Credit card business - credit theory of the phenom -

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Credit card business | credit theory of the phenomenon of high interest rates

Abstract: Compared with the cost of funds, credit card interest rates high and very sticky, so much controversy. In this paper, the results of foreign studies, respectively, from the search costs, switching costs, adverse selection, and consumer behavior perspective of the phenomenon of high interest rates of credit cards, credit card interest rates on the understanding of behavior of some reference value. Keywords: credit card interest rates the cost of adverse selection, search and conversion behavior of consumers I. Introduction Currently, the credit card business in China in the ascendant. According to statistics of China Union Pay, the end of 2005, the amount of credit cards reached 40 million total domestic credit card overdraft balance of nearly 150 billion yuan, both issuance volume and the overdraft balance of rapid growth. Credit card business in China is the rapid development of high-profit potential of the business of inseparable. Internationally, credit card interest rates remain at 18-23% level, and very stable, does not vary with changes in the benchmark interest rate changes, showing a considerable viscosity 1. At present, credit card loans at interest rate of five ten thousandths, which translates into annual interest rate is as high as 18.25%, much higher than the same period of deposit interest rates, far higher than the bank's other lending rates. Can see the potential benefits of the credit card business is very high, which is China's commercial banks to promote the driving force behind the business. However, there are two issues here: First, why banks charge such high credit card interest rates? Second, why are consumers willing to bear the higher cost of credit card overdraft? For the first problem, an intuitive explanation is that credit cards are unsecured revolving credit, so face a higher credit risk. In addition, the credit card business also faces black agency, fraud, malicious overdraft and other risks. In recent years, South Korea, the United States and Taiwan regions have experienced varying degrees of credit crisis seems to have corroborated the high risk credit card business. However, whether this high risk sufficient to explain the phenomenon of high interest rate credit card loan? In fact, in a period of relatively low default risk, credit cards, loans still obtain a higher interest rate. For the second question, we first classify the credit card holder. Credit card holders can be divided into three categories: the first is the transaction user (transaction user), such as a user principal medium of exchange, credit card, in full payment before the grace period is the amount of credit card advances, so do not pay interest; second customer in order to facilitate the user (convenience user), such periodic behavior of customers overdraft, usually only on vacation, or when consumer spending is relatively large overdraft and pay interest; the third type of customer is the loop users ( revolver), type of customers a line of credit in a short-term loans for overdraft in consumption, and bear the resulting interest and other costs. At present, China's credit card customers are transaction customers, such customers do not bring interest income for the bank. Transaction behavior of customers seems to be rational, they do not want to bear the high interest. But cycle users and facilitate the users, both acts are willing to pay interest on their overdrafts, which seems inconsistent with rational behavior. In addition, the bank could cut interest rates to attract user-overdraft? On these issues, this paper will make a more in-depth theoretical study. Second, search costs, switching costs and the credit card interest rate credit card an interpretation of the theory of the phenomenon of high interest rates is the search cost and switching cost theory. Ausubel (1991) that the credit card market, search costs and switching costs include: (a) low interest rates card issuers to find the information brought by the cost; (b) bid for the new card takes time, energy and mood (possibly denied) so the cost; (c) a long time to hold a bank credit card can get a higher credit rating (credit rating) and a higher credit limit (credit limit), to give up these gains resulting costs; (d) apply for a new card and the time lag to take to the new card. The existence of switching costs led to the monopoly rents (monopoly rent) the presence of (Klemperer, 1987). Therefore, when switching costs in the face of the cardholder, even if banks charge higher prices on credit card, customers can also be locked. Search costs and switching costs can explain the existence of the phenomenon of high interest rates credit card on this issue, the academic community has been controversial. Ausubel (1991) that the credit card market, search costs and switching costs exist, but they are sufficient to explain the continued high interest rates credit card market phenomenon remains a doubt. Berlin and Mester (2004) the use Wilde and Schwartz (1979) on the monopolistic competition model of consumer search on credit card interest rates and the relationship between search costs were studied, the results show that even if the U.S. consumer is facing 80 years than at present search cost much, but still can not determine when the search cost is high credit card interest rates higher the main reason. Calem and Mester (1995) pointed out that consumers maintain a high credit card balances often face higher search costs and switching costs, because these consumers apply for a new card, bank card replacements is difficult to distinguish them motivation, thus greatly increasing the possibility. In addition, the higher the credibility of other credit card holders in turn invest in the company, will have to give up the currently available high credit rating and built up a higher credit limit, not very different in the case of interest rates, holding cards were unwilling to give up this kind of Stango (2002) have done empirical research also shows that the existence of switching costs on the credit card market, the conversion cost is a major factor in the price of credit. Can see from the above study, the cost of credit card holders face search and switching costs, which led to the existence of monopoly rents, which may partly explain the high credit card interest rates. However, compared with the eighties and nineties of the last century, mankind has entered the information society, the search costs fall, but the credit card interest rates still remain high, and therefore not sufficient to explain the theory of consumer search behavior of credit card interest rates. Third, adverse selection and credit card interest rates (a) consumer-based non-rational theory of adverse selection Ausubel (1991) proposed that can be used for some non-rational theory of adverse selection (adverse selection theory) to explain the phenomenon of high interest rate credit cards. Imagine such a class of non-rational consumers: they do not intend to use the high cost of consumer credit card advances, but later found himself still continued to do so. These users is the so-called loop users (revolver), might be called the first class of the cardholder (customer). From the bank's point of view, first holder of the highest quality clients. They borrow at higher interest rates, and in most cases be able to repay the loan. Meanwhile, the first customers of the rate cuts are unlikely to respond because they did not intend to start borrowing consumption. The second category is that the cardholder cardholder: they have enough will to advance with a credit card spending, but poor credit, but also the lack of other lower cost of borrowing channels. From the bank's point of view, the second type of customer is not ideal, because they advance the amount is high and often default. But it is interesting that, compared with the first class of customers, and the second type of customer is more likely to compare different credit card interest rates, as they originally intended to pay higher borrowing costs. The third class of customers is to facilitate users (including transaction users), and rarely use credit cards to pay interest, and therefore does not respond to changes in interest rates, it is not within the scope of discussion. Ausubel (1991) called the third class of customers is rational. Made the classification of customers in the future, banks will be reluctant to compete in the interest rate level, as by lowering interest rates to attract customers are mostly in the second category, it faces adverse selection problem. Since adverse selection makes banks reluctant to lower interest rates, the banks can only attract customers by other means, for example, for a grace period (grace period), lower annual fees, subsidies, etc. to provide transaction. Thus, based on non-rational theory of adverse selection for consumers to explain the phenomenon of high interest rates of credit cards. Ausubel (1991) theory of adverse selection is the key to the establishment of the existence of non-rational first cardholder. For example, many consumers may operate on credit card interest rates do not quite understand, and thus underestimated the consequences of overdraft, these consumers are irrational. The author found that the credit card market there are indeed irrational cardholders. A substantial proportion of consumers do not realize that they are constantly, frequently overdraft consumption, or even do not recognize myself. Moreover, according to credit card sales personnel on past experience, many consumers seem to be more sensitive to the increase in annual fees, despite the fact that they paid the overdraft account for a large proportion of the interest. Ausubel (1999) market through large-scale randomized trials (market experiment), again on the credit card market, the adverse selection problem is studied, and further confirmed the credit card market and the adverse selection problem and I made earlier underestimate the assumption (underestimation hypothesis), the consumer may be on the current and future credit card borrowing showed systematic underestimation. Ausubel's theory of adverse selection provides a perspective of thinking, but the argument is irrational consumers is questionable. Perhaps the previous consumers when overdraft, do not realize that higher interest rates on the interest rate structure issues or do not understand, and thus assumed the penalty did not intend to take the high. But consumers do not always go so wrong. Consumers can based on the information in the past after the overdraft on consumer behavior to make Bayesian adjustment. However, Ausubel (1991) envisaged a non-rational consumers more like a random walk, there is no memory. (B) based on switching costs and search cost theory of adverse selection Calem and Mester (1995) view is that the higher the consumer credit card account balances with higher search costs, search activity has a negative effectiveness. Psychological reasons because consumers who do not want to put time on the search activity is more emphasis on the cardholder on the current consumption, that is, the cardholder in the current consumption and future consumption showed a strong choice is not patience. In this case, if the credit card company to lower interest rates, then the customer will be attracted to those who maintain a low consumer credit card balances, which will obviously reduce the credit card company's profit levels. Therefore, there is the case of search costs, the bank faces adverse selection problem. Brought about the conversion costs of adverse selection problem, consider the following two aspects. First, the credibility of the high switching costs customers face higher, because if the switch to other companies, will have to give up a higher cumulative credit rating and credit limit. At this point, the credit card company to lower interest rates, the customer is likely to attract some of the credibility of poor, high-risk customers. Second, under the same conditions as other factors, to maintain a high credit balance customers rejected the possibility of also lower than the balance of the customer, because card companies is difficult to understand the transformation of motivation. While maintaining a high balance customers may be high-quality customers, but the existence of moral hazard conservative card companies, the result is just cut interest rates to attract customers to maintain credit card balances low, the level of corporate profits so affected. That the existence of switching costs and search costs of the case, lower credit card interest rates will lead to adverse selection, therefore, the card issuing companies are unwilling to lower interest rates as a means of competition. Although Ausubel (1991), Calem and Mester (1995) and other scholars have explained the theory of adverse selection with a credit card interest rate viscosity characteristics, but they are different. The former problem of adverse selection due to irrational consumers,[link widoczny dla zalogowanych], search costs and switching costs on the role of the noncommittal. The latter is more emphasis on search costs and switching costs in the role of adverse selection, that the existence of these two costs do not make the credit card market in the state of perfect competition and lead to adverse selection, adverse selection, in turn, increased the cost of these two the impact of competition on the market.

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