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Paying with Plastic

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Paying with Plastic

The Digital Revolution in Buying and Borrowing

MIT Press,

15 min read
10 take-aways
Audio & text

What's inside?

That credit card in your pocket makes money move around the world, but did you ever wonder exactly how it works?

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

In this history of payment cards, David S. Evans and Richard Schmalensee provide an amazingly lucid account of a couple of unusual business models: the "two-sided platform," which in the use of payment cards means walking a tightrope between the interests of merchants and consumers; and the "co-opetitive," in which the bank members of MasterCard and Visa cooperate in developing industry practices while competing for business. The authors, who are both former Visa consultants, sound like your favorite college professors - up to date and extremely sophisticated, yet friendly and anecdotal (at one point, they describe a Shell gas station near MIT to make a point about competition among cards). They typically begin chapters with easily understood notions from which they methodically build complex structures of ideas and information. Another virtue of the book is its concreteness - although that occasionally devolves into repetitiveness - starting with an explanation involving electronic signals and following the paper path of what happens when you hand your credit, debit or charge card to a cashier. The authors even consider the design and manufacture of the cards themselves. getAbstract.com recommends this book as essential reading for those in the banking or payment card industries; and it’s not a bad idea for card users to read it - which these days means you...and just about everyone else.

Summary

How the Cards Work

Payment cards come in three varieties: charge cards, which must be paid in full each month; credit cards, which enable the holder to run up a balance; and debit cards, where payment is withdrawn directly from the holder’s bank account. When you swipe a payment card through a card reader to buy something, you instigate a number of electronic messages that go back and forth instantly among the merchant; the credit card company; the "acquirer," which is the bank that handles the merchant’s card business; and the "issuer," which is the institution that gave you your card. Once this process determines that you have enough money or enough in your credit line to cover the expense, the charge is approved and you get your receipt. To receive payment, the merchant contacts the acquirer, which contacts the credit card company, which contacts your issuer, which charges your account. The acquirer charges the merchant a "merchant discount" fee for its services. The acquirer then must pay an "interchange fee" to the issuer.

This system has bloomed since 1949, when businessman Frank McNamara conceived of the Diners Club, the first "general purpose payment card." ...

About the Authors

David. S. Evans is a consultant with LECG Europe. An expert on the economics of high-technology and platform-based businesses, he is the author of four books and more than 70 journal articles as well as many newspaper opinion pieces. Richard Schmalensee is professor of economics and management at the Massachusetts Institute of Technology and dean of the MIT Sloan School of Management. He was a member of the President’s Council of Economic Advisers from 1989 through 1991. Visa has employed Evans and Schmalensee as consultants on antitrust lawsuits since 1991.

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