Credit Card Issuing
6141
By 2007 approximately 28 percent of all consumer payments were credit- or debit-card-based, according to Bank Technology News. This was double the percentage from a decade before. At the point of sale, 56 percent of purchases were made using cards, and more than 6 million merchants allowed customers to pay with cards. However, citing a report from Celent, the publication indicated that there was still considerable growth potential for issuing banks; checks and cash still outpaced cards, which had a growth market valued at $4.5 trillion.
During the 2000s, card companies scrambled in pursuit of new cardholders. While still relying on old recruitment techniques such as direct mailings and telemarketing, card issuers also turned to ad campaigns aimed at tech savvy generation X-ers and offered nearly "instant" credit approval via online applications. They stepped up efforts to cross-sell new programs to current cardholders. In addition, they courted untapped pools of potential card issuees such as the newly affluent and small business owners. They even approached heretofore off-limits demographic pools such as college students, teens, and those they formerly shunned—individuals with poor credit histories.
Changes in consumer spending habits also spurred new credit card products and marketing strategies. The growing popularity of online financial transactions and shopping, which offer alternate modes of payment to conventional credit cards, meant that card companies had to adapt quickly to the world of Web commerce. Credit cards must contend with stored value cards, electronic checks, and direct electronic bill payment options. Chip-embedded "smart cards," already used in many countries, emerged in the United States as the most promising new card technology. By 2007, issuers and participating merchants were strongly supporting the use of contactless smart cards for signature-free payments under $25.
The Federal Reserve reported that total consumer debt was a record $2.41 trillion in January of 2007. A study conducted by the Federal Reserve Board in the wake of 2005's bankruptcy law reforms found that credit card companies were not to blame for high consumer debt levels. The report indicated that issuers were not careless in extending credit card offers, and that most cardholders made timely payments. Even so, some industry players were predicting a rise in delinquencies in 2007 and 2008.
Traditional credit cards—magnetic stripe plastic cards that, when accompanied by the holder's signature, entitle the bearer to draw on a revolving line of credit—still dominate the landscape of non-cash transactions in the United States. Cardholders who carry over part of their balances to the next pay period are charged an annual rate of interest that varies according to their income and past credit history. Card firms often also levy an annual fee for use of their cards, plus additional penalties and other fees for charging over the approved card limit such as making purchases outside of the United States or failing to use the card within a specified period.
Some credit cards are affinity cards, which are offered jointly by two organizations, one a financial institution and the other a non-financial group such as a university or sports team. Co-branded cards are issued by financial institutions and collaborating retailers such as department stores or airlines. The cards bear the names of both organizations. MBNA Corp. dominates the domestic affinity card market.
Charge cards are similar to credit cards except outstanding balances must be paid in full by each due date. No interest is charged for their use. American Express and Diners' Club are the most well-known charge card brands.
Debit cards are bank cards that, like checks, draw funds directly from the holder's bank account. The amount is taken out immediately with online cards but is delayed by up to 72 hours with offline versions. Both MasterCard and Visa offer debit cards in addition to credit cards.
Retailers can issue private label cards, which bear the retailer's logo. They are accepted only by the issuer, which partners with financial companies to back the cards. About 10 percent of mass market retailer Target Corp.'s $8.56 billion sales in 1999 were processed through its private label card. Also in 1999, the world's number one retailer, Wal-Mart, jumped on the private label bandwagon for the first time in its 37-year history. In February 2000, Staples debuted a no-fee private label credit card targeted at small business owners. Ford Motor Co. also developed a private label card for small businesses—cardholders who service their cars at participating dealers earn discounts toward the purchase or lease of their next Ford.
Smart cards (or chip cards) contain computer chips with a given amount of memory or storage capacity. When read by special terminals, the terminals can access data stored on the chip. They can be used as cash cards, identification cards, or credit cards, and offer potential for enhanced security for online financial transactions. By 2000, most smart cards functioned as memory-only cards with stored monetary values and thus served as a replacement for cash at photocopying machines, subways, and public phones. Smart cards have already been implemented in over 90 countries. Germany, for example, has 85 million national insurance smart cards. Smart cards are widely viewed as the next wide-scale development in the card industry. Also see the essay entitled Smart Cards.
Heading into the late 2000s, contactless smart cards were poised for strong growth as merchants and issuers alike supported and promoted their use for micro-payments (payments less than $25). Contactless cards allowed consumers to simply waive their card at a special wireless sensor and pay for their purchase without signing. While the transactions are encrypted, card issuers backed the technology up with the same fraud protection as standard cards. By March of 2007, issuers such as Chase and American Express offered this technology to cardholders regardless of whether they requested it.
The man behind the first widely accepted charge card was Frank McNamara, a World War II veteran who founded Diners' Club in 1950. McNamara claimed he dreamed up the idea of presenting an authorized cash substitute, the value of which the carrier would pay at a later date, one evening in New York City when he couldn't foot the dinner bill while entertaining a business client. Dubbed the "last supper," the incident was later revealed to be a promotional yarn.
McNamara, however, did persuade a group of New York restaurateurs to take cardboard cards in lieu of hard cash from customers on the understanding that the cards were backed by a financially reliable third party, Diners' Club. Diners' Club paid the restaurant bills, retained a 7 percent service fee, and then in turn was paid by its cardholders. Within two years, approximately 150,000 diners had become card-carrying members.
In the long run, this scheme didn't benefit McNamara, though. He sold his interest in Diners' Club in 1952 for $500,000, believing that charge cards were merely a passing trend. After having tried his luck at real estate, in 1957 he died penniless of a heart attack at age 40.
In 2000 the modern credit card completed its fifth decade. The concept of credit cards appeared much earlier, in Edward Bellamy's futuristic 1888 novel, Looking Backward. Proprietary credit cards, honored only at a single establishment, appeared in the 1920s, when a California gas station chain issued cards to its regular customers. Departments and hotels followed suit. In 1947, Flatbush National Bank collaborated with nearby retailers in an arrangement that permitted customers to charge their purchases. The result was the first known third party charge card.
The charge card burst onto the national scene in 1950 with the Diners' Club card, which a number of hotels and restaurants agreed to accept. In 1958, American Express (AmEx) created its own charge card to rival the industry pioneer. Although early versions were made of cardboard, AmEx introduced plastic cards and computerized billing in the 1970s.
Also in 1958, Bank of America premiered Bank Americard (known as Visa since 1976), the first true credit card. With it, customers didn't have to pay off their card balances each month. Instead, they could make a minimum payment and be charged interest on the remaining revolving balance. The initial offer of a $500 line of credit with an 18 percent interest rate drew about 60,000 members. In 1966, Bank of...
To continue reading
Request your trial