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Formal and Informal Regulations for Credit Card Payment Services

Guzin Akin (), Ahmet Aysan (), Gültekin Gollu and Levent Yildiran

BIFEC Book of Abstracts & Proceedings, 2014, vol. 1, issue 2, 1-33

Abstract: The Turkish credit card market has recently undergone two important formal regulations: the interchange fee regulation in 2005 and the interest rate regulation in 2006. Banks started to charge annual fees to cardholders after the interest rate regulation, before which credit card ownership was costless. This practice sparked a widespread public outcry and legislative activity to control annual fees. Consumer unions vigorously called for regulations. They argued that in response to the fall in their interest revenues, banks started to exercise excessive market power in the payment services market. By employing the Panzar and Rosse (1982, 1987) method and a unique data set for all non-participation banks between 2002 and 2008, we investigate the effects of the formal and informal regulations on competition in the payment services market. We find that despite the increase in prices, the credit card payment services market actually became more competitive after the interest rate regulation. We attribute the rise in banks’ prices to a rise in their costs. Because of the prevailing informal regulations banks could pass along only part of the increase in their costs to the prices of their payment services. The resulting fall in their price-cost margins reduced banks’ market power in the payment services market. Thus, our results do not justify further price regulations.

Keywords: Competition; Self-regulation; Threat of Regulation; Panzar-Rosse; Annual Fees; Merchant Discounts (search for similar items in EconPapers)
JEL-codes: G21 G28 O16 (search for similar items in EconPapers)
Date: 2014
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