Large businesses like Sears said no. They saw Bank of America’s card as a competitor to their own and saw no reason to pay the 6% transaction fee the bank demanded.
Corner stores, though, loved the idea. “When I explained the concept of our credit card” to a drug store owner, one alum of the drop told Nocera, “the man almost knelt down and kissed my feet.” The man
cards were invented, so too was credit card fraud. Delinquency rates were 18% higher than expected, and Bank of America, whose chief pusher of credit cards naively expected everyone to pay on time, struggled to collect payments from customers.
When Bank of America later did a drop in Los Angeles, its staff put together a list of customers who should not receive a credit card, and then accidentally sent everyone on that list a card. Similar chaos marred most every drop.
Other changes helped make credit cards more universal. To get large chains like J.C. Penney to accept credit cards, banks dropped credit card fees to as low as 3%. Bank of America also began franchising its BankAmericard to banks around the country, which issued Bank of America cards to their customers. In response, other banks created competing credit card networks.
By 1970, the networks had consolidated into two dominant cards. They were later renamed Visa and MasterCard.
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Before Visa became Visa and MasterCard became MasterCard, credit cards were increasingly accepted and used. But their future looked in doubt. Banks had spent or lost hundreds of millions of dollars on credit card drops, advertisements, and fraudulent purchases. Many bankers doubted they could ever recoup their investment.
Bank of America’s credit card network suffered from two related problems.
The first was that its interchange system—the way banks settled their accounts, since customers and stores often had different banks—was a mess. As Nocera writes in A Piece of the Action , each bank had to mail letters to thousands of other banks each day to ask for payment. It was a slow, burdensome process made worse by the fact that banks cheated each other. Banks argued over who should pay for fraudulent purchases, paid other banks late to inflate their balance s
heets, or lied about the rates they charged merchants to underpay other banks.
The second was that the credit card’s main selling point—convenience—rang hollow. When customers pulled out a credit card in stores, it could be a long wait. Nocera explains :
The merchant had to call his bank, and while he was put on hold, his bank would make a long distance call to the bank that had issued the credit card, and while it was put on hold, the clerk on the other end of the line would pull out a fat printout of names and numbers and look up the customer’s balance… And that was when the system was operatingsmoothly .
The solution was Visa, an organization originally name
d National BankAmericard Inc. ,which the banks in the BankAmericard network created to run the interchange system. Visa would be an honest broker that ensured each bank dealt with the others fairly. It would also make both the interchange system and the process of using a credit card more efficient.
The banks chose a man named Dee Hock to head Visa. Nocera describes Hock as a man who screamed and bullied to get his way, y
et who inspired employees to feel that they were changing the world. To contemporary ears, Hock sounds like a Bitcoin advocate. While the banks just wanted Hock to get their system running smoothly, Hock saw himself
as creating the future of money. When challenged on this, he’d define money as a “medium of exchange” and explain how money had evolved from shells to paper currency—and now to credit cards.
Under Hock, Visa computerized the credit card system. This made managing credit card transactions much easier and profitable for banks, and it sped up the process of paying by credit card. A credit card transaction still involved multiple banks and intermediaries communicating back and forth, but once computers started doing the work, in 1973, it took less than a minute. There were no more phone calls to ask a clerk to look up a credit limit. It felt like magic.
Visa, along with its main competitor MasterCard, also introduced debit cards in the mid-1970s, as ATMs became common. By the 1980s, credit cards were wildly profitable, and Visa and MasterCard expanded overseas. They signed up banks and stores and advertised globally. Eventually customers all over the world knew the names Visa and MasterCard, and they could pay with Visa or MasterCard.
Credit cards had become a universal wallet.
The Transaction Fees are too Damn High
Today, store owners no longer want to kiss the feet of people who work on credit cards.
Sixty yea
Today, the average credit card transaction fee in the United States is roughly 2% —and significantly more for online stores.
That’s not necessarily how much Safeway gives up when you buy your groceries. Each credit card network has dozens of potential rates that range from under 1% to more than 5%.
And yet, decades later, credit card fees remain almost as high as they were when banks wooed large department stores in the 1970s.
The result is that—in an age when dozens
of free services allow you to instantly send money to friends—retailers pay dearly to accept credit cards.
Banks, Visa, MasterCard, American Express, and other companies that profit from credit card transactions say that the fees reflect the cost of a valuable service.
Store owners and merchants, however, say they simply can’t risk not accepting a major brand of credit card, which keeps fees outrageously high. “Just two companies, Visa and Mastercard, so dominate the business of processing debit- and credit-card payments,” Lyle Beckwith of the National Association of Convenience Stores has written , “that – without competition – they have price-fixed these swipe fees at staggeringly high levels.”
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