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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 today. 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 FDIC BAN1EMVG REvlay 2 3 2005, VoLumE 17, No. 3