Regulate one service, tame the entire market: Credit cards in Turkey

• Published in: Journal of banking & finance 2013-04, Vol.37 (4), p.1195-1204
• Main Authors: Akin, Guzin Gulsun, Aysan, Ahmet Faruk, Borici, Denada, Yildiran, Levent
• Format: Article
• Language: English
• Subjects: Banks; Competition; Competition between banks; Credit card industry; Credit card rates; Credit cards; Credit services; Economic theory; Interchange fees; Market power; Merchant discounts; Middle East; Oligopoly; Panzar–Rosse; Payment services; Regulation; Regulation of financial institutions; Revenue; Studies; Turkey
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2012.11.016

► We investigate the extent of competition in the Turkish credit card market. ► We consider payment and credit services together in a Panzar–Rosse framework. ► We examine the effects of the interchange fee and interest rate regulations. ► The interchange fee regulation affects neither banks’ revenues nor the competition. ► The interest rate regulation leads to a rise in both revenues and the competition. In credit card markets banks provide both payment and credit services. Two regulations were recently enacted in the Turkish credit card market: one on payment services in 2005 and the other on credit services in 2006. By employing the well-known Panzar and Rosse (1982, 1987) method and a unique quarterly data set for 21 Turkish banks between 2002 and 2008, we investigate the extent of banks’ market power in the Turkish credit card market before and after the regulations. Unlike most of the existing literature, which considers competition and regulation for either credit or payment services and ignores the externalities between them, we consider the entire market by taking both services into account. Fixed effects estimations reveal that banks enjoyed collusive oligopoly power before the regulations. Although the first regulation did not have much impact, the second led to rises in both banks’ total revenues and competition in the entire market.