David Evans author QA
A post-plastic revolution is under way toward virtual payments
Every time you make a purchase with a payment card, you engage in a human activity that dates back more than 2,500 years, when a metal token representing stored value proved far more convenient for exchange than a two-ton ox.
It took a couple millennia before checks (short for "bill of exchange") made the exchange of large sums of money more convenient.
In our lifetime alone, we are experiencing not one but two payment revolutions, from paper to plastic and from plastic to mobile-enabled "virtual" payment.
|David S. Evans, author,
'Paying with Plastic'
In his book "Paying with Plastic: The Digital Revolution in Buying and Borrowing," author and economist David S. Evans places credit cards in an historic context, and then looks ahead to see where the industry is headed. The rise of mobile devices, he argues, is likely to be a huge game-changer, with the Internet turning into the pathway for many, if not most, transactions.
In "Paying with Plastic: The Digital Revolution in Buying and Borrowing," author and economist David S. Evans not only places the credit card in its historical context, but examines the intricate workings of the card industry and how it sold its two constituencies, bankers and consumers, on the idea.
CreditCards.com spoke with Evans about the current state of the card payment industry, MasterCard and Visa going public, the merits of the Credit CARD Act of 2009 and where iPhone applications might take us next.
CreditCards.com: As you observe, one of the things that distinguish credit cards is the two-sided nature of the industry, where consumers and merchants both have to participate to make it work. Is that unusual?
David Evans: There are actually a lot of these two-sided models around; it's just that people have just now started to realize the commonality between the payment card industry and other two-sided businesses. The credit card model is the same model as Google is in search, where Google is selling simultaneously to people who are getting search services for free and selling to advertisers who want access to those people. It's the same as the iPhone, where Apple has people using the iPhone and, on the other hand, it has application developers that want access to those users. They are more common than you might think.
CreditCards.com: Did that two-sided model always prevail in the card industry?
Evans: In the early days in the history of credit cards, once Diners Club paved the way, it became pretty clear to most people how this business was actually going to work. Pretty much everyone has copied the Diners Club model from the beginning. There were a few merchant groups in the 1950s that thought they would start their own systems to avoid having to pay the fee, but those failed. Since then, everyone has adopted the model where the consumer really doesn't pay much to use cards and the merchant ends up paying the cost of the card system.
CreditCards.com: Was there something inherent in this system that led to the abuses recently addressed by the Credit CARD Act?
Evans: These were the kinds of abuses you often see in an industry that is intensely competitive. You had these issuers that are struggling to figure out how to make money and a bunch of them were just overly creative in designing ways to extract money from the consumer, and did so in ways that ticked off consumers. And they got consumers so ticked off that it provided an opening in Washington to start thinking about legislation.
Whenever Congress decides to legislate on something, it fixes some things but in the course of doing that, it probably creates some problems, too. That's kind of what you have with the CARD Act; some things get fixed and then a bunch of other things get broken.
|-- Author David S. Evans
CreditCards.com: Did Congress get it right?
Evans: There really were legitimate abuses that people were concerned about. Whether legislation was needed or not is debatable. There are a bunch of other practices that the financial institutions engage in that I think were simply misunderstood by Congress. Whenever Congress decides to legislate on something, it fixes some things, but in the course of doing that, it probably creates some problems, too. That's kind of what you have with the CARD Act; some things get fixed and then a bunch of other things get broken.
CreditCards.com: You write at length about MasterCard and Visa going public in 2006 and 2008, respectively. What was the significance for consumers?
Evans: It was absolutely revolutionary. We haven't entirely seen the consequences of that yet, but it has completely changed the payment cards industry. Probably the most exciting thing is, Visa and MasterCard are becoming much more innovative and exciting companies than they used to be, and they have to be that way because they're now publicly traded companies that need to show shareholders that they're growing. You see that tangibly in both organizations in that there has been a significant change in management. They recognized that they really had to shake things up in order to turn those into modern corporations. Up until they did the IPO, they were institutions that were ultimately owned by banks, which are not generally regarded as the most innovative entities in the economy. Unleashing MasterCard and Visa from them was an interesting thing to do.
CreditCards.com: Is it going too far to say that the IPOs gave the two major card companies a social conscience?
Evans: I think they were always very sensitive to their public images. I think the difference now is, they are untied from banks, which gave both organizations the opportunity to distance themselves from a lot of the bad stuff that was going on in the banking sector. The interesting thing is, during the financial crisis, even though they used to be owned by the banks, people really didn't drag MasterCard or Visa into the firestorm. Nor should they have.
If you go to a store five years from now, my guess is their point-of-sale terminal is going to have some connection to the Internet.
|-- Author David S. Evans
CreditCards.com: Mobile seems to have suddenly revolutionized payment yet again. What's your take on the future?
Evans: It's a combination of mobile and the fact that pretty much all devices will relatively soon be connected to the Internet. The iPad can be used as a point-of-sale terminal, either through wireless connectivity through a WiFi network or wirelessly over AT&T. The importance of that is, these phones and devices are all going to be connected to the Internet and a lot of them are devices that consumers can carry around with them. If you go to a store five years from now, my guess is their point-of-sale terminal is going to have some connection to the Internet.
CreditCards.com: Much to the delight of merchants, who have been fighting expensive flavor-of-the-month terminal upgrades for years.
Evans: Sure. Once it's all Internet-based, you don't have to worry about upgrading your terminal all the time; you just upgrade the software.
CreditCards.com: Will mobile lead to further consolidation in the payments industry? Or is it likely to enable new players to participate?
Evans: I see that as two different issues. There may be consolidation for a whole bunch of different reasons, but what mobile and Internet connectivity does is present the opportunity for certain players to expand and new players to come in.
Take something like PayPal. It's an online payment system and people in the industry kind of treat it as, well, it's over here and that's what people do when they're online -- and that's just a small fraction of transactions, so let's not be too concerned about PayPal. But what we're seeing now, as more and more devices become connected to the Internet, is that everything is now online, so consequently, PayPal then becomes a viable payment option in situations that we're currently thinking of as being offline. We're already beginning to see that happen where PayPal is migrating into environments that were considered to be offline environments.
CreditCards.com: Should consumers be concerned about the security of their transactions in an increasingly mobile environment?
Evans: I think we're going to be able to foresee most of the threats, but it is stuff that obviously people are going to have to pay a lot of attention to. The need for security is going to increase, but I don't see that as an insurmountable problem. It's just something that people are going to need to worry about and do.
See related: Guide to the Credit CARD Act of 2009, The history of credit cards, Glossary of common credit card terms
Published: June 16, 2010