Credit Card Industry in India

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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 today. 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



References: Aite Group. 2005. Summary: Five Misconceptions about Interchange in America. http://www.aitegroup.com/reports/200504042.php. [August 8, 2005]. Aizcorbe, Ana M., Arthur B. Kennickell, and Kevin B. Moore. 2003. Recent Changes in U.S American Banker Online. 2005. In Brief: Restaurant Group Joins Protest. May 20. www.americanbanker.com. [August 8, 2005]. American Express. 2004a. American Express and MBNA Announce Card-Issuing Alliance. Press Release January 29. www.americanexpress.com. [July 22, 2005]. ———. 2004b. American Express Announces Card Issuing Alliance with Citibank. Press Release December 13 ———. 2005a. UBS Selects American Express, Juniper Bank, and Visa to Provide Its Dual- Card Program with Consolidated Rewards for UBS Wealth Management USA Clients. Press Release April 18. www.americanexpress.com. [August 8, 2005]. ———. 2005b. American Express and USAA Announce Card-Issuing Alliance. Press Release May 31 Bank of America. 2005. Bank of America to Acquire MBNA. Press Release June 30. www.bankofamerica.com. [August 8, 2005]. Capital One. 2005. Capital One to Acquire Hibernia Corporation for $5.3 Billion in Stock and Cash Chakravorti, Sujit. 2003. Theory of Credit Card Networks: A Survey of the Literature. Day, Kathleen, and Caroline E. Mayer. 2005. Credit Card Penalties, Fees Bury Debtors. Digital Transactions. 2005. New Merchant Group Forms to Win Regulatory Relief on Interchange. www.digitaltransactions.net. [August 3, 2005]. Diners Club. 2004. Diners Club and MasterCard Finalize Groundbreaking Alliance. Press Release September 28 Discover Financial. 2004. Pulse EFT Association to Merge with Discover Financial Services. Press Release November 15. www.discovercard.com. [July 22, 2005]. Evans, David. 2002. The Antitrust Economics of Two-sided Markets. AEI-Brookings Joint Center for Regulatory Studies Evans, David S., and Richard Schmalensee. 2005. Paying with Plastic. Massachusetts Institute of Technology. FinanceTech. 2004. Are Merchant-Controlled Debit Networks the Next Big Thing? FinanceTech Gould, John. 2004. Credit Card Customer Acquisition Strategy. The Tower Group, Inc. Kuykendall, Lavonee, and Isabelle Lindemayer. 2005. Small Merchants File Suit over Interchange. Lieber, Ron. 2005. The Diners Club Card Tries a Comeback; After Falling into Disuse, It Vastly Expands Reach; Racking Up Airline Points Mandell, Lewis. 1990. The Credit Card Industry: A History. Twayne Publishers. Mason, Howard K. 2005. AXP: The Threat to Interchange from Retailer-Sponsored Credit Cards on the Discover Network, such as the GE-WMT MasterCard, Inc. 2004. Diners Club and MasterCard Pursue Alliance to Expand Customer Acceptance [July 20, 2005]. MasterCard International. 2005. MasterCard International Corporate Overview. Master- Card Incorporated. Schmalensee, Richard. 2001. Payment Systems and Interchange Fees. Working Paper 8256. Swartz, Daniel D. Garcia, Robert W. Hahn, and Anne Layne-Farrar. 2004. The Move toward a Cashless Society: A Closer Look at Payment Instrument Economics Visa U.S.A. Inc. 2005. Visa U.S.A Annual Report 2004. Visa U.S.A., Inc. Wal-Mart. 2005. Wal-Mart and GE Consumer Finance Plan to Issue a New Credit Card by Discover Washington Mutual. 2005. Washington Mutual to Acquire Providian Financial; Strategically Compelling Fit for Both Companies [July 22, 2005]. Wilke, John R., and Robin Sidel. 2005. Merchants Expand Credit-Card Fight; Lawsuits Claim Visa, MasterCard Collude on Fees; Could Hit Issuer Profits Wong, Regan. 2004a. The Business of Merchant Acquiring: Business Processes and Market Overview ———. 2004b. Cobranding in the U.S.: Overviews and Trends. The TowerGroup, Inc.

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