Conference on Consumer Transactions and Credit

The Federal Reserve Bank of Philadelphia and the Wharton School of the University of Pennsylvania, in association with the Journal of Financial Intermediation, sponsored a conference on consumer transactions and credit that provided a number of research findings that are relevant to the consumer credit industry.

How consumers manage cash and credit

The first paper presented was titled: "Consumer Responses to Changes in Credit Supply: Evidence from Credit Card Data." The co-authors were Nicholas S. Souleles (Wharton School) and David R. Gross (formerly of the Graduate School of Business, University of Chicago). Their research was based on their analysis of "a unique data set of several thousand individual credit card accounts followed monthly for 24 to 36 months." Their analysis of these data provide insights into the interrelationships of consumers' savings and credit card debts.

Basically, consumers are concerned about possible constraints on their ability to obtain funds to meet future needs, possibly unexpected emergencies or opportunities. Most consumers are "risk averse." They borrow on their credit cards, possibly at quite high rates, while maintaining large balances in low-yield checking and savings accounts. Soules found that "one-third of borrowers have over one month's of income in liquid assets, which is more than is typically needed for cash transactions." However, consumers are very sensitive to rates charged on their credit card debt. Consequently, "teaser" rates should be effective in solicitations for credit cards. Editors Note: a revised version of this paper (re-titled "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data") can be found in the February 2002 issue of The Quarterly Journal of Economics.

How costs of switching influence the pricing of credit cards

While low teaser rates encourage consumers to switch their credit cards, they are discouraged by the costs of switching from one credit card to another. Moshe Kim and Doron Kliger of the University of Halifax and Bent Vale of the Central Bank of Norway examined the issue. Using a large credit card portfolio, the authors estimated that: "For the entire sample, switching costs averaged 4.1 percent of total outstandings, which is about one-third of the market average interest rate on loans. But switching costs are found to decrease to 2.1 percent for banks with 60 or more branches." Further, locked-in cardholders add significantly to a bank's' value.

The effect of bank consolidation on interest rates
on auto loans and unsecured personal loans

Charles Kahn of the University of Illinois and George Pennacchi of Rutgers University examined how bank mergers affected the pricing of automobile loans and unsecured personal loans. The authors found that rates on automobile loans tend to fall while rates on personal loans tend to rise following a merger. They attribute the decline in rates on auto loans to "scale economies that exist in the auto loan market and the fact that there is strong competition from nonbank lenders for auto loans." In contrast, banks do not face the same intense competition in the market for large, unsecured personal loans.