This video explores the history and economics of the credit card industry in the United States, focusing on the power dynamics between major players like Visa, Mastercard, American Express, Discover, and the four largest American banks. It examines how the industry evolved, the strategies employed to increase consumer spending and bank profits, and the lasting impact of the 2008 financial crisis and subsequent regulations.
Credit card industry structure: The industry is dominated by a duopoly of Visa and Mastercard, with American Express and Discover holding smaller shares. The four largest American banks hold the lion's share of profits from issuing credit cards. This structure is a result of historical alliances and strategic cooperation, not technological superiority.
Profit drivers: Banks profit primarily from interest on unpaid balances, not swipe fees. Swipe fees are mainly paid to the bank that issued the card as compensation for credit risk. Visa and Mastercard profit from their role as payment processors. The industry uses various strategies to encourage consumers to carry balances, including high interest rates, hidden fees, and rewards programs.
Evolution of credit card marketing: Initially, banks employed aggressive tactics to encourage debt. After the 2008 financial crisis and the Card Act of 2009, the focus shifted to rewards programs and gamification, making credit card usage more attractive to consumers.
The role of rewards programs: Rewards programs are a key tool used by banks to encourage consumer spending. The points systems are designed to be enticing, but the banks have full control over the value and redemption of these points.
The impact of the Great Recession: The 2008 financial crisis exposed the predatory lending practices in the credit card industry. The resulting Card Act of 2009 introduced regulations aimed at curbing abusive practices, but the core power structure remained largely intact. Visa and Mastercard, as payment processors, were less affected by the downturn than the issuing banks.
