd2000 (30 Jul 2007)

Really depends on your definition of competition, doesn't it?

The Herfindahl index, which is a common measure of competition/concentration (albeit not a perfect one!) would say that the market isn't competitive/is highly concentrated.  Just because there are many players does not mean the market is necessarily competitive.  Inertia can make a market extremely uncompetitive (IMO that's the largest reason for lack of competition in Ireland)

IMO there is a need to encourage competition despite the inertia (in many markets).  We ALL lose when a large number of people are inert.  The article alone may make people more aware, which can help.


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## ClubMan (30 Jul 2007)

gd2000 said:


> the market isn't competitive/is highly concentrated.


Can you explain that in layman's terms? 


> Inertia can make a market extremely uncompetitive (IMO that's the largest reason for lack of competition in Ireland)


 I would agree that inertia is a problem in this and many other consumer contexts alright. In many cases consumers themselves fail to exercise what power they have to get the best deal - whether it be finding the cheapest sliced pan or the best credit card etc.


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## Gulliver (30 Jul 2007)

CCOVICH said:


> How did MBNA do it?


 
MBNA is a large international banking group - and it is relatively easy for such a group to get a banking license under current legislation.

True competition will only happen if indigineous (Ryanair-style) companies can develop and enter the banking market. The Irish process of obtaining a banking license for such a company is such that it will never happen. The process does not allow for a single wealthy individual, or a small group of wealthy individuals to do so - and if you examine how successful competitive Irish companies have been developed, it is always by such an individual or small group. So sadly, we are doomed to continue with the present lot, or new foreign entrants who have all of the characteristics of the present lot.


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## ClubMan (30 Jul 2007)

I don't understand the doom and gloom portrayed in the previous post. We have a situation today where customers can not only easily get transaction free current account banking but can even receive interest on current account balances in some cases. There are deposit rates on offer that are above mortgage rates and in line with or exceeding inflation. Relative newcomers to the mortgage and general banking markets in recent years have obviously stimulated competition and the consumer has benefited (at least those who don't let inertia stop them from shopping for the best deals). How is this not a "good thing"?

Wouldn't _Anglo Irish Bank _be an example of a dynamic new small entrant into the market in recent years?


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## CCOVICH (30 Jul 2007)

Gulliver said:


> MBNA is a large international banking group - and it is relatively easy for such a group to get a banking license under current legislation.
> 
> True competition will only happen if indigineous (Ryanair-style) companies can develop and enter the banking market. The Irish process of obtaining a banking license for such a company is such that it will never happen. The process does not allow for a single wealthy individual, or a small group of wealthy individuals to do so - and if you examine how successful competitive Irish companies have been developed, it is always by such an individual or small group. So sadly, we are doomed to continue with the present lot, or new foreign entrants who have all of the characteristics of the present lot.


 
Are there Ryanair type operators offering credit cards without the backing of major banks in other countries?  Surely banking/offering credit should be subject to a more stringent licencing process than a simple widget manufacturer?  

Would Mastercard and Visa want to deal with such operators?  Would they do so on terms that make it viable?

Anyway, do we want credit card rates so low that they encourage reckless use of cards?


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## Maine (30 Jul 2007)

Mary o Dea's comment re card market competition were off the mark. Competition equals lots of rates - if they all had the same rate then would we need to be worried.

Our education system is however very narrow with very little education on items like mortgages, loans and pensions which have significant impacts in later life. These sectors also have "buzz" words which can be intimidating to non financial people. We needs lots of education on this in school time.
The government has been complicit in this - look at the complexity surrounding pensions / PRSI contributions etc. - drive the population into the hands of the "experts"


A further point to note is that the financial sector is good at categorising people in terms of these peoples knowledge and position in society. Hence the doctor will be offered better terms and there will be less pressure to take the "lose your job" insurance while other occupations will be led to higher rates, lower terms and far more hard selling on items like insurance.


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## ClubMan (30 Jul 2007)

Maine said:


> Hence the doctor will be offered better terms ...


What do you mean by this? Better terms in what context or on what sorts of products?


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## CCOVICH (30 Jul 2007)

For example, to qualify for AIB's lowest interest rate credit card (the Platinum Card), you have to be earning at least €50,000 per annum.  This also entitles you to certain rewards etc.


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## ClubMan (30 Jul 2007)

But why would a doctor get preferential terms because of his/her profession if that's what the poster was insinuating?


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## CCOVICH (30 Jul 2007)

Because they earn more money than the average industrial wage?


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## ClubMan (30 Jul 2007)

Yes - but not specifically because they are a doctor?


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## CCOVICH (30 Jul 2007)

Surely it's a legimate example?  They could have said accountant, architecht, barrister.........


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## ClubMan (30 Jul 2007)

If that's what it was then fair enough. It's not clear from the original post.


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## Gulliver (31 Jul 2007)

CCOVICH said:


> Anyway, do we want credit card rates so low that they encourage reckless use of cards?


 
CCOVICH, have you lost the plot entirely.  Do you really need high rates to protect you from your instincts.  Why not also increase the price of food, energy, and all of the necessities of life?  Why not also increase taxes.  Then you might spend less!!


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## aircobra19 (31 Jul 2007)

Gulliver said:


> CCOVICH, have you lost the plot entirely.  Do you really need high rates to protect you from your instincts.  Why not also increase the price of food, energy, and all of the necessities of life?  Why not also increase taxes.  Then you might spend less!!



You mean like adding tax on fags, drink and petrol etc?


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## CCOVICH (31 Jul 2007)

Gulliver said:


> CCOVICH, have you lost the plot entirely. Do you really need high rates to protect you from your instincts. Why not also increase the price of food, energy, and all of the necessities of life? Why not also increase taxes. Then you might spend less!!


 
Since when is a credit card and the ability to build up debt a necessity?

Do you disagree with the notion that interest rates should not be so low as to encourage high levels of personal debt?

How do you feel about the ECB and their actions in the past 2 years? Have they lost the plot as well?

And can you please get back to your earlier point about barriers to entry etc. in the Irish credit card market. Are we any different from most other countries, e.g. the UK, where there are a similar number of operators offer cards and at rates that are comparable to Ireland?

Do you have any ecomonic or empirical analysis to support your opinions or are they just that?

I'm sure there are similar barriers to entry with respect to provision of insurance and funds etc. yet the likes of Sean Quinn and FBD seem to have done ok.


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## gonk (31 Jul 2007)

ClubMan said:


> If that's what it was then fair enough. It's not clear from the original post.


 
I think the other half of the point was doctors and other professionals would not be pressurised to buy insurance against losing their jobs because they are highly unlikely to be unemployed.


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## z109 (31 Jul 2007)

As one of the 50% who clears his CC debt each month, there is no incentive for me to switch from my current provider (BoI). Having looked around a while ago, the only card that was attractive to me was the Tesco one (clubcard points on spending), but I was refused it because I have no credit history (I've never been in debt!).

So could the regulator be saying that the market is uncompetitive because few of the card providers are offering an incentive to switch? (i.e. they are not actively trying to get 50% of the market to switch cards).


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## ClubMan (31 Jul 2007)

Apart from the interest rate charged (which ideally should be academic to people if they clear their balances before interest applies) there are other features/charges that many people don't bother checking or shopping around for the best deal on - e.g. incentives such as those mentioned in the previous post, forex margins on non € transactions - a 0.9% difference between some cards, length of credit periods, cash advance and/or withdrawal fees etc. See the _IFSRA _cost survey for more. This survey alone surely suggests that there is competition in this market?

[broken link removed]


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## KalEl (31 Jul 2007)

CCOVICH said:


> Since when is a credit card and the ability to build up debt a necessity?
> 
> Do you disagree with the notion that interest rates should not be so low as to encourage high levels of personal debt?


 
CCOVICH, this is an outrageous viewpoint...morality and people's self discipline should have nothing to do with setting interest rate levels. That's Thought Police stuff.


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## Maine (31 Jul 2007)

CCOVICH said:


> Surely it's a legimate example? They could have said accountant, architecht, barrister.........


 
yes - this is what I mean.

On two levels

1. these are less likely to be unemployed etc better salaries etc

2. As these folks then to be more financially savvy bank employees will not in my opinion hard sell to them as they would to joe bloggs. Bank employees will be more inclined to accept their position and do less herding of client towards a high margin product.

Banks have all sorts of bonuses for sales - this mean bank staff have to make sales of high margin and a number of them will go higher pressure more often on the average joe / mary in my opinion.


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## shanegl (31 Jul 2007)

CCOVICH said:


> Do you disagree with the notion that interest rates should not be so low as to encourage high levels of personal debt?


 
High inflation maybe, but interest rates should have nothing to do with how much debt people have. If the powers that be are worried about that they should introduce tougher lending criteria.


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## CCOVICH (31 Jul 2007)

KalEl said:


> CCOVICH, this is an outrageous viewpoint...morality and people's self discipline should have nothing to do with setting interest rate levels. That's Thought Police stuff.


 

Sorry, but I am not a believer that usury is sin, and I am also a borrower so you can leave the morals out of it.

Higher levels of personal debt would imply increasing inflation which is bad news for almost everyone.

Higher interest rates serve to cool the appetite for debt. 

That's common sense. Not 'Thought Police' stuff.


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## KalEl (31 Jul 2007)

CCOVICH said:


> Sorry, but I am not a believer that usury is sin, and I am also a borrower so you can leave the morals out of it.
> 
> Higher levels of personal debt would imply increasing inflation which is bad news for almost everyone.
> 
> ...


 
But what you were suggesting was artificially keeping interest rates high to curb the irresponsible behaviour of some when it comes to credit cards.
A credit card should only be used as a cash flow aid or for distance purchases (online etc) Anything else is using the card for a purpose it was not designed for. But penalising the majority would be unfair, like curbing the use of shovels just because some use them to hit people over the head!


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## CCOVICH (31 Jul 2007)

KalEl said:


> A credit card should only be used as a cash flow aid or for distance purchases (online etc) Anything else is using the card for a purpose it was not designed for. But penalising the majority would be unfair, like curbing the use of shovels just because some use them to hit people over the head!


 
But there is no penalty if you pay off your balance within the intrest free period (this is how a credit card 'should' be used, right?)-and if 50% of us are doing that all the time, then the 'majority' aren't affected , are they?

And how else would you suggest that people are discouraged from misusing, i.e. for reasons other than you have outlined above, their card? Should they be _encouraged_ to build up debts on their credit cards?

I am not suggesting artificially high rates.  I am saying that rates should be appropriate to a stable economy.

My morals have nothing to do with my views on this-it's purely self-interest, which would suggest my morals aren't as high as you are implying...

And as far as I know, hitting someone over the head with shovel is generally illegal, so their use is most certainly curbed in that respect.


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## KalEl (31 Jul 2007)

What I am saying is people shouldn't be encouraged or discouraged purely by the rate. Yes entitities like the Financial Regulator and even the banks themselves should warn people of the perils of unsustainable debt, much like bookies run self exclusion and help programmes.
But keeping interest rates high purely to discourage the misuse of credit cards is too extreme in my opinion.


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## CCOVICH (31 Jul 2007)

Fair enough. I agree with much of what you have said there, especially re. the role of the Fincancial Regulator as a source of information (in fact I feel we should have a totally separate entity to perform such a function, but that's another discussion).


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## Riddler (18 Aug 2007)

Price is not an issue so long as it's reasonable for the vast majority of consumers. What really matters is access when and where I want it. Factor in convenience and you begin to understand the dynamics ...Now and again someone will disrupt this dynamic by offering and shouting about lower prices at a high cost (marketing spend). Some of the loudest are in fact in the process of pulling a fast one. As bankers are great mimics they will always copy instead of compete it's intrinsic fact of life when you are into balanced mediocrity. Some super consumers focus too much on price but you have to remember this is not the total "cost" that people reckon on. Credit is a habit and it seems we are in for a shock as it has a cost most people have difficulty in addressing...consume now and pay for it out of future income...a cyclical hurtful learning experience that requires for many people an external intervention.


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