The route of credit card begins around 1914. It was introduced from company such as Western Union and other department stores, hotels, and oil companies. At that time, the card can only purchases goods and services from the issuer and the full amount must also be repaid upon the due date. The first "general-purpose" charge card was not introduced until 1950. It was the Diner's Club who initiated; however, it was not until the late 50s when the banks entered the credit card industry and revolutionized it by allowing balances to be carried over from month to month. For more than a decade, the credit card industry was growing at a very slow rate, largely due to the fact that only local bank cards were accepted by the merchants. The national system to process credit card transactions developed at 1966 when Bank of America began to license its BankAmericard credit card logo to the other banks. The system however becomes a chaos at the late 60s as the franchisees' attempts to undercut competitors by the means of cheating. In 1970, Dee Hock convinced Bank of America to separate its banking division from the BankAmericard system to resolve the issue and transformed it to what is now known as the Visa payment network. Other group of banks followed and formed the MasterCard association.
Regulations of the Credit Card Industry
Although the development of Visa and MasterCard associations was recognized by the merchants nationwide, different usury laws across the states set back the potential benefits of the system. Some states set the usury ceilings considerately low in compare to other states making it less appeal for issuers to lend loans in this states. In addition, the interpretation of the federal law at the time regulated the lender to charge no more than the usury ceiling where the borrower resides. This increases the legal burden cost the issuers have to bear also.
Combined with the complexity and the highly regulated usury law across the states, the issuers' profit margins were much bounded. Limited profitability causes the lenders to be especially cautious to extend the credit to the higher risk borrowers. In a regime of restrictive usury ceilings, where the lenders' income potential was limited, lenders extend credit only to higher quality borrowers, and poorer quality borrower were shut out of the market. This situation resulted in less credit availability and lower charge-offs. The credit availability continued to be rigorous throughout the 70s as high nominal interest rate were introduced by the Federal Reserve to counter off the high inflations. This made the issue of scarce credit availability even more visible.
Deregulations of the Usury Law
The interpretation of the usury law was changed by the Supreme Court in 1978 with the case of Marquette National Bank of Minneapolis v. First Omaha Service Corp. It is based on the Minnesota solicitor general who tried to prevent First Omaha from exporting Nebraska's higher interest rates into Minnesota. The general believes that the permission of exporting higher interest rates will distort the effectiveness of the state usury law. However, the court adopted the section 85 of the National Bank Act and stated that the usury issue should be a legislative matter. Hence allowed the lender to charge the highest interest rate based on where they reside instead of the borrowers.
This decision resulted changes of usury ceilings across states and redistribution of lending to certain states. Although some states refused to attract banks and consumer lenders to immigrate by the means of deregulating interest rate. However, two states, South Dakota and Delaware took the opportunities to...