About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline

17 FDIC Banking Rev. 23 (2005)
Overview of Recent Developments in the Credit Card Industry

handle is hein.journals/fdicbnkrv17 and id is 107 raw text is: 

Overview     of Recent Deve opments

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-con-
trolled 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 advan-
tage 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  arrange-
ments and  alliances that may be a prelude to fur-
ther 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 function-
ing of credit card networks: the various kinds of
network  models, and the significance of inter-
change fees in the most complex model. Next  dis-
cussed 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 civi-
lization, the present-day credit card industry in the
United  States originated in the nineteenth centu-
ry. 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 identifi-
cation cards to their most valued customers. When
a customer presented such a card to a clerk at the
issuing establishment, the customer's creditworthi-
ness 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 limit-
ed geographic area-an  area where local mer-
chants accepted competitors' cards as proof of a
customer's creditworthiness.

* 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 Cub is a very small participant.

FDIC BAI~wo Riiv~iw                               23                              2005, VOLUME 17, No. S


2 3

2005, VoLumE 17, No. 3

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.

Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Contact us for annual subscription options:

Already a HeinOnline Subscriber?

profiles profiles most