Credit Solicitations as Market Experiments in the U.S. Credit Card Industry

2017 ◽  
pp. 1-5
Author(s):  
Nabil Al-Najjar ◽  
David Besanko ◽  
Roberto Uchoa
Keyword(s):  
Interest Rates ◽  
Selection Bias ◽  
Credit Card ◽  
Risk Profile ◽  
Average Risk ◽  
Credit Reporting ◽  
Credit Score ◽  
Typical Experiment ◽  
Market Experiments ◽  
The U.S

Describes market experiments conducted by a major credit card issuer. In a typical experiment, the issuer sends out hundreds of thousands of solicitations based on information received from credit reporting agencies (e.g., credit score, past delinquencies, etc.). Selection bias is striking: the average risk profile of those responding to higher interest rates is significantly worse than that of respondents to lower rates. Tracking respondents for 27 months after the experiment, respondents to higher rates displayed significantly higher delinquency and bankruptcy rates. Based on a research paper by Larry Ausubel.

Overconfidence in the Credit Card Market

2016 ◽  
pp. 150-168
Author(s):  
Susan Kriete-Dodds ◽  
Dietmar Maringer
Keyword(s):  
Interest Rates ◽  
Credit Card ◽  
Trading Volume ◽  
Credit Card Debt ◽  
Agent Based ◽  
Credit Card Market ◽  
Income Expectations ◽  
Credit Card Usage ◽  
Payment Credit ◽  
The U.S

High credit card debt default has been symptomatic for the U.S. and other countries in the last decades. Different explanations for this situation exist in the literature. One explanation is overconfidence, which has become a key concept in behavioural economics for explaining anomalies in financial markets such as excessive trading volume. There is also the idea that overconfidence is to blame for high credit card debt. In this paper, an agent-based model is presented that examines the effects of overconfidence on credit card usage. Overconfidence is used here to explain why people who never intend to borrow on their credit card(s) do so anyway. The model contains consumption, two means of payment (credit card and cash), and a distortion to agents' income expectations via overconfidence. It was found that overconfidence leads to more “accidental” borrowing and higher interest rates.

scholarly journals Tight Money And Loose Credit In An Open Economy

2011 ◽  
Vol 5 (4) ◽  
Author(s):  
Michael Cosgrove ◽  
Daniel Marsh
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Open Economy ◽  
Credit Card ◽  
Far East ◽  
Federal Funds Rate ◽  
The Far East ◽  
Time Period ◽  
Bank Reserves ◽  
The U.S

<p class="MsoNormal" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The U.S. Federal Reserve has been following a tight money policy, defined by growth in the quantity of money compared to nominal GDP growth since the first quarter of 2004. The Fed has also increased the federal funds rate 17 times in a row by August 8, 2006. Normally, this degree of tightening would be reflected in a slowing of real economic activity by mid-2006, with subsequent lowering of inflation pressures. Yet evidence of a slowdown only materialized in the second quarter of 2006. The housing sector illustrated signs of softening as the inventory numbers started to rise. Are there different factors influencing the effectiveness of monetary policy in this tightening cycle from prior tightening cycles in the Greenspan era? Our thesis is that the linkage between money and credit has become weaker in this cycle. Money appeared to be tight over the relevant time period, while credit was loose. Normally the two move in the same direction &ndash; when monetary policy tightens, credit conditions also tighten. But that didn&rsquo;t occur until very late in the tightening cycle, as credit remained plentiful. Long term interest rates remained low, compared to prior tightening cycles over the cycle. This divergence, in the assessment of the authors, is due to three factors: 1) an increase in monetary base velocity, 2) large net inflows of capital into the U.S., in particular from the Far East &ndash; Japan and China, and 3) the expansion of the markets for securitized assets. Rising incomes and high saving rates in the Far East combined with a relaxation of international capital controls resulted in a flood of savings washing up on America&rsquo;s shores. The securitization of bank-originated assets&mdash;originally home mortgages, but now including auto finance loans and credit card debt&mdash;has loosened the link between bank reserves and the level of credit in the economy.<span style="mso-spacerun: yes;">&nbsp; </span>These factors combined to explain why credit is loose in the U.S. while money appeared tight. A U.S. economy with these characteristics explains in part why the connection between domestic money policy and credit market conditions has been weakened.</span></span></p>

Development and validation of financial well-being related scales

2019 ◽  
Vol 37 (4) ◽  
pp. 1025-1040 ◽  
Author(s):  
Farah Diba M.A. Abrantes-Braga ◽  
Tania Veludo-de-Oliveira
Keyword(s):  
Interest Rates ◽  
Credit Card ◽  
Discriminant Validity ◽  
Well Being ◽  
Confirmatory Factor Analyses ◽  
Content Type ◽  
Convergent And Discriminant Validity ◽  
Group Interviews ◽  
Development And Validation ◽  
Additional Income

PurposeThe purpose of this paper is to develop valid and reliable scales for assessing a driver and two obstacles potentially related to financial well-being (FWB): financial preparedness for emergency, beliefs of credit limits as additional income and risky indebtedness behaviour.Design/methodology/approachThe scales were developed from scratch across six studies, employing a two-step methodology, which encompassed both qualitative (e.g. focus group, interviews) and quantitative (i.e. online surveys) data collection. Exploratory and confirmatory factor analyses were employed to test and validate the proposed scales.FindingsThis study provides a set of three parsimonious, self-reported behavioural measures that could be employed in conjunction with objective economic indicators to identify individuals who are financially ill prepared and potential candidates for delinquency. The three proposed scales achieved satisfactory levels of reliability and convergent and discriminant validity.Research limitations/implicationsThe resulting scales still need to be tested for predictive validity and in different consumer groups. The scales were validated in a single culture population (Brazil, a country that presents extraordinarily high credit card interest rates), and they should be tested cross-culturally in countries with different economic and credit policies.Originality/valueThe literature on FWB has traditionally employed objective financial indicators as an attempt to measure the concept of FWB and its elements. Self-reported behavioural measures of such constructs are scant to the point of being non-existent for some elements. This study is the first to offer scales for measuring the elements of financial preparedness for emergency, beliefs of credit limits as additional income and risky indebtedness behaviour.

scholarly journals Does the visual salience of credit card features affect choice?

2021 ◽  
pp. 1-18
Author(s):  
Matthew D. Hilchey ◽  
Matthew Osborne ◽  
Dilip Soman
Keyword(s):  
Interest Rates ◽  
Random Sample ◽  
Credit Card ◽  
Credit Cards ◽  
Salient Feature ◽  
The Other ◽  
Visual Salience ◽  
Product Features ◽  
Hypothetical Scenario

Abstract Regulators require lenders to display a subset of credit card features in summary tables before customers finalize a credit card choice. Some jurisdictions require some features to be displayed more prominently than others to help ensure that consumers are made aware of them. This approach could lead to untoward effects on choice, such that relevant but nonprominent product features do not factor in as significantly. To test this possibility, we instructed a random sample of 1615 adults to choose between two hypothetical credit cards whose features were shown side by side in tables. The sample was instructed to select the card that would result in the lowest financial charges, given a hypothetical scenario. Critically, we randomly varied whether the annual interest rates and fees were made visually salient by making one, both, or neither brighter than other features. The findings show that even among credit-savvy individuals, choice tends strongly toward the product that outperforms the other on a salient feature. As a result, we encourage regulators to consider not only whether a key feature should be made more salient, but also the guidelines regarding when a key feature should be displayed prominently during credit card acquisition.

scholarly journals The value of in-person banking: evidence from U.S. small businesses

2021 ◽  
Author(s):  
Song Zhang ◽  
Liang Han ◽  
Konstantinos Kallias ◽  
Antonios Kallias
Keyword(s):  
Interest Rates ◽  
Interpersonal Communication ◽  
Rural Areas ◽  
Financial Services ◽  
Small Businesses ◽  
Business Owners ◽  
Soft Information ◽  
Face To Face ◽  
Treatment Effect Models ◽  
The U.S

AbstractWe produce the first systematic study of the determinants and implications of in-person banking. Using survey data from the U.S., we show that firms which are informationally opaque or operate in rural areas are liable to contact their primary bank in-person. This tendency extends to older, less educated, and female business owners. We find that a relationship based on face-to-face communication, on average, lasts 17.88 months longer, spans a wider range of financial services, and is more likely to be exclusive. The associated loans mature 3.37 months later and bear interest rates which are 11 basis points lower. For good quality firms, in-person communication also relates to less discouraged borrowing. These results are robust to multiple approaches for endogeneity, including recursive bivariate probits, treatment effect models, and instrumental variables regressions. Overall, our findings offer empirical grounding to soft information theory and a note of caution to banks against suppressing channels of interpersonal communication.

Foreign Employment, Income Shifting, and Tax Uncertainty

2021 ◽  
Author(s):  
Katharine D. Drake ◽  
Nathan C. Goldman ◽  
Frank Murphy
Keyword(s):  
Supply Chain ◽  
Selection Bias ◽  
Lower Degree ◽  
Income Shifting ◽  
Costs And Benefits ◽  
High Degree ◽  
The U.S ◽  
Tax Uncertainty

We examine the effect of foreign employment on two outcomes-income shifting and the tax uncertainty of foreign transactions. Using a hand-collected sample of employment disclosures, we partition our sample into firm-years with a higher or lower degree of foreign employment. Using two distinct income shifting models, we document that, on average, a high degree of foreign employment is associated with greater tax-motivated income shifting out of the U.S. We also posit and find that a high degree of foreign employment enhances the economic substance of foreign transactions, reducing the tax uncertainty associated with foreign income. We conduct additional analyses to mitigate selection bias concerns, and we use exogenous changes to the costs and benefits of income shifting using foreign employment to strengthen identification. Our results highlight firms' use of employees as part of a tax-efficient supply chain and how foreign employment enhances income shifting opportunities between jurisdictions.

scholarly journals Credit Card Rates and Consumer Switch: New Evidence

2016 ◽  
Vol 8 (12) ◽  
pp. 95
Author(s):  
Omar A. Abdelrahman
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Credit Card ◽  
Percent Level ◽  
Empirical Finding ◽  
Credit Cards ◽  
Credit Card Market ◽  
The Ohio State University ◽  
Using Data ◽  
Level Of Significance

This paper investigates the underlying determinants of consumer’s choices regarding switching credit-card balances. To estimate the likelihood that consumers switch credit cards, two logit models are estimated. Using data from the Consumer Finance Monthly (CFM) of The Ohio State University, the author finds that at the conventional 5 percent level of significance, the following variables have significance: old interest rate, new interest rate, duration of the introductory rate, balances, number of credit cards, homeownership, and age. As expected, interest rates, balances, the duration of new introductory offer rates, and homeownership have the greatest influence on why or why not people switch credit cards. The findings are consistent with the view that consumers make rational decisions in the credit card market, challenging Ausubel’s (1991) argument of credit card consumer irrationality and Calem and Mester’s (1995) empirical finding that credit card rates are sticky because consumers are irresponsive to rate cuts.

scholarly journals Savings Level Determinants and Sustainability of Commercial Banks in Rwanda: A Case of I&M Bank Rwanda

2022 ◽  
Vol 6 (1) ◽  
pp. 10-27
Author(s):  
Aimable Nshimiyimana ◽  
◽  
Eugenia Nkechi Irechukwu ◽  
Keyword(s):  
Interest Rates ◽  
Commercial Banks ◽  
Financial Institution ◽  
Secondary Data ◽  
Income Level ◽  
Access To Credit ◽  
Credit Score ◽  
Descriptive Research ◽  
Specific Objective ◽  
Finance Department

The purpose of this study was to investigate the effect of savings level determinant on sustainability in I&M Rwanda. The specific objectives were to establish the effect of interest rate, income level and access to credit on the sustainability of I&M Bank. This study implemented a descriptive research design and utilized coefficient of correlation to assess the effect of each specific objective on the sustainability of the Bank. The population comprised of 12,057 including 12,050 customers and 7 staff of finance department of I&M Bank Rwanda. A sample size of 99 was calculated using Yamane (1967) simplified formula. To accomplish this aim, both primary and secondary data are used. The researcher used simple random and purposive sampling techniques. A questionnaire and interview have used to collect data. Quantitative data was obtained using questionnaire while a financial statement of I&M Bank covering 2016-2020 was used as secondary data. Descriptive and inferential statistical analysis showing mean, standard deviation, correlation and regression was used statistical Package for Social Sciences (SPSS) version 26.0 to analyze statistical information while content analysis used to analyze qualitative information. The findings and recommendations for this study addressed to the I & M Bank Rwanda, for decision-making and policies. The study found that interest rates, income level and access to credit have significant positive effect on sustainability of commercial banks in Rwanda at 78%, 90.5% and 92.9% respectively. The relationship among saving level determinants and sustainability of business bank was also determined to be linear with increase in get admission to credit score by means of clients. The researcher concluded that saving degree and get admission to credit volatility had more effect on sustainability of banks. The study endorsed that guideline to be installed vicinity to boom financial institution lending and ensure monitoring the same. Keywords: Savings Level Determinant, Sustainability, Commercial Banks, I&M Bank, Rwanda

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