CREDIT CARDS & SMART CARDS

(the devil is in the details)

CREDIT CARDS

• First Bankcard introduced in 1951 by Franklin National Bank, Long Island

• Revolving card introduced in 1958: by many retail stores: Sears, JC Penneys, etc.

• Types of Cards:– (1) 2-Party Card: oil, retail stores– (2) Bankcard: general purpose (initially all

banks, now many companies)

Credit Cards

• USERS:– (1) Convenience Users (20-30%)– (2) Borrowers (70-80%)

• MARKET– U.S. – over 10,000 card issuers (25% banks)– U.S. – over 300 million VISA cards and

another 300 million worldwide– Credit card receivables over 600B worldwide

Credit Cards

• U.S. – over 750,000 secured credit cards in addition

• Pricing: unregulated– 1978 Supreme Court Decision “Marquette

National Bank v. First of Omaha – this eliminated price regulations, only subject to state usury laws in which credit card subsidiary is located (most popular: South Dakota, Delaware)

Credit Cards

• Credit card receivables can be bundled and sold via securitization process (uniform pool which is very predictable)

• ASIDE - 2 Fallacies– (1) minimum payment– (2) credit card limit

Credit Cards

• Inspite of many buyers/sellers, credit card interest rates remain high

• Some non-price competition: airline miles, dollars for cars, rebates

• Merchant fees have fallen: originally 3% and now down to 1-1.5%

Credit Cards

• 3 Explanations for persistently high rates:

• (1) Search/switch costs

• (2) customer irrationality

• (3) Adverse selection– Ackerlof (1970) “market for lemons”– Received Nobel Prize in Economics

None of explanations really convincing!

SMART CARDS

• Smart Card is a card with a computer chip (as opposed to magnetic strip credit card)

• First Chipcard introduced in France in 1974 “carte á memoire”

• In late 1990s: wave of the future• Today: used in Hong Kong, France,

Germany but generally for transportation, phone

Smart Card

• Smart Card potential Use:– (1) Storage: medical information, financial

information, personal information (privacy issues!)

– (2) Money: currency exchange, parking meters, subway use, etc.

– (3) Access: phone, internet, databases

Smart Card

• For Smart Cards to work, need 2 things:

• (1) Smart Card Readers : 25000 smart readers compared to over 25 million magnetic strip readers

• (2) Cheap Card: magnetic strip card costs between 10-50 cents whereas smart card costs between $1-20

Smart Card

• Smart Card: standardized contacts on front of card replace/supplement magnetic strip

• Some require contact with card and pins in reader

• Some use contactless laser technology (mostly for transit or quick use)

Smart Card

• In US tested in late 1990s:

• Tested in Atlanta during Olympics

• Tested in NYC by Citibank

• Tested in Milwaukee foodstores

• Nissan – cars with a smart card

• Utah – driver license with card

Smart Card

• Probably not widely used in U.S. because of (1) cost and (2) get people to change

• Smart Card producers: Gemplus, Schlumberger, Solaic

• Silicon made by: Motorola, Seimens, SGS-Thompson

• About 2 dozen companies working on smart card readers