CONSUMER BEHAVIOUR

Consumer Behaviour in Credit Card Industry of UK

Introduction

Credit cards are an integral part of the financial and payment systems of modern societies being used as a convenient payment medium (in place of traditional paperbased instruments such as cash and checks) and a method for obtaining short-term revolving credit to make purchases. Evidence suggests that reliance on credit cards has led to an increase in consumer indebtedness and a rise in personal bankruptcy.

In recent years, banks and other financial institutions offering credit cards have implemented risk-based pricing strategies, where high-risk cardholders are granted credit cards at higher Annual Percentage Rates of interest (APRs) relative to their lowrisk counterparts. In a world of full information and rational decision makers, pricing differences should only be related to differences in credit risk (Getter, 2006). Despite the obvious importance for banks issuing credit cards, and government agencies tasked with supervising and monitoring developments in the credit card industry, there has been very little empirical research to assess whether in fact these strategies are effective in measuring risk. This in part is due to a lack of publicly available data..

Cardholder risk measures comprise: FICO credit score; presence of unpaid credit card debt in the previous twelve months; and outstanding credit card debt. This classification represents an improvement to previous empirical studies which only differentiate between high- and low-risk cardholders in terms of outstanding card debt. To test the effect of card issuer characteristics (supply of credit card plans) and the risk of cardholders (demand side) on credit card interest rates, we utilize a two-stage least squares approach to control for potential endogeneity biases in the empirical specification..

This increases the demand on government and community agencies. The recent reforms to credit card lending are designed to alter credit card usage and thus consumer behavior with the express purpose of reducing the rates of unmanageable credit card debt causing financial hardship. This note explores the recent reforms enacted under the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 ('Amendment Act') and Regulations.

Cardholders pay high APRs for credit cards that include minimum finance charges. Furthermore, some cardholders are willing to pay a premium for access to a large card network. For example, in the case of the Discover card (a major network in the US), cardholders are willing to pay higher interest rates compared to counterparts holding cards affiliated to smaller networks such as American Express or Diners Club. We also observe that prime cardholders of premium and gold cards pay lower APRs than their sub-prime counterparts. Finally, our results suggest that APRs adjust to changes in the market interest rates (1 year CD rate that represents a cost of funding to the card providers) even after controlling for non-price characteristics of credit cards. These results are robust to different econometric specifications.

Marketing managers can no longer rely on only domestic markets to ensure their firm's long-term survival. Globalization, fierce competition, and saturation of the developed markets can be considered as influential factors that push ...