Welcome back to the deep dive where we take complex
topics, strip away the noise, and deliver the
essential insights you need to be truly informed.
We're diving into something today that most of
us interact with constantly, often multiple times
a day, without ever really stopping to think
about the massive, multi -trillion dollar infrastructure
that's sitting behind it. Right. It's that rectangular
piece of plastic, or maybe sleek metal if you're
a rewards connoisseur, just sitting there in
your wallet. Exactly. And the scale of this thing
is just... It's astonishing. When we started
pulling the sources, we found that as of mid
-2018, there were over 7 .7 billion credit cards
in circulation worldwide. 7 .7 billion. And in
the United States alone. By 2020, that number
was a staggering $1 .09 billion. So, you know,
if you're a consumer in the U .S., you likely
have, on average, what, three to four cards in
play right now. Yeah, at least. And it feels
like simple convenience, you know, a digital
version of cash, but it's anything but simple.
This little piece of plastic is really the operational
interface for a complex financial machine. A
machine that connects who? Banks, merchants.
Banks, merchants, consumers, payment processors,
global regulators. It's a whole mechanism built
on algorithms, on risk assessment and fundamentally
on debt. OK, so let's unpack this. Our sources
today are dense. They cover everything from.
like depression -era metal plates all the way
to modern antitrust lawsuits and global regulatory
wars. So our mission is pretty clear. We want
to go beyond the usual usage tips to really understand
the history of this instrument, the hidden mechanics
that happen in milliseconds, and the enormous,
often invisible costs this system imposes, not
just on the user, but on society as a whole.
And I think we should start by defining the subject
right away because even the definition can be
a little confusing. We are focused today on the
revolving credit card. OK. This is the card,
you know, typically issued by a bank that allows
you to purchase things or withdraw cash on credit.
This transaction accrues debt that you, the consumer,
have to repay later. And that concept of revolving
debt, that's the key, right? That's the crucial
distinction. We need to remember this is fundamentally
different from a charge card. Exactly. Charge
cards, which, you know. Companies like Diners
Club and American Express made popular early
on. They traditionally require you to repay the
balance in full at the end of every statement.
So you get credit for a month, but you can't
carry that balance over. Right. No carrying a
balance. And both of those are completely different
from a debit card. Which is just your own money.
It's just your own money. It instantly deducts
the purchase from your checking account. No credit,
no debt. So, yeah, our focus is the system that's
built entirely around credit, the system designed
for you to potentially borrow money. It's easy
to assume the credit card is, you know, a child
of the post -war economic boom, the 1950s. Yeah.
But the idea of using some kind of token to represent
a debt. It goes way, way back, late 19th century.
That's right. Before plastic, merchants used
what were called charge coins or customer tokens.
These were small physical identifiers often made
of celluloid, copper, aluminum. Just like the
little coins. Actual metal coins, yeah. And they
were mainly issued by hotels or big department
stores to their established customers, you know,
people who had a charge account directly with
that one business. So it was really localized,
like a store loyalty card, but with actual spending
power. Exactly. The token usually had the customer's
account number on it, the merchant's logo embossed
right there. They were practical, too, often
shaped with a hole so you could keep it on a
key ring. And the point wasn't just identification.
No, it was about efficiency. When you made a
purchase, the clerk would physically use that
token to imprint the account number onto a paper
sales slip. And that dramatically cut down on
manual errors in the back office, which was,
I mean, a huge logistical headache back then.
OK, so that idea of mechanical imprinting. That
seems like a direct line to the next big leap.
Yeah. The Charga plate in 1928. The Charga plate
was an early and I think essential precursor
to the modern card. It was a little sheet metal
rectangle, maybe two and a half by one and a
quarter inches. Not quite the size we know, but
getting there. Right. Still recognizable as an
ID, like a modernized dog tag, really. It was
embossed with the customer's name, their address,
all the account details. And how did that work
in the store? Well, it used this piece of equipment.
A lot of people compare it to an old military
printing device, like an addressograph. The clerk
would place the plate into an imprintor. and
an inked ribbon would press that embossed info
onto a multi -copy paper charge slip. Ah, so
it automated the paperwork. It standardized it,
yeah. It sped up transactions immensely. It was
a staple of retail from the 30s all the way through
the late 50s. It's funny, some stores would even
keep the plate on file, and the clerk would have
to go retrieve it after verifying who you were.
So we've moved from these single -store accounts,
and now we get to the idea of consolidation,
which brings us to 1934 and the air travel card.
This was a critical moment because it wasn't
just a single store anymore. It was the first
cross merchant or a cross airline system. It
was launched by American Airlines and the Air
Transport Association. And it let passengers
buy now, pay later across multiple airlines.
Across multiple carriers, yeah. They created
a standardized numbering system that identified
both the issuer and the customer account. And
the incentive to use it must have been huge.
It was. Travelers got a 15 % discount on air
travel if they paid using this card system. That's
a serious lever for mass adoption. 15 % is massive.
It absolutely was. And the system was so successful
that by the 1940s, all the major U .S. airlines
were in on it. By 1941, the air travel card accounted
for nearly half of all airline revenues. Wow.
And that success led directly to it becoming
the first internationally valid charge card in
1948, accepted by all the members of the International
Air Transport Association, or IATA. And here
is a tiny, wonderful, historical nugget for you,
our listener. The source notes that the reason
modern UATP, that's the Universal Air Travel
Plan cards, still start with the number one.
It's a direct legacy of that original 1934 numbering
scheme, a link across nine decades of payment
tech. Amazing, isn't it? Then the general purpose
card arrives in the 50s. In 1950, Raoul Schneider
and Frank McNamara founded Diners Club. And this
was the real transition. A single card for all
sorts of different places, restaurants, shops.
Right. It consolidated the wallet. But crucially,
it started as a charge card. You had to pay it
off every month. American Express followed pretty
quickly in 1958 with its own charge card. But
the real disruption, the birth of the machine
we're talking about today, that needs the system
to pivot from monthly repayment to revolving
credit. Bunch of small banks tried and failed
to create that system. They did. This was the
famous chicken and egg problem. That phrase perfectly
captures it. It really does. Consumers wouldn't
sign up for a card that merchants didn't accept,
and merchants wouldn't buy the equipment for
a card that nobody carried. Bank of America just
blew that cycle wide open in 1958. With the launch
of the Bank of America card in Fresno, California.
And this is universally seen as the first successful
modern credit card offering revolving credit.
Why Fresno, though? Why start there specifically?
It was strategic brilliance or maybe recklessness,
depending on how you look at it. Bank of America
had incredible market penetration in Fresno.
Forty five percent of the residents were already
customers. OK, so they had a built in base. A
huge base. And to guarantee merchant adoption,
to just force a solution to that chicken and
egg problem, they made an unprecedented, really
audacious move. They sent cards unsolicited to
60 ,000 residents. All at once. Wait, they just,
they mailed active credit cards to people who
didn't ask for them. That sounds like an absolute
disaster waiting to happen. It was a monumental
disaster. It created monumental chaos. These
mass unsolicited mailings were quickly dubbed
drops in the banking world. And the financial
vetting must have been. Non -existent. The vetting
was minimal if there was any at all. Accounts
from the time are just shocking. Cards were mailed
to, and I'm quoting here, unemployable people,
drunks, narcotics addicts, and to compulsive
debtors. Oh my. The financial losses for Bank
of America in that first year alone were estimated
at over $8 million, a massive sum in 1959. That
is just a powerful illustration of the lengths
they went to to get this system off the ground.
And the public outcry, the bankruptcies. It was
so severe that these unsolicited mailings were
eventually outlawed by Congress in 1970. But
by then, the damage was done. Or the foundation
was laid. Exactly. By the time the law took full
effect, an estimated 100 million credit cards
had been dropped on the U .S. population. It
created the entrenched system we know today.
And from that chaotic start, the networks we
know today began to form. Bank AmeriCard evolved.
And in 1976, all its licensees united under the
brand we now know as Visa. Right. And to compete,
a rival group of banks established Master Charge
in 1966, which eventually became MasterCard.
And this wasn't just a U .S. thing. No, it went
global. Barclaycard launched the first credit
card outside the U .S. and the U .K. in 66. But
it's important to remember this wasn't universal.
In places like France and Japan, you know, they
had stronger cash traditions, so the adoption
of revolving credit was much slower. It gave
rise to other kinds of cashless payment systems
first. Okay, so we've covered the the tumultuous
history. Now let's drill down into the physical
card itself and that complex electronic flow
that happens the millisecond you decide to tap
to pay. First off, the card itself is highly
standardized. It conforms to a global standard,
ISO AE 7810 ID1, which dictates its precise size,
85 .60 by 53 .98 millimeters. And they're usually
plastic, but we're seeing more metal ones now.
Yeah, the metal cards really reflect their status
as a kind of luxury financial product. And the
numbers on the card, the 16 digits, they're not
random, right? There's a structure to them. Not
at all. They comply with another standard, ISO
IC... 7, 8, 12. And the first six digits are
absolutely critical. They form the bank identification
number or BININ. And the BININ tells you what?
It identifies the bank that issued the card and
the network, Visa, MasterCard, Amex, and so on.
The next nine digits are your individual account
number. And that very last digit is a simple
but essential validity check digit. To make sure
the number wasn't miskeyed or something. Precisely.
It's a simple algorithm that ensures basic integrity.
It's so interesting how some of the physical
features are just historical baggage. Like the
numbers are often still embossed, which is a
leftover from the Chargaplate era. It is. It's
a legacy from when they needed to be transferred
onto carbon paper slips. Even though we never
use those anymore, the structure just persists.
That's starting to change, right? I've seen cards
with the numbers flat on the back now. Yeah,
embossing is gradually being phased out, but
security has moved on so quickly. We went from
the magnetic stripe, which is very easy to copy.
The chip. Right, to the EMV chip. That's EuroPay
MasterCard Visa. It's a smart card tech that
generates unique codes for each transaction,
which drastically reduces physical forgery or
skimming. And now we're even seeing cards with
little keypads and fingerprint sensors built
right in. OK, now for what might be the most
confusing, but also the most essential part of
this whole deep dive, the ecosystem. When you
tap your card, you're not just talking to the
store. You're starting a conversation between,
what, at least eight distinct parties? It's an
electronic ballet. It truly is. And this complex
structure is what guarantees the security and,
more importantly, facilitates the movement of
billions of dollars across totally separate financial
institutions instantly. OK, let's break down
these eight roles. The first two are simple.
Right. Number one. The cardholder, that's you.
Number two, the merchant, the business you're
buying from. Easy enough. Then three, the card
issuing bank. This is your bank. The one that
extends you credit, sends you the bill, and most
critically bears the fraud risk and the risk
that you won't pay your debt. And number four.
Number four is the acquiring bank. This is the
merchant's bank, the institution that processes
and accepts the payment on the merchant's behalf.
So you have your bank and the store has its bank.
That's the four main players. But who sets the
rules of the game? That's number five, the card
association. This is Visa, MasterCard, American
Express. Think of them as the rulebook and the
brand. They set the transaction terms, the interchange
rates, all the standards for the other banks.
And number six. Number six is the transaction
network. This is the actual electronic pipeline
that implements the mechanics of the transfer.
It's the wires. While it's often owned by the
card association, like VisaNet, it can sometimes
be an independent third party. So. If I'm getting
this right, the card association is like the
government that sets the laws, and the transaction
network is like the postal service that securely
delivers the mail. That's a perfect analogy.
The association is governance. The network is
infrastructure. Okay. And the last two are more
behind the scenes. Very much so. Number seven
is the Independent Sales Organization, or ISO.
They basically resell the acquiring bank services
to smaller merchants. And number eight is the
affinity partner like a university or sports
team that lends its brand name to a card for
a fee. Got it. So now let's trace the money through
the interchange process. There are four steps
once you tap the card. Right. Step one is authorization.
The merchant sends your transaction details to
their acquirer. The acquirer passes the request
up to the card association, which routes it to
your issuer. And my bank checks if I have enough
credit. Exactly. It checks your validity, your
credit limit. And if it's all good, it reserves
that amount and sends an approval code all the
way back down the chain. This whole process takes
less than two seconds. Incredible. And step two.
Step two is batching. Authorized transactions
aren't settled one by one. The merchant usually
aggregates all the day's transactions into a
batch and submits it to their acquirer, usually
at the end of the day. So what happens if they
forget to submit the batch? Well, the authorization
hold on your account will eventually just expire
and your credit gets freed up. The merchant loses
the sale. Okay, then step three, clearing and
settlement. This is where the actual money moves
between the banks. This is where the card association
takes center stage. It debits the card -issuing
bank, your bank, and credits the acquiring bank,
the merchant's bank. Your bank pays the store's
bank. And finally, step four, funding. This is
where the acquiring bank pays the merchant. But
here's the essential part. It pays the merchant
the total batch amount minus the agreed upon
fees. These are the discount rates or interchange
fees, which are the lifeblood of the whole system.
And then there's the dreaded interruption to
this whole flow, the chargeback. Right. This
is when you, the cardholder, initiate a dispute.
You say, I didn't authorize this or the product
was broken. And that's a huge risk for the merchant.
A major risk and cost. Your issuer returns the
transaction to the acquirer, who then forwards
it to the merchant. And the merchant has to either
accept the loss or try to contest it with evidence.
So while your bank assumes the risk of you defaulting,
the merchant assumes the risk of disputes. It's
just a remarkable system. Layers of interconnected
risk all adjudicated in milliseconds. It's a
miracle of global finance that this chain involving
eight different parties takes less time than
it takes to unlock your phone. Now we have to
shift focus to the cardholder and really the
foundational engine of this whole multi -trillion
dollar system revolving debt. And the first gate
you have to pass is the credit limit. It's decided
based on a complex risk profile, right? Yeah.
Credit score, income, existing debt. All of it.
And the system is severely tiered. It really
concentrates lending capacity at the very top.
The divide is pretty stark, I imagine. It's huge.
Prime and super prime borrowers, so FICO scores
generally above 740, they're the most desirable
customers. Data from 2022 show that these top
tiers account for an astounding 80 % of the entire
available credit line capacity in the U .S. 80
% of over $5 trillion. Exactly. They get limits
of over $10 ,000, sometimes much, much higher.
And on the flip side, you have the subprime borrower.
Yeah. The score is below 620. And they often
start with limits as low as, say, $300 to $1
,000. They represent much higher risk, so the
system gives them the least capacity at the highest
cost. The median limit for a prime borrower was
around $7 ,100, while for subprime it was just
$1 ,500. And that high cost is enforced through
the infamous minimum payment trap. The system
is explicitly designed for a portion of the population
to become what they call revolvers. People who
carry debt from one month to the next. If you
don't pay your balance in full, you have to pay
a minimum. And the moment that deadline passes,
high interest rates kick in, sometimes compounding
daily. And that interest burden is just incredibly
lucrative. And we should also address the most
insidious danger, even if it's been regulated
now. Negative amortization. That's a critical
term. It was banned in the U .S. in 2003, but
it perfectly illustrates the predatory potential
here. Negative amortization is when the required
minimum monthly payment is actually less than
the finance charges and fees for that month.
Meaning what exactly? Meaning that even if you
pay the required minimum every single month on
time, your total debt increases. The balance
just grows and grows. It ensures the customer
is perpetually locked into debt. Wow. And stepping
back from the mechanics, there's a psychological
element, too. Research shows we just spend more
with plastic because we don't feel that immediate
pain of payment you get from handing over physical
cash. That psychological element feeds right
into the confusion around the grace period. Most
cards offer one, usually 20 to 55 days, where
you can pay your balance in full and you don't
get charged any interest. But if you miss that
zero balance threshold even once, you're in a
financial minefield. You lose the grace period
completely. And the consequences are immediate.
If you roll over even a tiny balance from the
last cycle, the grace period is usually gone.
So interest is charged retroactively. on the
old balance and on every single new purchase
you make starting from the exact date of that
purchase not from the statement date but from
the moment you swiped that's what shocks people
it is and it connects directly to the notorious
residual retail finance charge or rrfc we should
walk through an example here because it's so
confusing yeah let's do that okay so let's say
you had a five thousand dollar balance when your
statement closed on the first of the month you
then use the grace period and you pay off the
entire five thousand dollars on the 15th you
think you're at zero Right. Paid in full. But
your next statement on the first of the following
month will still have a charge on it. That's
the RRFC, the interest that accrued on that $5
,000 balance for the 15 days before you paid
it off. So even though I paid it in full, I get
a bill for, what, $35 of trailing interest. And
I'm thinking I missed a payment or miscalculated.
Exactly. It feels like a surprise fee, but it's
the lingering cost of having rolled over that
balance the cycle before. And compounding all
this are penalty rates. Right. Where your rate
can just jump to 20 or 30 percent for one late
payment. Yes. And we've seen the extremes. I
mean, it was discontinued in 2011, but First
Premier Bank once offered a credit card with
an APR of 79 .9 percent. 79 .9 percent. That's
just. Yeah. That basically guarantees you'll
be locked into debt forever. It does. And if
the interest rates weren't high enough. Let's
talk about the most expensive way to borrow money
on a card. Cash advances. Oh, yeah. They are
highly discouraged for a reason. You get hit
with an immediate fee, usually 3 % to 5 % of
the amount, plus a much higher interest rate
than regular purchases. And the worst part is
the interest starts immediately. Immediately,
compounding daily. Unlike purchases, there's
no grace period. Even if you pay your statement
in full, that interest is not waived. And the
system has found clever ways to classify certain
things as cash advances without you even realizing
it. This is a crucial point for anyone listening.
Network guidelines often classify things like
buying lottery tickets, money orders or casino
chips as cash advances. So you think you're making
a purchase, but you're actually taking out a
high interest loan. You are. And buying prepaid
debit cards or even using your card in a mobile
payment app for a peer to peer transfer that
can also be flagged as a cash advance. It's a
huge risk. And this mechanism can be exploited.
I know our sources pointed to a really shocking
example of this in Japan. around 2010. This is
a perfect case study in loophole exploitation.
Following a law change, online shops in Japan
set up these schemes. They would sell you a virtually
worthless item like a single glass marble for
an insane price, say 100 ,000 yen, which is about
$1 ,200. They charge that to your credit card.
Right. And then they immediately wire you 80
,000 yen as cash back. So you get 80 ,000 yen
in cash today, but a month later you owe 100
,000 yen on your credit card bill. Exactly. The
shop provided a short -term, high -interest loan
disguised as a retail sale, completely bypassing
all the lending regulations. The effective annual
interest rate on these things was around 300
% APR. And the shop has no credit risk. None.
The card owner is just saddled with the high
-interest debt. It just shows how easily the
whole credit mechanism can be warped when regulation
lags behind. The cardholder bears huge risks,
but we need to pivot now to the other side of
this economy, the merchant. Why do businesses
accept these cards when they are so expensive
to process? Well, the benefits are just too substantial.
It's unavoidable in modern commerce. First, consumer
resistance to buying something is much lower
compared to demanding cash. Makes sense. Second,
security. It's way safer than handling large
volumes of cash, reduces theft, reduces all the
back office work. And the most important benefit.
The issuer, my bank, assumes the credit risk.
That's the crucial guarantee. Once that authorization
comes through, the issuing bank guarantees payment
to the merchant's bank, even if you, the cardholder,
later default, that risk assumption is vital
for commerce. But all these benefits are paid
for by the massive burden on the merchant. The
interchange fees and discount rates. This is
the core engine of the whole plastic economy.
For every single transaction, the merchant pays
a commission. the discount rate, which typically
ranges from about 0 .5 % to 4 % of the sale price.
And the structure is a complete labyrinth. It
is. The fee changes based on the type of merchant,
their sales volume, whether the card was physically
present, Online sales cost more because of fraud
risk and, critically, the type of card you use.
Right. If you're using one of those premium high
rewards cards, the merchant is paying more to
the card issuer for that privilege. Absolutely.
Those high -tier rewards cards, the ones with
2 % cashback or travel points, they come with
a higher interchange fee. The merchant is, in
effect, funding your reward points. And this
high cost is what triggered those major legal
battles in the U .S. Exactly. Merchants argued
that Visa and MasterCard had a monopoly and were
setting unfairly high rates. This all culminated
in a huge class action antitrust settlement in
2013. Valued at what, $5 .7 billion? $5 .7 billion.
One of the largest antitrust settlements in U
.S. history. But the fight didn't end there.
Big retailers like Walmart and Amazon actually
opted out of that massive settlement. Why? Because
they felt it didn't fix the core structural problem,
which was the ability of the networks to just
keep setting these fees at what they saw as excessive
rates. For them, it was illegal price fixing.
So even a multibillion dollar payout was less
important than trying to gain control over their
ongoing costs. For them, yeah. By opting out,
they were signaling they were going to keep fighting
against what they saw as a mandatory anti -competitive
tax. And this brings us to the most significant
social detriment of this whole economy, inflated
pricing for all consumers. This is the crucial
takeaway for the listener on the hidden costs
of convenience. Yes, because the merchant has
to cover that 0 .5 % to 4 % fee somehow, but
they usually can't charge it directly to the
card user without risking customer backlash.
So they just raise the base price of everything.
For everyone. For everyone. They raise the prices
of all their goods and services to cover that
blended average cost, which means that if you
are a consumer paying with cash or a low -fee
debit card, you are effectively paying a hidden
tax on every single item to subsidize the cost
of processing high -fee credit cards. It's a
deeply regressive system. The scale of this subsidy
is just massive. In the U .S., in 2008 alone,
credit card companies collected... $48 billion
in interchange fees. Which averaged out to $427
per family when you spread it across the economy.
And that cost is most clearly funneled into the
rewards programs, the cashback, the airline miles
that the most affluent and savvy consumers love.
Exactly. Those rewards programs cost the issuers
a lot, usually between 0 .25 % and 2 .0 % of
the transaction. And that is entirely funded
by the higher network fees charged to merchants.
So those rewards aren't free. They're financed
by higher prices. is paid by everyone else. Precisely.
And this creates a quantifiable wealth transfer.
Research analyzing these programs suggests they
result in an estimated transfer of $1 ,282 annually
from the average cash payer to the average card
payer. That is a staggering figure. Let's just
sit with that. An annual financial transfer of
resources subsidized by the less affluent who
are more likely to use cash, all in favor of
the high -volume user, the transactor, who pays
their balance in full and reaps the rewards.
It raises profound questions about social welfare.
The people who benefit most from the rewards
are those financially secure enough to never
incur interest. The people who absorb the cost
through inflated prices are those who may rely
on cash or are already struggling. The system
is structurally designed to reward the wealthy
and transfer costs downward. So the convenience
we all enjoy is predicated on this embedded hidden
tax that ensures the most lucrative customers
are heavily incentivized to keep using the network.
Okay, moving beyond the standard model, the market
has created some specialized card types to address
specific needs or, you know, exploit specific
markets. Let's start with the one explicitly
designed to help people enter the market or recover
from financial trouble. The secured credit card.
Right. This is where you have to put down a cash
deposit with the bank, often 100 % or even 200
% of your credit limit. That deposit serves as
collateral. It mitigates the risk for the issuer
so they can offer credit to someone with no history
or bad credit. The key benefit is that your activity
is reported to the credit bureaus, so you can
actively build or rebuild your credit score.
But even with that secured system, there's a
significant hidden risk. That's right. The deposit
isn't a prepayment. If you miss a payment or
two, the issuer doesn't just take the deposit
right away. The account first goes through a
long delinquency period like 150 to 180 days.
And during those five or six months? Interest,
late fees. Penalty rates. They all keep accruing
at high speed. So the total debt you owe can
easily end up being way more than your original
deposit. You end up forfeiting your collateral
and still having a big debt that goes to collections.
Which completely defeats the purpose of rebuilding
your credit in the first place. It makes careful
management absolutely essential. Okay, next,
the confusing category of prepaid cards. They
often have Visa or MasterCard branding, but they're
not credit cards. Not at all. They're just stored
value cards, functionally identical to debit
cards. You load your own money on and spend it
down. They're often marketed to teens, but they
frequently carry high fees, activation fees,
purchasing fees, monthly fees. As our sources
note, consumer agencies often call them an expensive
way to spend your own money. Yeah. And then you
have business credit cards. Approval for these
often relies on the business owner's personal
credit score. The key feature though is that
some issuers won't report the account activity
to your personal credit file unless the account
goes delinquent. Which helps separate your business
and personal debt. Exactly. Now with all these
products, security is paramount. The industry's
goal, as they admit, isn't to eliminate fraud,
but to reduce it to manageable levels. And that
means multilayered defense. The EMV chip was
the big one against physical forgery. We also
have the CVV code on the back for online transactions.
But remote purchases are a different threat,
and the solution there includes things like virtual
cards. That's where you can generate a unique,
single -use, 16 -digit number that's tied to
your real account. Right. So if that number gets
compromised in a data breach, it's useless to
a thief. It protects your actual account details.
And let's not forget the old school analog security
response. The Code 10 call. This is a classic.
It's a signal between the merchant and the payment
network. If a merchant is suspicious about a
card or a user, they call the operator and say,
Code 10. And the operator asks yes -no questions.
Just yes -no, so the customer can't hear what's
going on. If the card is flagged as stolen, the
merchant might be asked to retain the card if
it's safe to do so, and they often get a little
reward from the bank for it. It's a fascinating
analog procedure in a digital world. Finally,
let's look at the regulatory guardrails. And
regulation varies dramatically country to country.
In the U .S., the big one was the Credit Card
Act of 2009. It addressed a lot of predatory
practices. Critically, it made companies inform
customers 45 days before certain fee increases
and required you to actively opt in to overlimit
charges. Right. If you don't opt in, the transaction
just gets declined. And maybe most helpfully,
it requires bills to clearly show how long it
would take to pay off your balance if you only
made minimum payments. It forces you to confront
the true cost of debt. But the U .S. system is
still a high fee, high reward model. The EU took
a much more radical approach. They did. The EU
interchange fee cap from 2015 fundamentally altered
the business model for card issuers in Europe.
How so? It imposed a maximum fee, 0 .2 percent
for debit cards and 0 .3 percent for credit cards.
0 .3 percent compared to the U .S. average of
what, 1 .73 percent? Exactly. That difference
is transformative. It immediately made all those
lucrative high reward card programs pretty much
unprofitable in the EU. Because the money to
fund the rewards just wasn't there anymore. It
wasn't there. And that one regulation fundamentally
changes the whole social welfare dynamic we talked
about. If the reward money is limited. that hidden
subsidy from cash payers to card users is dramatically
reduced. And finally, the French banking system
offers an even more restrictive contrast. France
is very risk -averse when it comes to consumer
debt. They have cards branded as Visa or MasterCard,
but they're often not revolving credit in the
American sense. They're more like an end -of
-month debiting system. So your bank account
is just automatically debited for the full balance
at the end of the month? In many cases, yes.
It's functionally a deferred debit card. It makes
it almost impossible to rack up debt just by
forgetting to pay a bill. It's just a totally
different philosophy on credit. A completely
different structure. of a universal credit score
that shared among all banks that really doesn't
exist in France in the same way. The system is
just not built to encourage high volume revolving
debt like the American model is. So we've established
the cards dual role instrument convenience, high
risk debt machine. But sometimes that accessible
line of credit is used for something much, much
riskier. entrepreneurial funding it sounds like
a terrible idea and statistically it usually
is over 80 % of startups fail pretty quickly
but the ability to access quick if expensive
capital has led to some remarkable success stories
it's the stuff of startup legend right maxing
out your personal plastic to buy the first server
or cover the first few months of rent Len Bosak
and Sandy Lerner, for instance, famously used
personal credit cards to get the initial funding
to launch Cisco systems. And perhaps most famously,
Larry Page and Sergey Brin used them for the
very initial stage of Google. They specifically
were called using personal plastic to buy a terabyte
of hard disks to get their first server running.
It's amazing that access to quick liquidity,
even at a high APR, was essential when a traditional
bank would have just laughed them out of the
room. And this wasn't just in tech. Filmmakers
have done it too. Kevin Smith financed most of
his breakout film clerks by maxing out several
cards. And Robert Townsend financed Hollywood
Shuffle the same way. These are definitely outliers,
but they're proof that for a select few, the
high interest accessibility of a credit card
can be a temporary engine of innovation. For
the average consumer, though, the key is just
awareness. And it's valuable to point out that
some governments do offer neutral resources to
help navigate this market. Absolutely. We noted
the Financial Consumer Agency of Canada, the
FCAC, maintains a public database of nearly 200
different credit cards. It details every fee,
feature, APR, all of it. These neutral comparison
tools are so crucial. So, OK, let's distill this
into the core takeaways for our listener. The
entire classic economy really functions based
on two major archetypes of the user. Right. First,
the card is a vital debt instrument for the revolvers.
The people who carry a balance and, through high
interest and fees, generate the main profit for
the issuers. And second, it's a convenience tool
for the transactors. The ones who pay in full
every month. And they fund the system by generating
those lucrative interchange fees that merchants
pay. But the key, often unseen element, is that
regressive wealth transfer. The system, fueled
by rewards, effectively transfers money. That
estimated $1 ,000 -plus annually per family,
from cash users and price -sensitive consumers
to the high -volume card users. So the credit
card is not just a piece of plastic. It's an
economic structure that influences consumption,
debt levels, and wealth distribution. The convenience
we demand is built on a fee structure that acts
as a hidden, mandatory tax on nearly every transaction
in the modern economy. So what does this all
mean for the future of payments? We know the
U .S. model thrives on these high, often hidden
fees that reward sophisticated users. If merchant
fees were capped globally, like in the EU, would
this fundamentally change consumer behavior by
killing the reward incentives? Or would card
issuers just find new, more explicit ways to
get revenue from the consumer? Would that $1
,282 annual subsidy just be transferred back
to the consumer through higher annual fees, effectively
ensuring that the system still finds a way for
the poor to subsidize the profitable card market?
Something to mull over until our next Deep Dive.
A fascinating question of global financial engineering.
Thank you for joining us. We'll see you next
time on the Deep Dive.