This series of articles will focus on the history and evolution of US payment cards from my personal perspective. I will cover this evolution from the earliest days to the present and focus on a broad range of topics from the economics to the social impacts of the business.

To tell the story properly, one has to go back to the inception of the credit card business in the U.S. While my direct experience with credit cards began in the mid-70s, I had the pleasure of working with many individuals who were around at the very beginning of the business, including Jim Eisenbath of Bankmate and Dennis Stokely of Safeway Stores. Dennis, in particular, was fond of saying words to the effect that the merchants taught the bankers how to provide consumers with credit cards, but the bankers eventually turned against their merchant/ teachers by raising fees and creating interchange. 

When I first got into the card business, it was as an issuer. My recollection is that network fees to merchant acquirers were very low, maybe a penny or two for authorizing and processing a transaction and interchange was around 1 ¼%+5 cents/ transaction. Consumer card rates ranged from 7-13% and “sin fees”, the fees charged for delinquent payments, overlimit use of the card and other consumer transgressions were similar to the fees for writing a check that exceeded the balance in the consumer’s checking account ($5-10) per check or per incidence.

The relationship between bank card issuers and merchants was much different in the early years of the card industry than it is today. Back then, banks performed the dual roles as card issuers to the Public as well as merchant card service providers (aka “acquirers”). While many banks focused on both roles, some focused almost exclusively on either card issuing or merchant servicing.

While veterans of the card industry might debate the time when cards began their metamorphosis to today’s card products, I would argue that it began in the late 70s when banks began to sell off their merchant card services to third party processors which were much more adept at keeping pace with the technological changes needed to keep up with the card business as it converted from transactions processed on paper-based systems to electronic systems. This phenomenon continues to this day, often reaching peaks corresponding to the rates of bank failures. The result is that now, banks have little interest in merchant processing and in the plight of the merchants who accept their cards. They are nearly all focused solely on card issuance.

Both merchants and cardholders are paying much higher prices today for card services. Cardholders who cannot afford to pay off their balances are feeling the greatest pain. All shoppers, including those who pay with cash and EBT recipients are helping underwrite the costs of reward programs benefiting those who pay off their card balances every month.

Today, interchange fees charged to merchants at the four largest card networks range from 1.4-3.5% and the rates charged to consumers who do not pay off their balance every month average nearly 25%. The weighted average of the interchange fees charged to merchants has been greatly increased as card-issuing banks have gradually replaced consumers’ expired cards bearing relatively low rates with new cards bearing much higher rates and by replacing consumer cards with business cards bearing much higher rates. The rates charged to consumers are particularly noteworthy as banks’ current cost of Fed funds are very similar to their costs of Fed funds in the mid-70s when consumer rates were only 7-13%!

By Mark Horwedel