Interaction between payment services and credit services in credit card markets

Credit card markets are complicated structures where two different services, payment services and credit services, are provided. The Turkish credit card market has recently undergone two important regulations: one on payment services in November 2005 and the other on credit services in June 2006. As these two service markets have externalities on each other, regulating one may have unintended consequences on the other. In this regard, our chapter aims to shed light on the link between these two service markets by investigating the revenues from each of them: the non-interest and interest revenues. Estimating the interest and non-interest revenues of banks simultaneously in a 3SLS framework, we examine the effects of the regulations on payment services and credit services. Our results indicate that the regulations on payment services had no significant impact on banks' revenues, whereas the regulations on credit services affected the interest and non-interest revenues in opposite directions. Reacting to stifled interest revenues, banks shifted their focus toward non-interest revenues. Looking at the results, we suggest careful consideration of the possible effects on all segments of a credit card market when a regulatory action is planned. Moreover, from the response of revenues to changing prices in these two service markets, we infer that the demand in the Turkish credit card market is inelastic.