The Hindu Business Line : On the fourth innovation in economic life

DO you know that between 1992 and 2001, Visa cardholders charged $3.6 trillion on their credit cards? Or that during the same period, Visa issuers had to write off $114 billion as a result of people not paying their bills? The loss was "three cents on every dollar charged," inform David S. Evans and Richard Schmalensee in Paying with Plastic, the second edition of which is out from The MIT Press (http://mitpress.mit.edu). The book is about payment cards — be they credit, debit or charge — that have "quietly revolutionised how we pay for goods and services," and also about the stories behind the complex industry.

Such as, how the entrepreneurs had to first solve the classic `chicken-and-egg' problem: "Consumers do not want cards that merchants do not take, and merchants do not want cards that consumers do not have." A `two-sided platform market' in economics lingo, explain the authors. It was in 1950 that Frank McNamara started a small platform by giving some cards "to a few hundred people in Manhattan and talked some local restaurants into paying his company 7 per cent of the meal tab billed to the Diners Club card." Now, Visa credit or debit card is accepted in 300 countries at more than 21 million merchants, say the authors, outlining the growth of plastic acceptance.

"Humankind has seen only four major innovations in the most routine aspect of economic life — how we transact with one another," write David and Richard. First was the switch from barter to coin around 700 BCE. Then came cheques by the Venetians in the twelfth century. Five centuries later, paper money took over. And now it's the turn of the payment card. A chapter titled `From seashells to electrons' traces the evolution.

Ever thought if the place from where credit card bill comes from has significance? In the US, for example, after "the 1978 Marquette decision allowed credit card issuers to get around state interest rate caps by issuing the cards in states without interest rate caps to consumers in states with interest rate caps," it was Delaware that rolled out the welcome mat for issuers. A story that should enthuse our States into a card race?

China has 270 million cards issued, while the tally in India is only six million. These are countries where issuers see a big potential. With the Indian consumer confidence rising, as the recent MasterCard survey announces, big industry players see a leapfrogging of demand. "Unencumbered by past investments in card terminals and cards, card systems in both China and India are exploring the possibility of moving rapidly to smart cards rather than using magnetic stripe technology," observe the authors.

Gradually cards eat into other ways of financing purchases — such as instalments, store credit and so on — because man will never cease to borrow, despite Shakespeare's exhortation in Hamlet: "Neither a borrower nor a lender be; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry." Borrowing is an ancient habit to smooth the timing of income and consumption over one's lifetime.

It is not only borrowing that ends in sorrowing, as Benjamin Franklin warned; there are sorrows of lending too, to overcome which issuers use credit-scoring models. The one developed by Fair, Isaac and Co is the most widely used system in the banking industry, though there are wackier models that track rent and utility payments to determine your creditworthiness.

In developed countries, where the market for issuing cards to persons with unblemished credit histories has become saturated, "aggressive issuers have been able to expand their card operations by issuing to customers with problematic credit histories," and they reap higher fees in return. A development that cannot be ignored is PayPal, "the only success story among a flood of new payment systems that started during the dotcom boom." Its killer app was to provide payment for eBay, P2P short for peer-to-peer, or buyer to seller.

"Whether you think of payment cards as pieces of plastic, small computer platforms, or just sequences of numbers in banks' computers, they truly are much more than money," declare the authors in conclusion. Yet, they don't rule out the possibility of a major "discontinuous change" any time. Perhaps that may be to a destination, "credit infinite, highly beloved," as in The Comedy of Errors.

A book on plastic worth paying cash for.

BookMark@thehindu.co.in

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On the fourth innovation in economic life