The Credit Card Market is Not Even Close to Being Overly Concentrated

The Department of Justice merger guidelines, which were revised and reissued in December of last year, specify market concentration and change-in-concentration thresholds for determining whether a proposed merger raises competitive concerns. These thresholds are grounded in many years of legal precedent, theoretical and empirical economic research, as well as in the practical experience of the Department of Justice and other agencies charged with antitrust oversight and enforcement.

The DOJ merger guidelines define a market to be highly concentrated if the market’s Herfindahl-Hirschman Index, which is the sum of the squares of the market shares of the individual firms operating in the market, exceeds 1,800. According to the guidelines, a merger that (1) creates a highly concentrated market or (2) further consolidates a highly concentrated market “is presumed to substantially lessen competition or tend to create a monopoly.” A merger that “creates a firm with a share over thirty percent” raises similar concerns, according to the guidelines.

Some critics of the recently announced proposed merger between Capital One Financial Corporation and Discover Financial Services claim that the consumer credit card market is overly concentrated and that the merger will therefore be anticompetitive. In this brief blog post, we demonstrate that such a claim is patently false and wholly disconnected from economic reality.

Even under a narrow and restrictive definition of the market for consumer cards that omits multiple significant sources of competition, concentration is far below the DOJ threshold and will remain so following the merger. In fact, there are numerous other important industries with levels of concentration well above that which characterizes the consumer credit card market.

Table 1 lists the 50 largest issuers of general-purpose credit cards in the U.S., not including credit unions (many of which make cards available to their members), based on card outstanding balances from regulatory filings, which is the measure of credit card activity most readily available in public data.[1] The table also reports the individual shares of these institutions relative to the aggregate balances of all 50. Two of the top 20, Credit One and Bread Financial, are nonbanks.

Table 1: Top 50 Depository Institution Issuers

Table 1 Top 50 Depository Institution Issuers

Equating the market with just these 50 institutions, an overly narrow definition we shall adopt for the sake of convenience, the HHI is calculated to be 1,010 based on these issuer shares. Thus, market concentration is presently far below the 1,800 HHI threshold specified in the guidelines.[2]

Because the largest credit unions serve a sizeable segment of the population, they exert a competitive influence on the overall market. If we were to redefine the top 50 ranking to include the largest credit unions, such as Navy Federal and Pentagon Federal, the HHI would drop to 950 due to the moderating impact they have on the shares of the largest banks. We can also calculate that post-merger, the HHI for this set of issuers would rise to 1,159 (or to 1,235 if credit unions are excluded), still far below the 1,800 threshold set forth in the DOJ merger guidelines for raising potential competitive concerns.

Note that either calculation excludes many other institutions offering credit cards. Aside from excluding credit unions, the listing in the table omits numerous smaller institutions—banks as well as nonbanks including fintechs—that issue credit cards. These smaller players represent a significant source of competition for the largest card issuers.[3] Thus, our calculated concentration measure, while itself indicative of a robust degree of competition among the top 50, actually understates the overall competitiveness of the market.

Moreover, consumer credit products that are close substitutes for credit cards form an additional layer of competition that is not reflected in the calculated HHI. For instance, “buy now pay later” products, mostly associated with fintech companies, are a rapidly growing consumer finance product that competes with credit cards. Banks that offer consumer credit lines that can be tapped into using a debit card also compete with credit card issuers.

Another way to look at the competitiveness of the credit card market is to examine it in a comparative context.  The Census Bureau provides HHI data for various industries (based on top 50 firms only), with 2017 being the most recent release of such data (although neither the full credit card market nor bank issuers of credit cards is among the industries covered). Figure 1 shows reported HHIs for a representative set of industries with HHIs exceeding 1,000, from the Census Bureau listing at the five-digit NIC classification level.[4] For comparison purposes, we insert the HHI calculated above for the credit card market (exclusive of credit unions).

Figure 1: HHIs by NIC 5-Digit Industry Classification

(Based on the top 50 firms in each industry)

HHIs by NIC 5-Digit Industry Classification

The chart demonstrates that even from an industry cross-sectional perspective, there is no evidence that the credit card industry is concentrated to any concerning degree. For example, breakfast cereal manufacturing, tire manufacturing and air transportation are substantially more concentrated than the credit card industry.

Finally, it is important to recognize that the merger will strengthen competition among payment networks, which is another market (in addition to the direct consumer side) to be affected by the proposed merger. Presently, the payments side of the market is highly concentrated (reflecting the very large economies of scale in this sector). There can be little doubt that the proposed merger will enhance competition by creating a stronger competitor in this market.

Currently — on the one hand — Discover operates its own payment network, which comprises a small share of a market dominated by Mastercard and Visa. On the other hand, Capital One is not in this business line at all, so there is no effect on concentration in that market as a result of the merger. The proposed merger will create a firm that is better positioned to expand its share of that market, both financially and because of an expanded customer base. Through expansion, the combined firm will achieve greater scale economies and provide more robust price competition against the two dominant players.

[1] Purchase volume is an alternative measure of card activity commonly used by industry analysts to gauge issuer share.

[2] In total, at the top-tier consolidated level, 3,755 entities report having non-zero credit card balances according to regulatory filings, including 140 bank holding companies, 11 savings and loan holding companies, 565 commercial banks, 18 savings banks and 3,037 credit unions. Total outstanding credit card balances for the regulated depository institutions in Table 1 are obtained from the FR Y-9C reports, Call Reports, and S&L Holding Company reports and bank Call Reports filed with the banking regulatory agencies. For Credit One, we combined loans outstanding at its bank subsidiary plus credit card loans serviced for others reported in the bank’s Call Report. For Bread Financial, which is not considered a bank holding company according to the regulatory definition, we combined credit card loans outstanding for its two bank subsidiaries (Comenity Bank and Comenity Capital Bank), based on their Call Reports.

[3] The growing role of fintechs in the consumer credit card arena incorporates both banking-as-a-service relationships and direct card offerings.

[4] Credit cards are a product segment within the broader consumer credit market, which itself is a segment of the financial services industry. As such, we believe that industries at the five-digit NIC code level provide a reasonable benchmark for the credit card industry. There are 41 industries in this NIC classification with an HHI above 1000, of which 7 have an HHI exceeding 1800, from which we selected some of the more recognizable ones to include in Figure 1.