The Cost of Being Late: The Case of Credit Card Penalty Fees

Journal of Financial Stability, Volume (Year): 7 (2011) Issue (Month): 2 (June), Pages: 49-59

AFA 2007 Chicago Meetings Paper

University of Alberta School of Business Research Paper No. 2013-1144

52 Pages Posted: 15 Mar 2006 Last revised: 25 Jul 2013

See all articles by Nadia Massoud

Nadia Massoud

Melbourne Business School, University of Melbourne

Anthony Saunders

New York University - Leonard N. Stern School of Business

Barry Scholnick

University of Alberta - Department of Marketing, Business Economics & Law

Date Written: March 1, 2006

Abstract

This paper is the first in the literature to examine the determinants of US credit card penalty fees, which in 2004 amounted to $13 Billion, in a credit card market that had $800 Billion debt outstanding. Standard theory states that the price of debt should be related to default risk, yet many critics of credit card fees - including former presidential candidate John Kerry - have argued that credit card penalty fees reflect banks' market share. In this paper we examine, theoretically and empirically, credit card penalty fee pricing. Using a unique data set we find that credit card penalty fees are positively related to consumer default risk, measured at both the bank level as well as the macro level. However, we also find evidence that penalty fees are positively related to measures of bank market share. Our finding that fees are increasing in customer risk, supports the position of defenders of penalty fees such as banks. However, our finding that fees are increasing in market share is consistent with rent extraction, and the concerns expressed by politicians and regulators.

Keywords: Credit Cards, Penalty Fees, Risk

JEL Classification: G21

Suggested Citation

Massoud, Nadia and Saunders, Anthony and Scholnick, Barry, The Cost of Being Late: The Case of Credit Card Penalty Fees (March 1, 2006). Journal of Financial Stability, Volume (Year): 7 (2011) Issue (Month): 2 (June), Pages: 49-59; AFA 2007 Chicago Meetings Paper; University of Alberta School of Business Research Paper No. 2013-1144. Available at SSRN: https://ssrn.com/abstract=890826 or http://dx.doi.org/10.2139/ssrn.890826

Nadia Massoud (Contact Author)

Melbourne Business School, University of Melbourne ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia
+61 3 9349 8130 (Phone)
+61 3 9349 8136 (Fax)

HOME PAGE: http://mbs.edu/facultyresearch/facultydirectory/Pages/NadiaMassoud.aspx

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Barry Scholnick

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
627
Abstract Views
4,208
rank
41,430
PlumX Metrics