Happy Birthday Credit Cards! Redux

Photo by Paul Felberbauer on Unsplash

For a long time, one of the pillars of the cashless economy has been the advent of bank-sponsored credit cards (at the time called universal payment cards). There are several books about it as well as academic papers, of these my favourite is that by Dave Stearns. You can also see a video by Lana Swartz discussing her book which touches on the genesis of Diner’s Club.

Today (18.Sep.2020), David Birch reminds of the genesis of this payment medium in his column while celebrating the 58th anniversary to what was to become VISA. Throughout his writings, Birch has had a preference for the insight story by Joe Nocera’s “A Piece of the Action “(which, of course, Dave and Lana considered in their work).

However, I had to somewhat disagree with Birch’s version of events. For one I think he is giving too much credit to Diner’s, which was a travel and entertainment card. He is also downplaying the role of large retailers, which offered credit to customers and the main competitors for the banks.

Another point of departure is whether the “combination of regulation and technology” sorted all the problems. In terms of technology, the magnetic stripe was necessary. But at a more fundamental level were the computer systems that enabled to process the large volume of payments within deadlines.

There has been a lot of emphasis on how credit cards were posted indiscriminately for their adoption. We wrote on the UK experience of Barclaycard. However, banks in the USA had been attempting to offer an alternative to store credit since at least the 1940s. Geographic restrictions at the time in the USA led to the development of a business model that enabled users to cross state lines (something difficult to do with personal cheques or the yet to develop ATM network). I think that was part of the key to explaining the success of VISA (and shortly after what was to become Mastercard, launched by Illinois banks which at the time was a single branch state). So a model in which banks were able to network on creating a platform is the argument that Evans and Schmalensee used in their seminal work on two-sided markets. 

However, in a paper with Gustavo del Angel, we argued that American banks made their proposition superior to that of single retailers thanks to their financial muscle and contacts with diverse retailers. It was also the case that the international network built thanks to “monopoly” positions of large incumbent banks in different countries, which eventually became and remain the biggest acquirers in their territory.

Here the non-discrimination clause (where paying by cash was not to be less expensive than paying plastic) was a critical achievement in the marketing of the card by banks amongst retailers. Retailers accepted the cards (and pay banks a commission when customers used the card), based on market studies showing customers with cards would purchase more. The one issue was that these studies prepared by the banks or credit card companies themselves.

It was also the case that many international licences achieved positive cash flows much earlier than expected. Hence the risk of reading too much on developments in the US, where banks were much smaller in terms of branches and customers than in Europe, Japan and large Latin American countries.

In short, I agree with Birtch that:

That the evolutionary trajectory of credit cards was not a simple, straight, onwards-and-upwards hockey-stick to glory and to gross margins that merchants can only dream of.

But the story has perhaps more twists and turns than most people give credit.

 

RePEc Papers mentioned in this entry:

Bernardo Batiz-Lazo & Gustavo A. Del Angel, 2016. “The Dawn of the Plastic Jungle: The Introduction of the Credit Card in Europe and North America, 1950-1975,” Economics Working Papers, Hoover Institution, Stanford University. Accessed https://ideas.repec.org/p/hoo/wpaper/16107.html

Bernardo Batiz-Lazo & Nurdilek Hacialioglu, 2004. “Barclaycard: Still the King of Pla$tic?,” General Economics and Teaching, University Library of Munich, Germany. Accessed https://ideas.repec.org/p/wpa/wuwpgt/0405004.html

See also

Bernardo Batiz-Lazo & Nurdilek Hacialioglu, 2004. “Barclaycard: Still the King of Pla$tic? (Exhibits),” General Economics and Teaching, University Library of Munich, Germany. Accessed https://ideas.repec.org/p/wpa/wuwpgt/0405005.html

 

Cashless in Cyprus

We are delighted to announce a new addition to our collection. The paper written by Leonidas Efthymiou and Sophia Michael (both at Intercollege Larnaca) entitled ‘When Cards and ATM’s are the only choice: A fortnight in Cyprus with no banking system, nor trust’ continues with our aim of informing the debate around cashless society and mobile payments, by detailing the events around the suspension of the banking system in Cyprus.

A brief introduction contextualised the discussion by enumerating the deployment and use prior to the crisis of ATMs, mobile and internet banking as well as some data on Point of Sale (POS) terminals in this small, open economy (where tourism is one of the main sectors of economic activity). The interaction between these elements of the payment ecosystem is even more clear when considering new technologies. For instance, Leonidas and Sophia note:

1) The only bank which offers a Contactless visa card is the Bank of Cyprus. Their 18-25 Youth card is the first card in Cyprus with contact-less technology and can be used for transactions below 20 euros, without having to insert a PIN in front of the POS. For transactions above 20 euros, you can keep the card in front of the POS, but you have to input your pin.

2) There are approximately 1460 enterprises across the island with contactless technology. Some of these enterprises include cafes such as Costa Coffee and Starbucks, pharmacies, bakeries, supermarkets, petrol stations and shops in malls.

3) JCC, the main payment system provider in Cyprus, is currently running a campaign at Nicosia cafes. All contactless transactions that take place at Nicosia cafes are eligible to participate in three monthly draws for 3 IPAD minis.

Essential to the 15 day closure of the banking system in March 2013 (similar only to the US in 1933 and Argentina in 2002), was that all electronic transactions and money transfers were frozen with the exception of credit/debit cards and ATM withdrawals. Leonidas and Sophia adopt a ‘sequence of events’ method to discuss an intensification in the use of cash during this period as ‘people can sustain themselves only by queuing at the long lines of ATMs to withdraw cash, or stay cashless and use their credit cards.’ Interestingly, during their research, they were unable to provide evidence to support rumours that ‘IOU’ notes replaced cash and cards as means of payments during Cypriot banking crisis.

Shortly after the central banks’ announcement that that banks will remain closed, long queues begin to form in front of the cash machines (18-III-2013)

In spite the Central Bank of Cyrpus’s instructions to banks that they should keep re-supplying the ATMs with money several times, by March 22nd (seven days into the crisis) long queues have formed at almost every one of the bank’s ATMs island wide. This was partly a result of panic and partly a result of the rejection of card payments by merchants. In other words (and like was the case in New York during Huracain Catrina), the payments ecosystem suffered a massive blow ‘as every card transaction directs the retailers’ money into a bank account. With a bank system under the threat of bankruptcy, or levy as the best option, most retailers prefer to turn down customers rather than accept their cards.’

In summary, the paper of Leonidas and Sophia offers a detail reach account of the Cypriot banking crisis, with a focus on the effects on the retail payment system but without loosing its connection with institutional stakeholders and macroeconomic developments. This narrative is enriched when the authors compare and contrast with developments in the US and Argentina, as it enables to ascertain the unique features of the crisis in Cyprus.

The challenge of digital micropayments in Mexico

In a recent post in the Celent Banking Blog entitled The Mobile RDC Cost-savings Myth, Bob Meara discusses the mirage of costs savings for banking thinking of introducing mobile payments alongside a well developed mulch-channel network. His argument is spot on, the cost of the transaction might be lower but there are also maintenance issues to be considered, activity cost in banking is the stuff of Alice in Wonderland and more important, potential savings might be small when considering that many have already been realized.

At the other side of the spectrum, however, are micro-finance institutions working in developing countries such as Mexico. So far many they have relied on staff as the main distribution channel. Mobile payments offer the possibilities of foregoing legacy investments and jumping the queue, sort to speak.

logo-Guatemala

Thanks to a travel and subsistence grant from FUNDEF,with Gustavo del Angel and Enrique Cardenas, we have started to map the evolution of payment systems in Mexico. While on site, I was lucky to be invited to a field visit to see first hand operations from Banco Compartamos, a Mexican microfinance institution.

The day started early (kicking off at 0630 hrs) to travel in group to the nearby city of Cuernavaca. The sherpa for the day was Enrique Majos, Banco Compartamos CEO, together with his IT and PR directors. We were joined by two other directors at the site. These visits are a regular thing for Compartamos’ directors.

I was introduced to all the local staff members and took part in the daily debrief (a pilot scheme in which all team leaders report on their activities for the day and any issues from the previous day). All “colleagues” set off on to meet with their customers groups – along the lines of Gramin, Compartamos lends small amounts to individuals (chiefly self-employed women), who are part of co-sponsor groups.

During the meeting individuals bring their weekly repayment and make sure everyone has met their commitment. The “colleague” role is to inquire on the nature and state of the indiviudual’s business while also looking for cross selling opportunities. An “expert colleague” will establish good rapport with all/most the members of the group. If appropriate he/she will also hand deliver a certified cheque for any new loan.

Virtually all individuals will bring their weekly repayment in cash. The leader of the meeting will keep track (through a basic ledger and updating individual pass books manually). At the end of the meeting all repayments are then taken to be deposited in a nearby retail bank branch.

Repayment (cash is collected within the white box) - also evident on the table (Compartamos' staff in their distinctive pink shirts)

Repayment: cash is collected within the white box and is also evident on the table (Compartamos’ staff in their distinctive pink shirts)

Hence, Compartamos’ staff do not handle cash. Yet Compartamos has to rely on larger banks and a network of correspondents (such as a chain of convenience stores) to collect deposits and distribute loans. Most of these, in turn, will charge individual depositors onerous fees to provide their service. Like many other microfinance, the distribution channel is challenging growth and diversification.

Mobile payments are not the solution at present. For one, the service is highly unreliable outside of big cities and in some of the regions where Compartamos operates, there is no network cover at all. Second and most important, individuals who borrow from Compartamos work in a cash economy. Their business (such as market stalls, beauty products, or seasonal goods) is carried out in cash. Few have access to the Internet or a smart phone (yet all have a mobile).

A mobile branch (i.e. on the back of a bus or minivan) could provide some relief provided it is not a target of highjacking or highway robbery. The volume of individual business is not enough to justify deploying ATMs (let alone self-replenishing machines) in the most remote areas while other financial intermediaries discourage their use of ATM through punitive fees. The time is perhaps ripe for Compartamos and other microfinance come together in the deployment.

Cashless at the Royal Mint

A recent item in the BBC News website on the Royal Mint (below), found the apparent controversy that where money is actually made (well coins really), employees are not allowed to use them to purchase their food during lunch. This in turn let to a invitation to discuss the pros and cons of the cashless society.

Article: Made of money: The Royal Mint where cash is banned http://www.bbc.co.uk/news/business-23327926

Video: Is there a cashless society? Jon Sopel Interviews Bernardo Bátiz-Lazo (Global – @BBCNews) http://t.co/rBDHkNbU9e (6 min)

Back on track

Well it seems teaching is over and the Autumn term was too much for Dave and I to keep feeding this blog.

We also had a very interesting and thought provoking meeting at UC Irvine entitled “Payment Technologies: Past, Present and Future” (read an excellent summary by Irving Wladawsky-Berger&lt) and I also had a couple of presentations at industry conferences (I am serialising the summaries underCurrent issues in payments within the Light Blue Touchpaper blog).

So rather than boast about our travels, I wanted to restart our thoughts on cashlessness through a provocation and with the help of an apparently unrelated article that caught my attention. Entitled “How Memes Are Orchestrated by the Man“, Kevin Ashton of The Atlantic, tells a very detailed and well documented story of how commercial interest rather than a new Internet culture that which propelled the Harlem Shuffle to stardom. Interestingly, it says the meme died in February, but I still find big references to it, chief among them this one in the Mexican football classic a couple of days ago – and my football blind, eldest son immediately knew what this was about.

But what is relevant to this forum is the following extract:

Google regards clicks and views as a “currency,” and take pains to get the numbers right, but unlike most other mass media, its figures are not verified by anyone who does not profit from higher numbers.

and goes on to conclude

The technology may have changed, but the money still flows the same way: to creators of contracts not creators of content.

And that got me thinking of Jon Matonis and other supporters of cryptocurrencies (see for instance Bitcoin Prevents Monetary Tyranny) or mobile wallets for that matter. Why? Because more often than not, the proponents of digital payments are focusing their discussion on content and are naive of institutional change.

The Responsibility of Mobile Money Intellectuals

The narrative for the underlying adoption of cashless payments in developing countries is that of financial inclusion: mobile phones are a widespread and thus, with a little push, more people would escape the tyranny of the cash and join the financial system heaven (with the alleged benefits this entails such as greater liquidity, possibilities for greater indebtedness and of course, the privilege of paying charges and fees to financial institutions). For 30 years or so the likes of the World Bank and the Bill & Melinda Gates Foundation have supported mobile banking initiatives as well as their predecessors, namely microfinance institutions.

But as Kevin Donovan reminds us in his brief paper, a long term review of microfinance and mobile payments questions whether outside of specific examples, either has had an impact on development. Moreover, there is a lack of critical evidence to support the millions of dollars provided to these initiatives during the last 30 years. He also reminds us of the term Mobile Money Intellectuals (coined by Bill Maurer at UC Irvine’s Institute for Money, Technology, and Financial Inclusion) or the “community of scholars and practitioners from academia, business, government, and philanthropy” that should be the base of a critical discussion around micro finance and the cash free economy.

This is not, lets us emphasise, a negation of financial inclusion or mobile payments but a call for a balanced assessment of the way forward (including different technological solutions). A case in point is PayPal, the online payments intermediary owned by eBay Inc., who has prevailed through adaption: by copying Square’s white dongle with a blue triangle; establishing a strategic alliance with Discover whilst foregoing a mobile wallet application. PayPal retains a major market share of electronic payments (as poignantly noted in this article by mashable.com).

Donovan’s view is that:

There are certainly developmental benefits to technologically enabled finance, but it would be a shame to ignore the downside or fail to address the type of foundational questions that challenge and advance our understanding of innovations such as microfinance and mobile money.

Indeed we need a conceptual and empirical body of knowledge that looks beyond fads and into what works better for society. This is what this blog and indeed, our cashless society project is all about. We are happy to count Kevin as one of the key members of our growing network.

Myths and realities of the cashless society

People *think* that technology moves fast and culture moves slowly. I mean, the Rolling Stones are still one of the world’s most popular bands, right? But that’s not always true. If you look at futurists’ takes from the middle of the last century, their biggest misses were not just technological (jetpacks instead of iPhones) but cultural .. [such as failing to] anticipate the rise of the natural and organic food movements. Alexis C. Madrigal – The Atlantic

A panel named as above took place at the European Business History Association annual conference (#ebha2012) in Paris (August 30th to 1st September, 2012). The panel was chaired by Carles Maixe (@carlesmaixe) from University of La Coruña (Spain), who introduced the audience to the authors as well as the idea behind this blog/forum. A common theme was looking at the practical implications of delivering on the idea of a cashless society by not for profit deposit taking financial institutions.

The panel was composed of:

The comments by Mark Billings (Exeter, UK) and the discussion that ensued included contributions from of Patrice Beaubeau (Paris Ouest Nanterre, France), Steve Toms (Leeds, UK), Chris Colvin (Queens Belfast, UK) and Osamu Uda (Nihon, Japan), among others. Points raised included (included, in no particular order):

  • This panel and indeed a good attendance, reflects a growing literature and interest to look at the impact of technology in financial services from an historical perspective, which is challenged to provide a true comparative history of automation (rather than individual case studies sitting side by side).
  • For the foreseable future we are likely to talk about “the less cash society” (see recent article in Gadget Lab — www.wired.com about generalise mobile payments needed at least another 10 years).
  • There is a need to look at the impact of cashless (and indeed deeper analysis of ATMs) into bank employees and banking practices.
  • Provide a comprehensive survey of how the idea of a cashless society has been dealt with, at least conceptually (including contributions to economics, social costs of different payments, anthropology, etc).
  • It is still not clear the importance of differences in the institutional setting to promote financial inclusion and aid (or hamper) a cashless society.
  • The 1960s sees the birth of the modern monetary economy, which in large part is based on applications of computer technology.
  • The discussion on the cashless society (and particularly contemporary narratives) tends to emphasise the artifacts (such as mobile phones or chips) as opposed to what is money and its economic and social uses.

The discussion continued during the evening (see photo below). An idea here emerged following last week’s post on transparency, as it was considered that surcharges on cash withdrawals were similar to a regressive tax: a fixed value regardless of amount withdrawn is more punitive on lower income individuals as the total payment of surcharging fees is a greater proportion of their income than for high-income individuals. An empirical issue is which of the two groups observes greater frequency of withdrawals and keeps a higher balance of cash and coins. Gustavo del Angel baptised this effect as “feeding the gander”, in a loose symil to the large tubes commonly used in the creation of fois gra, replicating the payments pipeline giving no option but to “eat” the surcharge.

(L 2 R): Gustavo del Angel, Carles Maixé-Altés and Bernardo Bátiz-Lazo, Paris (Sep, 2012)