Lulu Wang

Many consumers choose banks, not individual financial products. We study how such product complementarity shapes competition and regulation in retail banking. Across three U.S. consumer surveys, consumers are three to five times more likely to hold credit cards, auto loans, mortgages, and brokerage accounts at their deposit bank than independent product choice implies. We use the 2019 transfer of Walmart’s credit-card portfolio to Capital One to show that winning a consumer’s card business helps win their deposits, providing quasi-experimental evidence of complementarity. An original survey with discrete choice experiments and retrospective questions on how consumers came to hold their accounts lets us separate the mechanisms behind cross-holding, and we use it to estimate an equilibrium model of joint deposit and credit-card choice. We find that complementarity primarily reflects utility and accounts for about 60 percent of excess cross-holding, with the rest reflecting correlated preferences. Complementarity shapes product pricing in ways that single-market analyses miss. Rewards credit cards are loss leaders: they earn 8 percent of banks’ accounting profits but generate 21 percent of franchise value by attracting and retaining depositors. Interchange-fee regulation that compresses rewards raises deposit rates, and a bank merger that creates complementarity lowers deposit rates, as the merged bank captures the synergy rather than passing it through.

Bank branch density, defined as the number of a bank’s branches divided by its total deposits, declined significantly between 2010 and 2022. We show that the transition from branch-based to digital banking has concentrated financially and technologically sophisticated depositors in low-density banks, thereby increasing the flightiness of their deposits. Survey microdata on consumers’ bank choices show that depositors at low-density banks are more likely to read financial news, invest in money market mutual funds, and report intentions to switch banks. This pattern suggests that low-density banks attract a financially sophisticated clientele, not that banks’ digital platforms make depositors more attentive. This clientele exposes low-density banks to deposit flightiness risk. When interest rates rose in 2023, these banks suffered steeper stock declines and larger deposit outflows, even conditional on asset-side losses, than typical banks.

We use novel data on the composition and cost of payments across U.S. merchants to quantify consumer redistribution in the payment system. Cards charge interchange fees to merchants to fund consumer rewards. When merchants raise prices for all consumers in response to these costs, users of low-cost payment methods (e.g., cash and debit) cross-subsidize high-reward credit card users who shop at the same merchant. This standard mechanism implicitly assumes that consumers using different payment methods shop at the same merchants and that merchants face similar fees. We show instead that incidence depends on the joint distribution of payment choices across merchants. We document two key forces that shape redistribution. First, consumer sorting—where consumers who use different payment methods shop at different merchants—limits the exposure of cash and debit users to the effects of high interchange fees. Second, interchange fees vary across merchants; where users of different payment methods overlap, such as at large grocery stores, fees are lower due to sector discounts and private negotiations. We embed these forces in a sufficient-statistics framework that maps observed heterogeneity directly into redistribution. We estimate that interchange fees transfer approximately $30 billion every year from cash and debit users to credit card users. Consumer sorting and merchant fee heterogeneity reduce the magnitude of this regressive transfer by 25%, but do not eliminate it. Finally, we show that both the Durbin Amendment and the rise of premium credit cards have been regressive, highlighting how policy and innovation can reshape the incidence of platform fees.

Payment networks fund consumer rewards through merchant fees. Because merchants rarely surcharge, consumers fail to internalize costs and overuse credit cards relative to the social optimum. I develop a quantitative model of platform competition to compare policy solutions. Capping merchant fees reduces rewards and credit card use, increasing total welfare by $27 billion. Because consumers are sensitive to rewards but merchants are insensitive to fees, network competition inflates rewards and exacerbates the costs of over-adoption. Dual-routing mandates that increase consumer multi-homing redirect competition from rewards toward merchant fees, increasing welfare. The direction of competition matters, not just its intensity.

Financial frictions can overturn conventional antitrust analysis of startup acquisitions. I extend Myers-Majluf to include the option to be acquired. Low types are acquired, medium types issue equity, and high types do not invest. Blocking acquisitions lowers the average type of equity issuers and raises the cost of capital for standalone startups. The welfare loss from lower investment can overwhelm the welfare gains from blocking anticompetitive acquisitions. A case study from the pharmaceutical industry suggests antitrust policy can have a large effect on the valuations of startups who are unlikely to be acquired for anticompetitive reasons.