A brief history of credit cards | Hacker News Reader

A brief history of credit cards

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There is a great 99% Invisible episode on the early days of credit cards: http://99percentinvisible.org/episode/the-fresno-drop/

Is there anytime similar about the 1-2.5% fee merchants have to pay to utilize this service? I'd bet Visa, MasterCard, and AMEX are making a fortune off all these transactions.

Most of the fee goes to the issuer, the part Visa/MasterCard earn is quite small.

AMEX of course earns a bit more due to the nature of a three party scheme.

Edit: 0.02% - 0.05% of the transaction is usually the scheme fee that goes to Visa/MasterCard.

> Is there anytime similar about the 1-2.5% fee merchants have to pay to utilize this service? I'd bet Visa, MasterCard, and AMEX are making a fortune off all these transactions.

My current primary credit card (Alliant's CashBack card) gives me 2.5% cashback on each credit card transaction (3% cashback in the first year).

I'd assume that Alliant makes money from customers who aren't paying the complete balance off each month, but with 2.5% cashback there's not a lot of room to make money from transaction fees.

This comment shows how little people really understand about the business model of credit card companies and their relationships with merchant banks.

> but with 2.5% cashback there's not a lot of room to make money from transaction fees.

The cash back is not instantaneous. It does not happen in the cycle in which the consumer buys something; it is pushed out as a short-term liability by the banks, contingent upon Visa/MC doing all the math and allocating the pieces from the top-down.

In the short term, all these microaccounts of customers "cashback savings" are accumulated as points or whatever to the consumer, but they are real cash assets for the holders. Taken in aggregate they equal huge long-term cash assets (for Visa/MC). Just like everything else in the credit card world, it adds up quickly across hundreds of millions of customers.

That leverage is why Visa has been untouchable and why MC has virtually no incentive to make it compete. Merchant banks are already so fragmented (and in many instances actually competing with each other) that the lockin is something they just accept.

This is why the collusion to set fees at 2.9 percent (or whatever) among payments processors is so evil: Visa and MC ransom the full fees for the short term to make the banks/merchants beholden to their terms in perpetuity. Cash back rewards are not a necessary part of a credit transaction, but they're being baked in to hike the "commissions" of the middlemen.

This industry is just like the Realtor industry: full of corrupt and exploitative groups of individuals implicitly colluding with each other to maximize their collective rapaciousness.

you wrote: >> This comment shows how little people really understand about the business model of credit card companies and their relationships with merchant banks.

thanks for enlightening the world

They may have to pay you 2.5% cash back (but through the usage of their card), however the neighbor next door is paying up to 25% on their rolling balance.

Multiply that by everyone else in your neighborhood with a balance.

American Express and Diner's Club still issue charge cards which have to be paid off in full at the end of each billing cycle.

American Express is often also the issuing bank for a lot of its cards which is why it charges more to merchants who accept its cards than Visa and MasterCard do.

And often it is the acquiring bank too - it has historically insisted that merchants send transactions directly to them.

And their money comes from annual fees, instead. Though they do offer Pay Over Time options as well.

After watching the Video, What is the purpose of Chase in the example?

Me ( Clients ) > BoA ( Issuers ) > Visa > Chase ( Acquiring Bank ) > Merchant.

And how does Apply Pay / Samsung Pay / WePay / AliPay fits into this?

The acquiring bank provides merchants with an API to process payments, both their own cards and other banks, the latter of which are processed through the networks of schemes like Visa. They also settle with the merchants.

WePay/Alipay if they are processing card payments on behalf of users could be considered merchants (or merchant aggregators). However Wepay/Alipay stored-value wallets are different. They are technically issuers (ie your bank), but typically not connected to this particular type of system - though they could be quite easily.

Apple-pay & Samsung-pay are a little more complicated. They act as pseduo-issuers through a partner thats connected to the above system but outside the scope of the video. When you make a payment with apple-pay, they issue you a custom card number which passes through the terminal at POS and the system in the video to the partner, who then matches it with the actual issuer of your bank, and passes it on through for processing.

Most prosaically, Chase moves money to the merchant, so that BoA doesn't have to move money to someone who is not their customer and who they have no direct relationship with. They just pay Chase a mindbogglingly large amount of money every day and trust Chase to sort out the logistics. (Back in the day, this would be easy for Chase to do because the merchant banked at Chase, but this is very not guaranteed anymore.)

Chase (or a party related to Chase) also had the job of making sure this merchant got signed up to accept Visa cards. They had the boots-on-the-ground salesforce to make it happen.

Chase also performed underwriting of the burrito shop to determine whether they are creditworthy, because the purchaser is not the only person being extended credit here -- Chase has a more-than-notional exposure to the merchant's health as a business as well. Why? If you call BoA and say you didn't get your burrito, you will get your money back. BoA is willing to give you your money back, very quickly, because Chase is always good for it. Chase will generally attempt to recoup your money from the burrito shop, but in the case where you are dissatisfied with your burrito because you didn't receive it because the burrito shop went out of business, Chase (and not BoA or Visa, importantly) takes that loss on the chin.

(This is less relevant for burritos sold in person, because proprietors very rarely drop dead after swiping cards but before handing over the burrito, but is far more relevant for more complicated business models.)

I'm 35. I felt old talking about floppies and cassettes a few days ago. But I'm still young enough to not have known swipe cards :)

I'm mildly curious as to where you live? I thought the UK was one of the first countries to get EMV/Chip and Pin. I'm 32 and I had a swipe before a Chip and Pin card. The earliest worldwide public trials and rollouts look to be ~ 2003, that would mean you didn't have a bank account with a card until you were ~21? Is that normal where you come from? I think I had my first swipe ~16, second swipe ~18, the bank switched me to Chip and Pin roughly a year later if my memory serves... which it often doesn't ;-)

Not OP, but I'm 32, French, and I never even saw my parents use a swipe card. My earliest memories of credit cards are chip and pin (and I still remember their code). Apparently this started in 1992 here, though I guess it wasn't technically "credit cards" but the national debit cards system.

"though I guess it wasn't technically "credit cards" but the national debit cards system"

Well yeah sure, but we're talking credit cards here. Either way, many parts of Europe used swipe-style debit cards (with pin) until a few years ago; I'm pretty sure I used them in France too, < 10 years ago (although I can't remember for sure).

I don't think credit cards are widely used outside US - most use debit.

I was not trying to talk other countries down. For what it's worth you can't survive in France without a checkbook: it's the only way to pay for some transactions. Sad.

Also the debit cards we're talking about do both credit and debit. Not sure they disqualify.

IIRC France had an earlier chip system called something like "B0 Prime" or "B Zero Prime". It predates the EMV cards that came in mid-late 90s.

Maybe Australia or NZ - they're a bit quicker to roll out new-ish card tech than UK I think

I'm a 24 year old Australian and I certainly knew swipe cards when I got my first bank account...

Like a few others who replied, I grew up in France. Technically debit cards indeed. Not sure card which do exclusively credit are a thing there.

Credit cards are totally unnecessary in the age of online banking. Why does it not die already?

Perhaps part of it is because it's such a heavily regulated industry that change takes a while/is hard to initiate.

Correct me if I am wrong but I thought the US already had (creditcardless) internet banking. It seems credit card inertia is hard to overcome. What is more frustrating is "trends" from the US keep washing up on our shores like a bad dream and upset any advances we have made. Case in point: Netflix India does not accept anything else other than credit cards. A similar phenomena can be observed in the healthcare industry. India is already moving towards the way (IMO) the broken US healthcare system works. It gives me nightmares. I hope the Indian government clamps down heavily on this unscrupulousness.

Credit cards provide protection that you don't get with debit payments:

  - Fraud protection and limited liability
  - Ability to charge back a transaction if the product is not delivered, if you have a dispute with the seller, or if the seller goes bankrupt.
  - For the seller, guaranteed payment even if the customer is a bad credit risk.

Plus of course flexible payment options:

  - Delay repayment interest-free up to typically 45 days
  - Delay repayment over longer periods, with interest charged

And potentially additional benefits:

  - Rewards and air miles
  - Extended purchase warranties
  - etc

All these 'value added' services have a cost to deliver (e.g. fraud losses ~20bp). They are funded by a complex combination of upfront product/rewards fees, interchange fees paid by the merchant to their bank (the acquiring bank) and passed back to the customer's bank (issuing bank), penalty fees for late payments and going overlimit, and the customer. A slice also goes back to the card scheme, Visa/MasterCard. Customers may have to pay their bank for the product.

The size of these cash flows varies greatly by country and product, influenced by marketing, competition and regulatory arbitrage considerations.

(Disclosure: I used to run Operations/Portfolio Management/Strategy for credit card businesses, was involved in many product launches, introduction of EMV chip cards, commercial negotiations with card schemes, etc)

It’s really more about payment cards (debit, credit) in general, not credit per se.

Where exactly does Apple Pay fit in this chain? Do they replace the card issuer or are they a new link between the acquiring bank and the issuer?

Wouldn't Apple Pay just be more of a 6th intermediary that just obfuscates the actual payment card from certain parties in that chain?

Apple Pay operates using network tokenization, which is part of the EMV standard. This works in two parts.

When you add a card to Apple Pay, your device checks if the bank can use Apple Pay, and gets a device token from your bank, along with some cryptographic data. The original card number your typed in is discarded; it is replaced by the device token, which looks like a credit card number. All this data is stored in the device’s Secure Enclave. It’s important to note that Apple does not store card data, and doesn’t even take part in the transaction flow.

When you pay with Apple Pay, your device generates a network token. In practice, this network token is your device token, which is sent along with a cryptographic signature, the cryptogram (generated using the data previously stored into the Secure Enclave). This data fits into traditional card fields (name/number/expiration date/cvv), plus an additional field for the cryptogram. The token is transmitted through the merchant to their gateway/acquirer, which sends passes it to the payment network (Visa/Mastercard). The network checks the cryptogram, does a reverse lookup of the device token and associates it with the real card number. The transaction proceeds like a normal transaction using the real card number.

https://www.emvco.com/wp-content/uploads/documents/EMVCo_Pay... : The official tokenization specification. Page 71 has a good diagram of the flow (the Token Service Providers are usually the networks themselves).

https://www.apple.com/business/docs/iOS_Security_Guide.pdf : The iOS Security Guide, which has interesting information in the Apple Pay section (page 34).

IIRC, Android Pay works using the same standard, with Google storing the device tokens in the cloud and generating network tokens on the behalf of the user (not all Android devices have secure elements). May be inaccurate, I haven’t had the opportunity to implement it at the payment provider level (yet!).

From what you write and from the diagram in that pdf, it's the issuer bank that creates the device token, but then it's the network that does the reverse lookup. Do both the issuer bank and the network know the mapping between device tokens and cards?

Yes. The network needs of course to map tokens back to PANs (Primary Account Numbers). Tokens are included in authorization requests to issuing banks, in addition to the actual payment details.

Also, both issuers and networks need to be able to suspend and unlink tokens in case of fraud or if the end user loses their device, which implies that they know individual device tokens.

Wait a second. Android Pay doesn't work offline then?

It seems that Android devices are allowed to store a few pre-generated tokens to use offline for a limited duration. I don't have a first-party source for that however.

I have never been in favor of credits cards myself and I tell everyone to avoid getting one as much as I can. It's just a well that keeps going deeper and pull you into more debt.

Do you think your advice generalizes though? Do you really think most people who have a credit card go into debt because of it?

The whole idea of a credit card is that you buy something by borrowing money, because you don't have the money right now. If you do have the money, use a debit card.

However, I'm not completely against debt. I think debt can be managed and healthy under the right circumstances, and as long as it's used for stuff that you need and not stuff you want. If you truly need the stuff, the time and other purchases the debt gave you (such as a student loan to get a degree for your job, or a mortgage to live close your job) will pay for themselves.

I don't think you answered my question. I'm trying to say that people use credit cards even when they have the money and aren't going into any kind of debt.

For me, credit cards — as opposed to debit cards in their various forms — are exceptionally useful for their benefits (e.g. transaction liability, insurances, rewards schemes) which don't require you to ever pay a cent of interest.

I have various credit cards and all of them are set up to automatically pay themselves off on the statement due date. I've not paid a cent in credit card interest in my life.

>The whole idea of a credit card is that you buy something by borrowing money, because you don't have the money right now

That's a false premise: it's cheaper to pay for something on 0% credit while the same money gathers interest than it is to buy it outright. It also ignores opportunity cost and could be applied to every form of credit from mortgages to business investment and government bonds.

Not having money, and "being good for the money" are two different things.

That's patently untrue as a blanket statement. I NEVER use my debit cards for purchases, only my credit cards. I pay all of my bills in full every month. I use my credit cards because I'm not risking the security of my primary checking account in online transactions, and also because I've collected ~ $2000 in rewards in the first half of this year alone by using my credit cards ...

According to this article, yes.

http://time.com/money/4213757/average-american-credit-card-d...

> Only 35% of credit card users don't carry a balance--they pay off their bill every month, like you're supposed to.

What percentage of those carrying a balance are living in debt though? Like even someone with perfect credit and means to pay would happily take advantage of a 0% balance transfer offer to carry a balance for a couple of years when he could pay it off fully. I would be curious what percentages of these revolving balances are due to a strict lack of funds rather than due to wanting to keep emergency cash on hand, or taking advantage of a sensible offer, or otherwise.

That said, even 35% is more than a third of the population, which should be more than enough reason to suggest you shouldn't be telling everyone you meet not to get a credit card. The consumer protection is far greater, and it's far less risky than carrying a debit card. (I would be surprised if anyone here didn't know these already, but then I'm surprised at the advice being given.)

The security from credit card is FUD. If anything, it's probably less secure:

1. Users are encouraged not to care about the security as they are insured - which means spending in dodgy online stores.

2. Magnetic stripe technology is terribly insecure.

Combine the both and you end up Americans being prime target of fraud, constantly (rightfully) scared of Eastern European fraudsters. Meanwhile people here in Europe never ever worried about it.

No, it's not FUD. First, magnetic strips are already phased out in many places and continuing to be so in even more, so I don't understand that complaint. Second, see my reply to the sister comment -- even with magnetic strips they're still safer.

What's the difference in consumer protection between a credit card and a Visa/MC debit card?

Googling should provide plenty of answers to this question, but I'll quote a couple differences here for your convenience:

1. "According to the EFTA, your potential liability for fraudulent debit card transactions is virtually unlimited. Under the FCBA, your maximum liability for fraudulent credit card transactions is $50." [1]

2. "The real difference between a debit card and a credit card when it comes to fraud is in how you get your money back. When a fraudulent transaction occurs on your credit card, you have lost no money. You can report the fraud, get a credit on your statement, and the issue will never affect your bank account. With a debit card, your bank account balance is affected from the moment the fraudulent transaction takes place. If the transactions are significant, you could experience a domino effect of financial headaches. Fraudulent charges can tie up funds so that legitimate charges are declined or cause overdrafts." [1]

3. Individual credit cards have other protections for your purchases, e.g. Citi has Price Rewind and Extended Warranty for your purchases. I haven't seen these with debit cards, and I'd be happy to hear if you know of any that do have these features. But it's icing on the cake anyway; the above are far more important.

4. A number of credit cards allow generating temporary card numbers with limited amounts or expiration dates for online purchases. I use this all the time. Again, I haven't seen any debit cards that allow this.

[1] https://www.nerdwallet.com/blog/credit-cards/credit-card-vs-...

In Australia I have seen "platinum" debit cards with 3.

2 definitely makes sense.

1 probably varies by jurisdiction, of course.

They can be really good if you're responsible. If you always pay my cards off in full, then they can be extremely beneficial.

With a debit card, somebody who gets ahold of the details might be able to drain the account that its linked to, but with my credit cards I have fairly low credit limits (like $5K) and I have absolutely no liability for fraudulent transactions so I'd not have to pay for them if my card details were stolen (luckily I've never had that happen so far).

I don't have a corporate card for my job, so I use my personal one for travelling and things like that. With the credit card I don't have to use any of my own money - work reimburses the expenses within two weeks, which is well within the interest free period of thirty days.

The rewards are pretty good - my Amex gives me frequent flyer points so I prefer that to having a corporate card. I book my own flights, hotel, etc. when I travel for work and charge it to the card instead of getting a travel agent to do (they would invoice the company) so I get the rewards.

Finally, you get a bit of a spread if you already have the money but use the credit card and take advantage of its interest free period. If I'm making a large purchase, that might be 30 extra days that money is in my savings account earning interest. Probably doesn't add up to much at the current savings rates (2.8% on my best account) but it's something!

Miss one payment and you loose years worth of your spread. Not worth the risk IMHO.

There is exactly one good use for credit cards: free purchase insurance. It used to be a requirement for online purchases but now everyone's debit cards will do this too. Still, if you buy something defective or non-delivered, and can't take action against the seller, you can take it up with the card company.

Obviously you have to always pay the card off in full at the end of the month!

There has to be a better way.

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