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.

New Working Paper: Mobile Payments in Turkey

One of our primary activities here at the Cashless Society Project is to develop working papers that examine the idea of a cashless society from historical, contemporary, and international perspectives. In keeping with that, I’m thrilled to announce that we’ve recently posted a new working paper on Mobile Payment Systems in Turkey, written by Nurdilek Dalziel and Can Ali Avunduk. Both Nurdilek and Can Ali have spent time working in the Turkish banking sector, so their paper provides a insider perspective on how the Turkish banks and mobile telephony providers are currently approaching electronic payment services.

The paper opens with a brief overview of Turkish electronic payments in general, but then quickly dives into what they refer to as “direct carrier billing (DCB).” DCB is an approach to mobile payments where the mobile network operator (e.g., Turkcell, Vodafone, etc) manages the accounts and plays the central clearing role instead of a bank or bank-owned service organization. With this approach, anyone with a mobile phone can send and receive electronic payments, even if that person doesn’t have a bank account. The authors estimate that of Turkey’s 74 million inhabitants, 27 million (37%) do not currently have bank accounts, but most of those do own some kind of mobile phone. Thus, DCB could be one method by which this “unbanked” section of the population can gain access to electronic payments.

Of course, DCB also has the potential to cut the Turkish banks out of the payments game if they are not careful. So far, the authors report, the growth of DCB schemes is quite small, their networks are limited, many consumers don’t seem to be aware of their existence, and the overall payment volumes are actually restricted by the system for fear of fraud. Thus, DCB systems do not yet pose any kind of serious threat to the Turkish banks, and the authors see them more as supplements to the existing banking system rather than substitutes.

New Working Paper: Pre-1900 Utopian Visions of the Cashless Society

One of goals for this project is to contribute some historical perspective to the current discussions of the cashless society, and to that end, I’m happy to announce that we have added a rather intriguing new paper to our Working Papers section: Pre-1900 utopian visions of the ‘cashless society’ by Matthew Hollow.

Although one might initially wonder what utopian literature has to do with current discussions of the cashless society, Hollow reminds us that “Historically, one of the most prominent mediums through which new ideas about monetary systems have been presented and debated is the utopian treatise.” As they describe their perfect society, utopian writers naturally have to re-imagine the economic life of that society, and decide what role, if any, money should play in it. Many utopian thinkers sought to do away with private property, trade, and money altogether, resulting in a completely moneyless society. Others, however, recognized that doing so would require a wholesale reorganization of society that was perhaps not entirely realistic, and thus offered suggestions for alterative money and payment systems that did away with precious metals, coins, and paper bank notes.

Current discussions about the cashless society often seem to imply that it is a relatively new idea, one that was introduced by the adoption of credit cards and now mobile payment systems, but Hollow shows that the idea of cashless society is actually quite an old one. The technologies may have changed significantly over the centuries, but the social implications are still largely the same, and utopian thinkers offer some valuable insights that could inform our contemporary discussions. Utopian literature also reminds us that simply introducing a new payment method may not be enough to effect a truly cashless society; it may also require larger social changes, which naturally take generations to accomplish.