Credit cards are 62. OK, Boomer.

In their excellent paper “The Ascent of Plastic Money: International Adoption of the Bank Credit Card, 1950–1975” in Business History Review (Issue 92, 2018), Bernardo Batiz-Lazo and Gustavo A. Del Angel state unequivocally what we all know to be true: that the bank-issued credit card marked a turning point in the history of retail payments and most countries saw an explosion in the number of new domestic entrants into “paying with plastic” following the spread of the American pioneer BankAmericard (eg, to Barclaycard in the UK) and its later rival Interbank.

The genesis of that pioneering BankAmericard was the “Fresno Drop”, a day that should be celebrated throughout the financial services sector and every other sector as well. On 18th September 1958, Bank of America officially launched its first 60,000 credit cards in Fresno, California, setting in motion an experiment that changed the American way of borrowing, paying and budgeting.

And, in time, changed everyone else’s way of doing those too.

Now is not the time to go over the whole story, and I am sure most of you are familiar with it anyway, but if you want a good introduction to the history of the credit card, from the Fresno Drop up to the Internet, I’d recommend Joe Nocera’s “A Piece of the Action“, which I read many years ago and still pick up from time to time. On the other hand, if you want to spend five minutes having a quick look at where the modern credit card business comes from, here’s the short version (courtesy of CNN Money)The most extraordinary episode in credit card history is the great Fresno Drop of 1958. The brainchild of a Bank of America middle manager named Joe Williams, he mailed out 60,000 credit cards, named BankAmericards, to nearly every household in Fresno [and] thousands of ordinary people suddenly found that thousands of dollars in credit had literally dropped into their laps…

No applications, no credit scoring, no approval mechanism. Almost every household got one. Each card had a credit limit of $500 (that’s around $5,000 adjusted for inflation). It was an astonishing and audacious experiment.

Windhield

with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

There you go. Now you can go ahead and bore at least one person today with the story of the Fresno Drop. I know I will, because I cover the drop in my book Before Babylon, Beyond Bitcoin, where I point out that what is sometimes overlooked from our modern perspective is that the evolutionary trajectory of credit cards was not a simple, straight, onwards-and-upwards path. For the first decade or so, it was far from clear whether the credit card would continue to exist as a product at all, and as late as 1970 there were people predicting that banks would abandon the concept completely. Margins were thin and as Dee Hock, the visionary founder of the inter-bank organisation that became Visa, wrote in his history of the industry that at the end of the 1960s fraud was spiralling out of control and threatening to kill the industry stone dead. Blank cards were stolen from warehouses, personalised cards were stolen from the mail and organized crime was on the scene.

What changed everything was a combination of regulation and technology: regulation that allowed banks to charge higher interest rates and the technology of the magnetic stripe and computer networks for online authorisation systems. This changed the customer experience, transformed the risk management and cut costs dramatically while simultaneously allowing the banks to earn a profit from the business.

(I can’t resist pointing out that it was the London transit system that pioneered the use of magnetic stripes on the back cards. The first transaction was at Stamford Brook station on 5th January 1964, well before BankAmericard introduced their first bank-issued magnetic stripe card in 1972 ahead of the deployment of electronic authorisation in 1973.)

OK, Boomer

So now they are 62, where do these baby boomers go next? When cards went through middle age they bought the sports car of tokenisation and made some younger friends (Apple Pay and GooglePay). But now, as cards approach their golden years, who are the millennials set to inherit the (less profitable) Earth? Many years ago, I saw Anthony Jenkins (the former CEO of Barclays) give a terrific talk at a product launch in which he predicted that mobile phones were going to replace cards long before they replaced cash, a view echoed earlier this year by Deutsche Bank research in their future of payments study. I think they are right, of course, but what exactly will we use those mobile phones for? Instant credit transfers or digital currency? Request-to-pay and Libra transfer or WeChat message with digital Yuan inside? Bank credit transfers or AmazonAMZN credit transfers?

What seemingly failing financial technology experiment of today will change the world a decade from now because of a combination of regulatory and technological change? Click To Tweet

Remember, it took more than a decade for the Fresno drop to turn into the mass market business, integral to the economy, that we know today. So I cannot resist asking you all what seemingly failing financial technology experiment of today will have an impact of a similar magnitude a decade from now because of a combination of future regulatory and technological change? DeFi or Digital ID? FacebookPay or the Lightning Network?

My guess is that will be something to do with digital asset token trading, but I’d be curious to hear yours.

[An edited version of this piece first appeared in Forbes, 18th September 2020.]

The First Rule of Hollywood is the First Rule of Cryptocurrency too

You may have heard of Matty Simmons. He was the man behind the movie “Animal House”. That’s interesting enough for one lifetime. But if you are interested in electronic payments, you should read his 1995 book. I have it in front of me as I write. He just died, aged 93. My friend the author, storyteller and all round nice guy Jeffrey Robinson wrote a brilliant piece on Simmons’ role in founding the payment industry, and it was brilliant. He was, as Jeffrey put it, a witness to an event “which changed our world, but never actually happened”.

The New York dinner that launched Diner's Club was an event that changed our world, but never actually happened. Click To Tweet

This event was the legendary New York supper in 1949 in The Major’s Cabin Grill at 33 West 33rd Street, known to everyone in the business as the birth of the Diners’ Club card and therefore the modern payment card industry. The apocryphal version (as told here by Lana Swartz) is that lawyer Frank McNamara forgot his wallet and had to call his wife who drove into the city from Long Island with money for him to pay. Like everyone else, I’d seen this story in many places and had always assumed it to be true. But it turns out that this story was made up by Simmons, who had been hired as the first employee of McNamara’s nascent Diner’s Club! As Simmons later said, he had to “glamorize the creation of the credit card”. In reality, McNamara had had the idea some time before and spent months going around Manhattan with Simmons to try and drum up interest in the idea before eventually persuading  street to take the first payment by general-purpose charge card.

Think about the problem Simmons was faced with. An entirely new way to pay. The public had never seen a payment card and didn’t know what one was or why they might want one. Matty must have been a PR genius. Look at this fascinating newspaper report from “The Hartford Courant” dated 23rd October 1962. It concerns the world premiere of a movie called “ The Man From The Diners’ Club ”:

The Board of Selectmen unanimously adopted an ordinance Monday night to prohibit the use of money and place the entire town on credit for a day next March 13. Columbia Pictures “The Man From the Diners’ Club” will have its world premier at the Strand Theater here that day. On the day of the premiere, all transactions by local merchants will be by Diners’ Club cards only. The ordinance says it will be “unlawful for any person to pay cash for any article or goods purchased and it shall be unlawful for any merchant to accept cash for any article or goods sold.” Diners’ Club cards will be issued to the entire population of the town for the premiere day with junior cards for children.

What an amazing promotion! A cashless city in the USA half a century back! OK, so it was only for a day, but even so that was pretty cool. The Mayor of Hartford is reported as saying that “I am especially pleased to participate in this progressive experiment in the use of credit which may prove to the business world that the future method of transacting business will be through such a device as a single credit card” (my emphasis). What a forward looking guy!

Anyway, here’s the trailer for the film, which was written by William Blatty (who went on to write “The Exorcist”). The New York Times review said of Kaye that “his acting in it is so disordered, so frantic without being droll, so completely devoid of invention and spontaneity that he did no more than remind us, somewhat sadly, of that other Danny Kaye and what a terrible thing television has done to comedy on the screen”.

This picture of Danny illustrates an amazing item of payment trivia that Lana pointed out to me. Danny is shown clowning around in front of a computer that looks exactly as you would imagine in a film from 1963. But Diners’ Club didn’t have a computer, this was invented for the film. Simmons says that they did not go over to computers until 1968!

I watched the film so you don’t have to.

At several points the characters stop the action in order to explain how a Diners’ Club card works! So someone would say “now I’m going to phone Diners’ Club to check that this card is valid” and someone else would say “Hey the card comes with a booklet showing you all the places you can use it” or an incredulous supporting player would gasp when told that you could use a card to pay for an airline ticket. All a bit ham-fisted, but at least American consumers would come out of the movie understanding what a payment card does.

So where’s Bitoin Matty? Perhaps what the world of cryptocurrency needs is a movie featuring a popular comedian, much loved by the public (excluding me) for his clowning skills, who works for a cryptocurrency exchange and who, via a serious of hilarious incidents, explains what cryptocurrency is and why the general public should use it. Mr. Bean Gets REKT, perhaps, or Mrs. Brown’s HODL Boys. I’ve already thought up a few example incidents for my pitch to an actual film producer…

  • “The hard drive crashes and customers lose all of their bitcoins”
  • “The exchange gets hacked and customers lose all of their bitcoins”
  • “The dog eats the cold wallet and customers lose all of their bitcoins”
  • “The exchange turns out to have been a scam and customers lose all of their bitcoins”
  • “The PC is infected with malware that steals the password and the exchange loses all of their bitcoins”.
  • “The guy running the exchange fakes his own death and customers lose all of their bitcoins”

What do you think? Maybe that last one is little far-fetched, but I think I’m on to a winner. Remember, William Goldman’s first rule of Hollywood is “no-one knows anything” and that’s first rule of cryptocurrency markets as well.

[This is an edited version of an article that first appeared on Forbes, 15th June 2020.]

Today we celebrate Saint Valentine, the patron saint of customer verification methods

It’s one of my favourite days of the year today! I am a payments romantic, so you will undoubtedly know why! Today across the civilised world, we celebrate Saint Valentine, the patron saint of customer verification methods (CVMs). We buy flowers and eat chocolates on this day every year cto commemorate the introduction of chip and PIN. Yes, chip and PIN was launched in the UK on 14th February 2006. 

Yes, it’s lovely St. Valentine’s Day. Was it really thirteen years ago? The beautiful day, the day unromantically dubbed “chip and PIN day”, when we stopped pretending that anyone was looking at cardholders’ signatures on the backs of cards and instead mechanised the “computer says no” alternative. It really was! Thirteen years!

We English, we love out heritage. We still write our laws on vellum, we still say “what an interesting idea” when somebody says something that is transparently insane and, for now at least, we still use cards to buy things in shops. We cling to tradition. And chip and PIN is a tradition. Or at least it was.

I’m sorry to say that in Merrie England, chip and PIN is on the wane. The majority of card transactions are contactless and, according to Worldpay (who should know), they have been for a few months now. Fraud is manageable because most transactions are authorised online now and would be whether we had chip and PIN or not. The offline PIN and “floor limit” world has gone. The world’s first optimised-for-offline payment system was launched after the world had already got online. This is why you see  Brian Rommele writing that “by the time the UK implemented chip & PIN, the base concept and much of the technology was already almost 40 years old”.

Early chip and PIN focus group.

It is time to remind people what Saint Valentine stood for and reiterate why we are using chip and PIN at all. In ancient times, when European retailers could not go online to verify PINs due to the anticompetitive pricing of the monopoly public telephone providers, it made sense to verify the PIN locally (ie, offline). But this is 2019. We have smart phones and laser beams and holiday snaps of Ultima Thule. We can probably think about verifying PINs online again, or even replacing PINs with fingerprints or DNA or whatever.

Smart phone in particular mean change and, as I have bored people on Twitter senseless by repeatedly tagging “#appandpay rather than #tapandpay”, this will take us forward to a new retail payment environment in which the retail payment experience will converge across channels to the app. As payments shift in-app so the whole dynamic of the industry will change. Introducing a new payment mechanism faces the well-known “two-sided market” problem: retailers won’t implement the new payment mechanism until lots of consumers use it, consumers won’t use it until they see lots of retailers accepting it. This gives EMV a huge lock-in, since the cost of adding new terminals is too great to justify speculative investment.

When you go in-app, however, the economics change vastly. For Tesco to accept DavePay in store is a big investment in terminals, staff training, management and so on. But for the Tesco app to accept DavePay is… nothing, really. Just a bit of software. However traditional we might be, the marginal cost of adding new payment mechanisms is falling (particularly direct-to-account mechanisms because of open banking) and our industry needs to think about what that means.

I’m not saying that cards and PINs are going to go away any time soon, but what I am saying is that it’s time to start thinking about what might come next. Right now, that looks like smartphones with biometric authentication, but who knows what technologies are lurking around to corner to link identification and continuous passive authentication to create an ambient payments environment in which cards (and for the matter, terminals) are present only in a very limited number of use cases.

Happy Birthday Credit Card Industry

Today is a very important day for us payments nerds. It’s the 60th anniversary of the “Fresno Drop”, the birth of the modern credit card industry. On 18th September 1958, Bank of America officially launched its first 60,000 credit cards in Fresno, California, setting in motion an experiment that changed the American way of borrowing, paying and budgeting.

And, in time, changed everyone else’s way of doing those too.

If you want a good introduction to the history of the credit card, from the Fresno Drop up to the Internet, I’d recommend Joe Nocera’s “A Piece of the Action“, which I read many years ago and still pick up from time to time.

If you want to spend five minutes having a quick look at where the modern credit card business comes from, here’s the short version (courtesy of CNN Money)The most extraordinary episode in credit card history is the great Fresno Drop of 1958. The brainchild of a Bank of America middle manager named Joe Williams, the “drop” (which is marketing-speak for “mass mailing”) was an inventive tactic to give Americans their first highly addictive taste of credit card living. Keep in mind that charge cards in those days–like Diners Club or American Express–were mainly used by jet setters, businessmen on expense accounts, and ladies who lunched… Williams wanted to change that. In September 1958, he mailed out 60,000 credit cards, named BankAmericards, to nearly every household in Fresno. Mind you, these cards arrived in the mailboxes of people who had never seen–let alone applied for–a card like that. But now thousands of ordinary people suddenly found that thousands of dollars in credit had literally dropped into their laps…

There you go. Now you can go ahead and bore at least one person today with the story of the Fresno Drop. I know I will.

As you might expect, I cover this episode in my book Before Babylon, Beyond Bitcoin, where I point out that what is sometimes overlooked from our modern perspective is that the evolutionary trajectory of credit cards was not a simple, straight, onwards-and-upwards path. For the first decade or so, it was far from clear whether the credit card would continue to exist as a product at all, and as late as 1970 there were people predicting that banks would abandon the concept completely. What changed everything was a combination of regulation and technology: regulation that allowed banks to charge higher interest rates and the technology of the magnetic stripe and Visa’s BASE I online authorisation system. This changed the customer experience, transformed the risk management and cut costs dramatically while simultaneously allowing the banks to earn a profit from the business.

It looks more than a decade for the Fresno drop to turn into the mass market business, integral to the economy, that we know today. So what financial technology experiment of our days will be of similar magnitude a decade because of regulatory and technological change a year from now? My guess would be something to do with tokens, but I’d be curious to hear yours.