Hi y’all, Cokie here.
Today I’m fortunate enough to be joined by Matthew Goldman from Vertical Finance. He also has a newsletter called CardsFTW, which I strongly recommend. Matthew and I started this project out of a shared interest in December of 2020. With his almost daunting knowledge and experience in the credit card space and my love of all things financial infrastructure, we figured we were the right duo to take on this report.
This report will be published in three parts:
- Part I is meant to serve as an introduction to credit cards, including terminology and history.
- Part II will talk about co-branded cards from traditional institutions and touch on modernized credit-card-as-a-service offerings.
- Part III will completely dive into credit-card-as-a-service offerings and conclude the report.
We hope you’ll enjoy it and thanks for reading!
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Introduction and Terminology
Credit cards today are a ubiquitous every day payment tool, with more than 1.12B cards in the United States in 2018, according to consumer personal finance site WalletHub. Since their introduction in 1958, cards have expanded rapidly with the average American having four open revolving credit cards as of 2018, according to the Consumer Financial Protection Bureau.
In this report, we examine the rise of modern Credit Cards as a Service Providers (CCaaS). These are financial technology companies that provide the necessary technical infrastructure, business expertise, and banking relationships for another non-bank entity to launch a credit card product. Traditionally, a bank has been the primary issuer of a credit card, both from a legal aspect, and from a marketing and servicing aspect. The bank defines, markets, and manages the card, in turn hiring certain vendors to provision the product. With CCaaS, the setup is flipped with a nonbank defining the marketing program, subject to approval and oversight by a partner bank and CCAAS provider. These service providers differentiate themselves from banks and core processors by providing a more complete service.
- Credit Card - an open revolving loan product with a physical and/or virtual card number for spending.
- Debit Card - a physical and/or virtual card attached to a demand deposit (checking) or other prepaid account.
- Issuer - a chartered bank (depository institution) regulated by the government and a member of one or more payment networks.
- Payment Network - a payment processing company that provides merchant acceptance for a card product, such as Visa or Mastercard.
- Open Loop - a card that is issued on a payment network and can be used at any merchant that is part of the payment network.
- Closed Loop - a card that can only be used at a specific merchant.
- Branded Card - a card with a payment network brand (see also “Open Loop”)
- Co-Branded Cards - a card with a merchant or non-bank brand as well as a payment network brand.
History of Credit and Co-branded Cards
Modern open loop credit cards started when Diners Club was formed in 1949 by Alfred Bloomingdale, Frank McNamara, and Ralph Snyder. At the time, some retailers, including gas or oil companies offered credit cards that allowed an individual consumer to charge a purchase at the merchants own stores and to settle the payments at a later date. The Diners Club team set out to create a universal card that a businessman could use at many merchants with a single bill at the end of the month.
American Express, which started out a mail express service in the mid-nineteenth century and evolved into a travelers check giant by the mid-twentieth century, entered the open loop credit card field in 1958. At the same time, The Hilton Hotel Corporation expanded its closed loop Carte Blanche card into an open loop operation. In that same explosive year, Bank of America and Chase Manhattan Bank (predecessor to today’s J.P. Morgan Chase) entered the space. Lots going on!
In 1966, Bank of America expanded its own credit card operation into a system that other banks could join called BankAmericard. A competitive group of banks started another national credit card system called the Interbank Card Association (renamed to MasterCharge in 1968). At a time when laws and regulations severely limited interstate banking, these associations were required to enable merchants connected to one local bank to accept credit cards from another local bank’s cardholders.
In 1976 BankAmericard changed its name to Visa. In 1980, the MasterCharge became Mastercard. By 1978, more than 11,000 banks had joined one or both of these networks and more than 52M Americans had at least two credit cards.
The first co-branded travel rewards cards were introduced in 1986 when Continental Airlines launched the Continental TravelBank Gold Mastercard card with Marine Midland Bank. American Airlines launched its co-branded card with Citibank in 1987. Diners Club launched its own rewards programs in the mid-1980s and American Express launched its Membership Miles program in 1991.
Following the financial crisis of 2008, many US banks consolidated and others ceased their credit card issuing programs. Today the majority of cards are issued by the largest banks such as Bank of America, JP Morgan Chase, Capital One, American Express, Citibank, and Wells Fargo.
It’s starting to feel a bit like the trend of every fintech suddenly offering a debit card and/or a checking account...
For more on co-brands, check out Matthew’s latest edition of CardsFTW on this exact topic.
See you in Part II where we’ll talk about co-branded cards from traditional institutions and touch on modernized credit-card-as-a-service offerings. Adios!