Latefee Avoidance

The U.S. Bank/Credit Card Oligopoly - 3 Co's with 65% Market Share

Today, 3 banks in the United States own a 65% to 70% share of the credit card market. These banks are: #1 - BOA/MBNA; #2 - Citigroup; and #3 - Chase/Bank One. Source: See discussion below.

Six years earlier, in 2000, the top 10 credit card companies owned collectively 75% of the credit card market. The 8 leading companies were, in 2000 order of importance:

1. Citigroup
3. Bank One
4. Chase Manhattan
5. Bank of America
6. Capital One
7. Household Credit Services
8. Discover (a special case, since it has its own card)

Source: Oligopoly Watch - Top 8 Credit Card Issuers in 2000.

Meanwhile, between 2000 and 2006, various bank mergers and acquisitions took place; in January, 2004, #4 (Chase/JPMorgan) acquired # 3 (Bank One), to become # 2 right behind Citigroup (Oligopoly Watch 1/15/04); and in July, 2005, # 5 (BOA) bought # 2 (MBNA) to become the top credit-card company (Oligopoly Watch 7/2/05) with Citigroup becoming # 2 and Chase/Bank One becoming # 3. Thus, the top 6 in 6 years or less merged into the top 3, with a total market share apparently between 65% and 70% by now, and with total fees to consumers going up, and with average interest rates to consumers going up, and with profits to the remaining 3 going up, and with campaign contributions to those elected representatives and especially to certain candidates for the Presidency going up, with no apparent limit in sight.

As stated in in the "Testimony of Craig Collette At the Hearing of the Federal Reserve Bank of San Francisco on Planned Merger of Nationsbank and Bank of America, July 10, 1998 - San Francisco:

The evidence shows that increased concentration in the banking industry has not benefitted bank customers. The economies of scale that supposedly justify large bank mergers either do not materialize or are not passed on to customers. In addition, large interbank mergers reduce competition in ATM network markets as well as in credit card markets. Consider the following:

A. Larger banks charge higher fees. According to Bank Rate Monitor, none of the top 50 banks in the U.S. offer the least expensive checking accounts. In fact, those offering the most expensive checking accounts are banks involved in the latest mega mergers. Citibank and Nationsbank. The best deals are offered by smaller regional and community banks. And a 1999 study found a widening gap beween large and small bank fees.

B. A Federal Reserve study found the average fees charged by multi state banks are significantly higher than those charged by single-state banks, even accounting for location and other factors that might explain the differences.

C. Bank mergers have an adverse effect on consumer deposit pricing. A Boston Federal Reserve Bank study of 499 bank mergers found the combined banks lowered interest rates paid on deposits regardless of the amount of competition in the market.

D. Economies of scale? The evidence suggests that the optimal size for a bank in terms of economies of scale, profitability and efficiency i s between $100 million and $1 billion, quite a bit smaller than the $300 to $600 billion behemoths that will be created from the latest mergers. And a Harvard study showd that instances of improved operating results after a merger were due primarily t o higher repricing,not economies of scale, suggesting the use of increased market power to raise prices. Given sufficient market power, large banks could price smaller competitors out o f the market with below market rate loans or above market rate deposits.

E. Small business lending receives short shrift in a world of ever-larger banks. Generally, the percentage of small business lending is inversely proportional to bank size. And mergers involving small banks tend to increase small business lending while mergers of large banks tend to reduce it.

* * * G. Large bank mergers are creating an oligopoly of credit card issuers led by Citicorp., Banc One and Nationsbank. Today, under the Visa or MasterCard joint venture umbrella, thousands of community banks are issuers of credit and debit cards, set their own pricing and terms, and have the national and worldwide acceptance essential for their card viability. Unfortunately, we believe that increasingly the large banks will promote their own brands to the detriment of the Visa or MasterCard brand. And as the Visa and MasterCard brand names are undermined or destroyed, this would be to the detriment of competition and to thousands of community financial institutions and their customers. We will be back in a tightly controlled card environment detrimental to both consumers and small merchants.

Source: Transcript of Craig Collette 7/10/98 Testimony - Pages 5-17

In a 2006 study entitled "Borrower Segmentation and Credit Scoring in Bank Consumer Lending" by William A. Scroggins, William T. Fielding and Louise J. Clark, all of Jacksonville State University, the authors stated (at page 4):

.... According to, a consulting group that tracks the credit card industry, credit card fees increased to 33.4 percent of total credit card revenue in 2003, up from 27.9 percent in 2000 and only 16.1 percent in 1996. Also, the average monthly late fee rose from $13.30 in May of 1996 to $30.29 in 2003 and then to $32.00 in May of 2004 (Pacelle, 2004). Robert Hammer, an industry consultant, points out that the credit card industry generated $14.8 billion from penalty fees in 2004, representing a 26 percent increase from $11.7 billion in 2003 (Davidson, 2005).

The majority of banks offered only one credit card until the early 1990s. The credit card usually carried an annual interest rate of approximately 18 percent and an annual fee of $25-$30. Cardholders who exceeded their credit limit or paid late were charged only modest fees. To increase market share, banks began eliminating annual fees and began to offer low introductory rates, then subjected customes to a multitude of risk-related fees such as late fees and fees for exceeding credit limits. Card issuers abandoned simple pricing models in favor of more complex models tailored to the customer's risk and behavior. Banks even began offering additional cards to customers with poor credit to generate additional growth in a market that was reaching saturation (Pacelle, 2004).

From a 2004 survey of 140 credit card issuers, the advocacy group Consumer Action found that 85 percent of the respondents make it a standard practice to raise rates for consumers who pay late, usually after just one late payment. Almost half raise rates if they discover that a customer has become delinquent with another creditor (Annual Credit Card Survey, 2004).

Banks indicate that penalties and fees are a necessary component for new models used to price financial services. The times when banks collected sizable annual fees on all credit cards and charged high rates to all customers are history. Today, banks maintain they must rely on risk-based pricing models. As a result, credit card customers with the riskier credit histories pay higher rates and more fees. The following section illustrates the use of differential pricing in second-degree price discrimination to increase revenue and profits. This section also depicts the commercial bank as a discriminating monopolist.

Source: "Borrower Segmentation and Credit Scoring in Bank Consumer Lending" by William A. Scroggins, William T. Fielding and Louise J. Clark