FDIC BANKING REVIEW 23 2005, VOLUME 17, NO. 3
Overview of Recent Developments
in the Credit Card Industry
by Douglas Akers, Jay Golter, Brian Lamm, and Martha Solt*
Since the 1980s, Visa U.S.A. (Visa) and Master-
Card International (MasterCard), the bank-controlled
credit card associations that together
account for approximately 70 percent of today’s
credit card market, have been able to control the
use of and access to their networks to the advantage
of their bank members. Recently, however,
the credit card industry has been changing:1 some
merchants are now large enough to exert their own
leverage, legal defeats have impeded the ability of
credit card associations to control the market, and
some participants have developed new arrangements
and alliances that may be a prelude to further
changes in the industry. This article surveys
recent developments in an industry that is facing
new competitive dynamics.
The article begins by describing the formation of
the payment card industry and then its structure.
The article continues by explaining the functioning
of credit card networks: the various kinds of
network models, and the significance of interchange
fees in the most complex model. Next discussed
are recent industry-altering litigation
involving Visa and MasterCard, and significant
aftereffects of the litigation. The article concludes
by noting the main challenges facing the industry
The Formation of the Credit Card Industry
Although merchant credit may be as old as civilization,
the present-day credit card industry in the
United States originated in the nineteenth century.
In the early 1800s, merchants and financial
intermediaries provided credit for agricultural and
durable goods, and by the early 1900s, major U.S.
hotels and department stores issued paper identification
cards to their most valued customers. When
a customer presented such a card to a clerk at the
issuing establishment, the customer’s creditworthiness
and status were instantly established. The
cards enabled merchants to cement the loyalty of
their top customers, and the cardholders benefited
by being able to obtain goods and services using
preestablished lines of credit. Generally these cards
were useful only at one location or within a limited
geographic area—an area where local merchants
accepted competitors’ cards as proof of a
* All the authors are in the Division of Insurance and Research at the Federal Deposit Insurance Corporation. Douglas Akers is a research assistant, Jay Golter a financial analyst, Brian Lamm a senior financial analyst, and Martha Solt a senior economist.
1 The term “credit card industry” as used in this article refers to the four major payment card networks: Visa, MasterCard, American Express, and Discover. In addition, Diners Club is a very small participant. ------------
Overview of Recent Developments in The Credit Card Industry
2005, VOLUME 17, NO. 3 24 FDIC BANKING REVIEW
In 1949, Diners Club established the first generalpurpose
charge card,2 enabling its cardholders to
purchase goods and services from many different
merchants in what soon became a nationwide network.
The Diners Club card was meant for highend
customers and was designed to be used for
entertainment and travel expenses. Diners Club
charged merchants who accepted the card 7 percent
of each transaction. Merchants found that
accepting Diners Club cards brought more customers
who spent more freely. The Diners Club
program proved successful, and in the following
decade it spawned many imitators.
In the late 1950s, Bank of America, located on the
West Coast, began the first general purpose credit
card (as opposed to charge card) program. At that
time, banking laws placed severe geographic
restrictions on individual banks. Virtually no banks
were able to operate across state lines, and additional
restrictions existed within many states. Yet
for a credit...
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