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The cost of being late? The case of credit card penalty fees

  • Massoud, Nadia
  • Saunders, Anthony
  • Scholnick, Barry
Registered author(s):

    This paper is the first in the literature to examine the determinants of US credit card penalty fees. Many critics of credit card fees - including a number of US Senators - have argued that credit card penalty fees reflect banks' market share. Using a unique data set we find that fees are increasing in customer risk which supports the position of defenders of penalty fees, such as banks. However, our finding that fees are increasing in a bank's market share is consistent with the concerns expressed by politicians and regulators. We also find card penalty fees are direct substitutes for card interest rates.

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    File URL: http://www.sciencedirect.com/science/article/B7CRR-4Y5BMFX-1/2/a613ff29cfaa240fe665d5359ace7fe2
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    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 7 (2011)
    Issue (Month): 2 (June)
    Pages: 49-59

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    Handle: RePEc:eee:finsta:v:7:y:2011:i:2:p:49-59
    Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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    1. Calem, Paul S. & Gordy, Michael B. & Mester, Loretta J., 2006. "Switching costs and adverse selection in the market for credit cards: New evidence," Journal of Banking & Finance, Elsevier, vol. 30(6), pages 1653-1685, June.
    2. Sarangi, Sudipta & Verbrugge, Randal, 2000. "Late fees and price discrimination," Economics Letters, Elsevier, vol. 69(2), pages 153-158, November.
    3. Peterson, Richard L, 1977. "Factors Affecting the Growth of Bank Credit Card and Check Credit," Journal of Finance, American Finance Association, vol. 32(2), pages 553-64, May.
    4. Joanna Stavins, 2000. "Credit card borrowing, delinquency, and personal bankruptcy," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 15-30.
    5. Christopher R. Knittel & Victor Stango, 2003. "Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards," American Economic Review, American Economic Association, vol. 93(5), pages 1703-1729, December.
    6. Mark Furletti, 2003. "Measuring credit card industry chargeoffs: a review of sources and methods," Payment Cards Center Discussion Paper 03-15, Federal Reserve Bank of Philadelphia.
    7. Mark Furletti, 2003. "Credit card pricing developments and their disclosure," Payment Cards Center Discussion Paper 03-02, Federal Reserve Bank of Philadelphia.
    8. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints And Interest Rates Matter For Consumer Behavior? Evidence From Credit Card Data," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 149-185, February.
    9. Timothy H. Hannan, 2005. "Retail deposit fees and multimarket banking," Finance and Economics Discussion Series 2005-65, Board of Governors of the Federal Reserve System (U.S.).
    10. David B. Gross, 2002. "An Empirical Analysis of Personal Bankruptcy and Delinquency," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 319-347, March.
    11. Gande, Amar & Puri, Manju & Saunders, Anthony, 1999. "Bank entry, competition, and the market for corporate securities underwriting," Journal of Financial Economics, Elsevier, vol. 54(2), pages 165-195, October.
    12. Scholnick, Barry & Massoud, Nadia & Saunders, Anthony & Carbo-Valverde, Santiago & Rodríguez-Fernández, Francisco, 2008. "The economics of credit cards, debit cards and ATMs: A survey and some new evidence," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1468-1483, August.
    13. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, 02.
    14. Stango, Victor, 2002. "Pricing with Consumer Switching Costs: Evidence from the Credit Card Market," Journal of Industrial Economics, Wiley Blackwell, vol. 50(4), pages 475-92, December.
    15. Brito, Dagobert L & Hartley, Peter R, 1995. "Consumer Rationality and Credit Cards," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 400-433, April.
    16. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
    17. Victor Stango, 2000. "Competition And Pricing In The Credit Card Market," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 499-508, August.
    18. Mitchell Berlin & Loretta J. Mester, 1987. "Credit card rates and consumer search," Working Papers 88-1, Federal Reserve Bank of Philadelphia.
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