New York Fed Research: Issuers in High-Share Markets Pass Through 20% Less of Funding Cost Declines
Two borrowers with similar credit scores and incomes applying for a credit card from the same issuer may receive noticeably different interest rates. Minneapolis Fed consultant Kyle Herkenhoff and New York Fed research economist Juan M. Morelli used data on 14 million newly issued cards, treating the unexpected January 2008 drop in the federal funds rate as a natural experiment. They found that issuers pass through 20% less of funding cost declines to borrowers in markets where they hold a large market share compared to low-share markets.
Why do two borrowers who appear nearly identical in credit score and income level receive significantly different annual percentage rates (APRs) when applying for a credit card at the same bank? In a study published on November 4, 2026, on Liberty Street Economics, the blog of the Federal Reserve Bank of New York, Kyle Herkenhoff, a consultant at the Federal Reserve Bank of Minneapolis, and Juan M. Morelli, a research economist in the Research and Statistics Group of the Federal Reserve Bank of New York, provide a mechanistic explanation: credit card issuers pass through changes in funding costs to a lesser extent in segmented markets where they hold a larger market share.
Understanding this conclusion requires an understanding of the structure of the credit card market. Issuers do not compete in a single, undifferentiated national market; rather, they design products and pricing strategies targeting specific types of borrowers. Industry reports, regulatory guidance, and academic research all document market segmentation based on credit risk, income levels, card characteristics, and acquisition channels. A prime borrower applying online for a standard non-co-branded card belongs to a completely different market than a subprime borrower accepting a pre-approved offer for a co-branded card. The same issuer can dominate one such segment while holding a very small share in another.
Guided by this framework, Herkenhoff and Morelli divided the national market into 960 distinct segments, combining four credit-score groups, card and product types, acquisition channels, and income groups based on the borrower’s ZIP code. In their dataset, an issuer operates in approximately 200 of these markets on average per week. Within each market, the issuer’s share is defined as its revenue relative to total revenue in that market.
They first utilized confidential account-level data collected by the Office of the Comptroller of the Currency (OCC), a U.S. banking regulator, to observe the relationship between interest rates and market share. After finely grouping accounts by characteristics such as income, credit score, and card type, they found a positive correlation of 54% between the average APR within each group and the average market share of the issuing lender within that group. This means that among borrowers with similar characteristics, cards issued by lenders with higher market shares carry higher interest rates.
However, correlation does not imply causation. High-share markets may differ in unobserved dimensions that also affect rates. To obtain more direct evidence, the authors turned to a natural experiment: when an issuer’s funding costs undergo an exogenous change, do its pricing adjustments differ between high-share and low-share markets?
The analysis focused on January 2008, which saw one of the largest unexpected drops in the federal funds rate (25 basis points). For new accounts, issuers set the initial APR and its spread over the benchmark rate at origination. The authors compared cards issued shortly before and after this unexpected rate change by the same issuer, stripping out market-wide common rate movements and controlling for observable differences in borrower credit scores, income, and card types. What remained was the difference in pass-through between high-share and low-share markets for the same issuer under the same exogenous shock.
The results were clear: two weeks after the Federal Open Market Committee (FOMC) event, the pass-through of rate changes by the same issuer was 20% lower in high-share markets than in low-share markets. Using an average adjusted APR of 10% as a reference, for every 1 percentage point change in the risk-free rate, the issuer adjusted borrowing rates by approximately 2 percentage points less in high-share markets than in low-share markets. In other words, when funding costs declined, borrowers in high-share markets received a smaller reduction in their offered interest rates.
This finding is not unique to January 2008. When the authors combined the large unexpected rate movements from the rest of 2008, the results remained significant. When including all qualifying risk-free rate increases and decreases from 2008 through 2019, the estimate shrank but retained statistical significance.
From a reader’s perspective, this study reveals a pricing mechanism that remains significant even after controlling for borrower risk characteristics: credit card rate differences stem not only from who is borrowing, but also from who is lending and the degree of pricing power the lender holds in specific segmented markets. For readers interested in consumer credit market structure, bank competition, and interest rate transmission, this provides a testable causal framework—higher market share correlates with lower elasticity of interest rates to funding cost changes.
Of course, the study has clear boundaries. The authors acknowledge that unobserved systematic differences may exist between high-share and low-share markets, which could themselves influence rates. Additionally, the study focuses on initial pricing at origination rather than rate adjustments for existing accounts. These limitations mean the conclusions apply specifically to the card issuance pricing phase and cannot be directly generalized to all interest rate change scenarios.