On competition, risk, and hidden assets in the market for bank credit cards

• Published in: Journal of banking & finance 1997, Vol.21 (1), p.89-112
• Main Authors: Nash, Robert C., Sinkey, Joseph F.
• Format: Article
• Language: English
• Subjects: Assets; Banking; Competition; Credit; Credit cards; Credit-card banks; Finance; Intangible (‘hidden’) assets; Market; Resale premiums; Risk; Securitization
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/S0378-4266(96)00030-1

The market for credit cards has been the subject of recent attention and controversy because of ‘high’ profits earned on credit cards and substantial premiums on the resale of credit-card receivables. This paper estimates risk—return profiles for credit-card banks and explores the role of intangible assets in determining resale premiums on credit-card receivables. In addition, the effects on the resale market of securitization and the opportunity cost of acquiring new accounts are analyzed. Using alternative measures of risk and alternative control groups, we find, for the years 1989 to 1995, that credit-card banks earned significantly higher returns on assets but that these returns were associated with greater risk-taking. Analysis of premia for the years 1993 to 1995 suggest that acquiring banks pay higher premia for mid-sized regional accounts than for larger, national portfolios, perhaps because of richer cross-selling opportunities.