Credit Cards & Smart Cards - Darkside
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Transcript of Credit Cards & Smart Cards - Darkside
CREDIT CARDS & SMART CARDS
(the devil is in the details)
CREDIT CARDS
• First Bankcard introduced in 1951 by Franklin National Bank, Long Island
• Revolving card introduced in 1958: by many retail stores: Sears, JC Penneys, etc.
• Types of Cards:– (1) 2-Party Card: oil, retail stores– (2) Bankcard: general purpose (initially all
banks, now many companies)
Credit Cards
• USERS:– (1) Convenience Users (20-30%)– (2) Borrowers (70-80%)
• MARKET– U.S. – over 10,000 card issuers (25% banks)– U.S. – over 300 million VISA cards and
another 300 million worldwide– Credit card receivables over 600B worldwide
Credit Cards
• U.S. – over 750,000 secured credit cards in addition
• Pricing: unregulated– 1978 Supreme Court Decision “Marquette
National Bank v. First of Omaha – this eliminated price regulations, only subject to state usury laws in which credit card subsidiary is located (most popular: South Dakota, Delaware)
Credit Cards
• Credit card receivables can be bundled and sold via securitization process (uniform pool which is very predictable)
• ASIDE - 2 Fallacies– (1) minimum payment– (2) credit card limit
Credit Cards
• Inspite of many buyers/sellers, credit card interest rates remain high
• Some non-price competition: airline miles, dollars for cars, rebates
• Merchant fees have fallen: originally 3% and now down to 1-1.5%
Credit Cards
• 3 Explanations for persistently high rates:
• (1) Search/switch costs
• (2) customer irrationality
• (3) Adverse selection– Ackerlof (1970) “market for lemons”– Received Nobel Prize in Economics
None of explanations really convincing!
SMART CARDS
• Smart Card is a card with a computer chip (as opposed to magnetic strip credit card)
• First Chipcard introduced in France in 1974 “carte á memoire”
• In late 1990s: wave of the future• Today: used in Hong Kong, France,
Germany but generally for transportation, phone
Smart Card
• Smart Card potential Use:– (1) Storage: medical information, financial
information, personal information (privacy issues!)
– (2) Money: currency exchange, parking meters, subway use, etc.
– (3) Access: phone, internet, databases
Smart Card
• For Smart Cards to work, need 2 things:
• (1) Smart Card Readers : 25000 smart readers compared to over 25 million magnetic strip readers
• (2) Cheap Card: magnetic strip card costs between 10-50 cents whereas smart card costs between $1-20
Smart Card
• Smart Card: standardized contacts on front of card replace/supplement magnetic strip
• Some require contact with card and pins in reader
• Some use contactless laser technology (mostly for transit or quick use)
Smart Card
• In US tested in late 1990s:
• Tested in Atlanta during Olympics
• Tested in NYC by Citibank
• Tested in Milwaukee foodstores
• Nissan – cars with a smart card
• Utah – driver license with card
Smart Card
• Probably not widely used in U.S. because of (1) cost and (2) get people to change
• Smart Card producers: Gemplus, Schlumberger, Solaic
• Silicon made by: Motorola, Seimens, SGS-Thompson
• About 2 dozen companies working on smart card readers