It’s hard to remember a time where everyone didn’t say “charge it.” Playing with Plastic’s authors make it clear that buying on credit certainly didn’t originate with credit cards: The real revolutionary development has been the diversification of purchasing options that these cards permit.
To set the background, Evans (vice chairman of LECG Europe consultants) and Schmalensee (dean of the MIT Sloan School of Management) describe the whole history of currency and how—starting with the issuance of the first credit cards in the 1950s—various methods have developed to charge purchases for later payment. As they write, only gradually have increasing numbers of merchants, banks, and consumers come to realize the benefits of credit cards.
One of the more intriguing stories is about the development of an innovative model that the authors call “co-opetition.” Co-opetition is when card issuers allow their systems to be interoperable. Banks may lose a little by helping competitors, but they gain much more when the cards appeal to a greater number of cardholders and merchants because they are linked to services like Visa or MasterCard. Such cooperation is also invaluable for the back processing of merchant receipts.
The industry as a whole has changed a lot since 1998 and the first edition of Paying with Plastic. New material in the book documents how the payment card industry has become more consolidated through numerous bank mergers: “The top ten bankcard issuers accounted for 74 percent of the Visa and MasterCard volume in 1999 versus 44 percent in 1990.”
In addition, payment cards have been essential to the growth of online commerce. People also manage their money differently, feeling they need less cash in the bank. The cards also permit greater “democratization” of credit, and are increasingly used to support entrepreneurship and small business financing. Countering bleak reports that the ready availability of credit cards is luring more people into debt, Evans and Schmalensee quote statistics to demonstrate that “the majority of the people use [cards] responsibly.”
Paying with Plastic’s focus is not only on card providers. The book also explores the back-end mechanics of how credit cards work, including a detailed account of the processing functions of First Data Corporation (FDC), a major third-party processor. More than a third of all merchant back-end processing was handled by FDC in 2002.
What will the future bring? A number of innovations are on the horizon that might enhance or conversely steal market share away from credit cards: PayPal and its influence as an alternate payment format online; paying by cell phone through services offered by cell phone providers; and the use of biometrics so that each of us could pay for purchases with nothing more complicated than a fingerprint.