Speaker: Daniel Cohen
Title: Switching Costs in Credit Markets: Evidence from Mexican Credit Cards
Abstract: Commercial credit cards are an important source of consumer credit, but imperfect competition and high switching costs can cause cardholders to pay excess interest. In this paper, I estimate the consequences of imperfect switching in the Mexican credit card market using universal administrative data. I begin by documenting that the market is ripe for high-consequence failures: interest rates are high and dispersed; card openings are infrequent among borrowers; and there is little correlation between risk and interest rate. Taken together, these facts imply that even the riskiest borrowers often have low-interest alternatives available. Next, I show that switching has a meaningful effect on outcomes: those who switch cards pay less interest and receive lower interest rates, especially compared to those who accumulate cards. Finally, I use matched credit bureau data to estimate borrowers' credit card choice sets and quantify how much money (in excess interest) they leave on the table by failing to switch. I show that 62% of cardholders fail to choose the lowest-rate card in their choice set, and the median borrower barely manages to pick their median card. The average balance-carrying borrower pays MX$4,977 (US$271) annually in excess interest compared to the cheapest card in their choice set. This amount represents 18 days of work at Mexico's minimum daily wage or 8 days of work at Mexico's average formal-sector daily wage. My results reinforce the importance of switching behavior in credit markets and demonstrate that, for regulators, improving the ease of switching would meaningfully increase consumer surplus in the credit card market.
Maggie Hendrix
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