U.S. Credit Card Industry:

Competitive Developments Need to Be Closely Monitored

GGD-94-23: Published: Apr 28, 1994. Publicly Released: Apr 28, 1994.

Additional Materials:

Contact:

James L. Bothwell
(202) 512-8678
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

Pursuant to a congressional request, GAO reviewed the competitiveness of the U.S. credit card industry, focusing on: (1) whether the industry's structure supports competition; (2) why the credit card industry has had relatively stable interest rates and high earnings; and (3) the proposed interest rate cap and other policy options.

GAO found that: (1) the structure of the U.S. credit card industry meets the standard criteria for competitiveness; (2) there is no compelling evidence that large credit card issuers improperly cooperate with each other to keep interest rates stable and their earnings artificially high; (3) current litigation between credit card issuers will likely have an important impact on the competitiveness of the U.S. credit card industry; (4) differences between credit card interest rates and commercial bank interest rates are attributable to the higher risks involved in unsecured credit card lending, the industry's structure, and consumers' failure to seek out lower interest rates; (5) the credit card industry's high earnings could be a result of low funding costs, reduced outstanding credit card balances, competitive pressures, and heightened public awareness; (6) the Federal Reserve should increase its collection of credit card information and report to Congress so that it can adequately monitor competitive developments in the credit card industry; (7) Congress is considering several policy options that could affect credit card interest rates, including imposing caps on credit card interest rates, fostering competition through nonintervention, and requiring the credit card industry to disclose additional information to increase consumer responsiveness; and (8) capping credit card interest rates could restrict credit card lending and adversely affect the securities markets.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Federal Reserve has implemented the recommendation, and is now collecting and publishing additional data about credit card interest rates. Specifically, the Federal Reserve is disseminating data about the average interest rate charged to all cardholders as well as the effective interest rates paid by consumers who revolve credit card debt. This data as of November 1994 have already been published while data for February 1995 will be published soon (the Federal Reserve collects this data quarterly in the second month of each quarter). The information contained in these new reports should benefit analysts who assess the competitiveness of the U.S. credit card industry and the interest rates paid by cardholders.

    Recommendation: The Chairman of the Federal Reserve should collect additional information on credit card interest rates that permits an assessment of the extent to which cardholders are benefiting from lower credit card interest rates and an assessment of how these rates affect industry earnings.

    Agency Affected: Federal Reserve System

  2. Status: Closed - Implemented

    Comments: As required by the Fair Credit and Charge Card Disclosure Act of 1988, the Federal Reserve issued annual reports on the profitability of the credit card industry. In the five reports issued to date, the Federal Reserve has commented on major developments in the industry that affect competition and profitability over the short and long term, such as the entrance of new issuers or changes in costs. A Federal Reserve official said that the organization will use the new information on credit card interest rates to expand on these profitability reports. The first annual profitability report to include this information will be published in September 1995. This expanded analysis in the profitability reports should benefit those who assess the competitiveness of the U.S. credit card industry and the interest rates paid by cardholders.

    Recommendation: The Chairman of the Federal Reserve should assess the short- and long-term impacts of competitive developments within the industry.

    Agency Affected: Federal Reserve System

  3. Status: Closed - Implemented

    Comments: As required by the Fair Credit and Charge Card Disclosure Act of 1988, the Federal Reserve issued annual reports on the profitability of the credit card industry. In the five reports issued to date, the Federal Reserve has commented on major developments in the industry that affect competition and profitability over the short and long term, such as the entrance of new issuers or changes in costs. A Federal Reserve official said that the organization will use the new information on credit card interest rates to expand on these profitability reports. The first annual profitability report to include this information will be published in September 1995. This expanded analysis in the profitability reports should benefit those who assess the competitiveness of the U.S. credit card industry and the interest rates paid by cardholders.

    Recommendation: The Chairman of the Federal Reserve should incorporate the credit information and analysis in the annual report to Congress on industry profitability to assist Congress in making informed public policy decisions.

    Agency Affected: Federal Reserve System

 

Explore the full database of GAO's Open Recommendations »

Oct 14, 2014

Sep 22, 2014

Sep 16, 2014

Jul 28, 2014

Jul 23, 2014

Jul 22, 2014

Jul 21, 2014

Jun 26, 2014

Jun 20, 2014

Looking for more? Browse all our products here