
A brief history of credit cards - astdb
http://a16z.com/2017/07/28/credit-cards-history-transaction-behind-scenes/
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Artemis2
There is a great 99% Invisible episode on the early days of credit cards:
[http://99percentinvisible.org/episode/the-fresno-
drop/](http://99percentinvisible.org/episode/the-fresno-drop/)

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mr_turtle
Is there anytime similar about the 1-2.5% fee merchants have to pay to utilize
this service? I'd bet Visa, MasterCard, and AMEX are making a fortune off all
these transactions.

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gst
> Is there anytime similar about the 1-2.5% fee merchants have to pay to
> utilize this service? I'd bet Visa, MasterCard, and AMEX are making a
> fortune off all these transactions.

My current primary credit card (Alliant's CashBack card) gives me 2.5%
cashback on each credit card transaction (3% cashback in the first year).

I'd assume that Alliant makes money from customers who aren't paying the
complete balance off each month, but with 2.5% cashback there's not a lot of
room to make money from transaction fees.

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shawnee_
This comment shows how little people really understand about the business
model of credit card companies and their relationships with merchant banks.

> but with 2.5% cashback there's not a lot of room to make money from
> transaction fees.

The cash back is not instantaneous. It does not happen in the cycle in which
the consumer buys something; it is pushed out as a short-term liability by the
banks, contingent upon Visa/MC doing all the math and allocating the pieces
from the top-down.

In the short term, all these microaccounts of customers "cashback savings" are
accumulated as points or whatever to the consumer, but they are real cash
assets for the holders. Taken in aggregate they equal huge long-term cash
assets (for Visa/MC). Just like everything else in the credit card world, it
adds up quickly across hundreds of millions of customers.

That leverage is why Visa has been untouchable and why MC has virtually no
incentive to make it compete. Merchant banks are already so fragmented (and in
many instances actually competing with each other) that the lockin is
something they just accept.

This is why the collusion to set fees at 2.9 percent (or whatever) among
payments processors is so evil: Visa and MC ransom the full fees for the short
term to make the banks/merchants beholden to their terms in perpetuity. Cash
back rewards are not a necessary part of a credit transaction, but they're
being baked in to hike the "commissions" of the middlemen.

This industry is just like the Realtor industry: full of corrupt and
exploitative groups of individuals implicitly colluding with each other to
maximize their collective rapaciousness.

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amirbehzad
you wrote: >> This comment shows how little people really understand about the
business model of credit card companies and their relationships with merchant
banks.

thanks for enlightening the world

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uiri
American Express and Diner's Club still issue charge cards which have to be
paid off in full at the end of each billing cycle.

American Express is often also the issuing bank for a lot of its cards which
is why it charges more to merchants who accept its cards than Visa and
MasterCard do.

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Nursie
And often it is the acquiring bank too - it has historically insisted that
merchants send transactions directly to them.

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ksec
After watching the Video, What is the purpose of Chase in the example?

Me ( Clients ) > BoA ( Issuers ) > Visa > Chase ( Acquiring Bank ) > Merchant.

And how does Apply Pay / Samsung Pay / WePay / AliPay fits into this?

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patio11
Most prosaically, Chase moves money to the merchant, so that BoA doesn't have
to move money to someone who is not their customer and who they have no direct
relationship with. They just pay Chase a mindbogglingly large amount of money
every day and trust Chase to sort out the logistics. (Back in the day, this
would be easy for Chase to do because the merchant banked at Chase, but this
is very not guaranteed anymore.)

Chase (or a party related to Chase) also had the job of making sure this
merchant got signed up to accept Visa cards. They had the boots-on-the-ground
salesforce to make it happen.

Chase also performed underwriting of the burrito shop to determine whether
they are creditworthy, because the purchaser is not the only person being
extended credit here -- Chase has a more-than-notional exposure to the
merchant's health as a business as well. Why? If you call BoA and say you
didn't get your burrito, you will get your money back. BoA is willing to give
you your money back, very quickly, because Chase is always good for it. Chase
will generally attempt to recoup your money from the burrito shop, but in the
case where you are dissatisfied with your burrito because you didn't receive
it because the burrito shop went out of business, Chase (and not BoA or Visa,
importantly) takes that loss on the chin.

(This is less relevant for burritos sold in person, because proprietors very
rarely drop dead after swiping cards but before handing over the burrito, but
is far more relevant for more complicated business models.)

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marcv81
I'm 35. I felt old talking about floppies and cassettes a few days ago. But
I'm still young enough to not have known swipe cards :)

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stedaniels
I'm mildly curious as to where you live? I thought the UK was one of the first
countries to get EMV/Chip and Pin. I'm 32 and I had a swipe before a Chip and
Pin card. The earliest worldwide public trials and rollouts look to be ~ 2003,
that would mean you didn't have a bank account with a card until you were ~21?
Is that normal where you come from? I think I had my first swipe ~16, second
swipe ~18, the bank switched me to Chip and Pin roughly a year later if my
memory serves... which it often doesn't ;-)

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seszett
Not OP, but I'm 32, French, and I never even saw my _parents_ use a swipe
card. My earliest memories of credit cards are chip and pin (and I still
remember their code). Apparently this started in 1992 here, though I guess it
wasn't technically "credit cards" but the national debit cards system.

~~~
roel_v
"though I guess it wasn't technically "credit cards" but the national debit
cards system"

Well yeah sure, but we're talking _credit cards_ here. Either way, many parts
of Europe used swipe-style debit cards (with pin) until a few years ago; I'm
pretty sure I used them in France too, < 10 years ago (although I can't
remember for sure).

~~~
marcv81
I was not trying to talk other countries down. For what it's worth you can't
survive in France without a checkbook: it's the only way to pay for some
transactions. Sad.

Also the debit cards we're talking about do both credit and debit. Not sure
they disqualify.

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programmer_dude
Credit cards are totally unnecessary in the age of online banking. Why does it
not die already?

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shishy
Perhaps part of it is because it's such a heavily regulated industry that
change takes a while/is hard to initiate.

~~~
programmer_dude
Correct me if I am wrong but I thought the US already had (creditcardless)
internet banking. It seems credit card inertia is hard to overcome. What is
more frustrating is "trends" from the US keep washing up on our shores like a
bad dream and upset any advances we have made. Case in point: Netflix India
does not accept anything else other than credit cards. A similar phenomena can
be observed in the healthcare industry. India is already moving towards the
way (IMO) the broken US healthcare system works. It gives me nightmares. I
hope the Indian government clamps down heavily on this unscrupulousness.

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azag0
It’s really more about payment cards (debit, credit) in general, not credit
per se.

Where exactly does Apple Pay fit in this chain? Do they replace the card
issuer or are they a new link between the acquiring bank and the issuer?

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Artemis2
Apple Pay operates using _network tokenization_ , which is part of the EMV
standard. This works in two parts.

When you add a card to Apple Pay, your device checks if the bank can use Apple
Pay, and gets a _device token_ from your bank, along with some cryptographic
data. The original card number your typed in is discarded; it is replaced by
the device token, which looks like a credit card number. All this data is
stored in the device’s Secure Enclave. It’s important to note that Apple does
not store card data, and doesn’t even take part in the transaction flow.

When you pay with Apple Pay, your device generates a _network token_. In
practice, this network token is your device token, which is sent along with a
cryptographic signature, the _cryptogram_ (generated using the data previously
stored into the Secure Enclave). This data fits into traditional card fields
(name/number/expiration date/cvv), plus an additional field for the
cryptogram. The token is transmitted through the merchant to their
gateway/acquirer, which sends passes it to the payment network
(Visa/Mastercard). The network checks the cryptogram, does a reverse lookup of
the device token and associates it with the real card number. The transaction
proceeds like a normal transaction using the real card number.

[https://www.emvco.com/wp-
content/uploads/documents/EMVCo_Pay...](https://www.emvco.com/wp-
content/uploads/documents/EMVCo_Payment_Tokenisation_Specification_Technical_Framework_v1.0.pdf)
: The official tokenization specification. Page 71 has a good diagram of the
flow (the Token Service Providers are usually the networks themselves).

[https://www.apple.com/business/docs/iOS_Security_Guide.pdf](https://www.apple.com/business/docs/iOS_Security_Guide.pdf)
: The iOS Security Guide, which has interesting information in the Apple Pay
section (page 34).

IIRC, Android Pay works using the same standard, with Google storing the
device tokens in the cloud and generating network tokens on the behalf of the
user (not all Android devices have secure elements). May be inaccurate, I
haven’t had the opportunity to implement it at the payment provider level
(yet!).

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azag0
From what you write and from the diagram in that pdf, it's the issuer bank
that creates the device token, but then it's the network that does the reverse
lookup. Do both the issuer bank and the network know the mapping between
device tokens and cards?

~~~
Artemis2
Yes. The network needs of course to map tokens back to PANs (Primary Account
Numbers). Tokens are included in authorization requests to issuing banks, in
addition to the actual payment details.

Also, both issuers and networks need to be able to suspend and unlink tokens
in case of fraud or if the end user loses their device, which implies that
they know individual device tokens.

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denisehilton
I have never been in favor of credits cards myself and I tell everyone to
avoid getting one as much as I can. It's just a well that keeps going deeper
and pull you into more debt.

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wfunction
Do you think your advice generalizes though? Do you really think most people
who have a credit card go into debt because of it?

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pimmen
The whole idea of a credit card is that you buy something by borrowing money,
because you don't have the money right now. If you do have the money, use a
debit card.

However, I'm not completely against debt. I think debt can be managed and
healthy under the right circumstances, and as long as it's used for stuff that
you need and not stuff you want. If you truly need the stuff, the time and
other purchases the debt gave you (such as a student loan to get a degree for
your job, or a mortgage to live close your job) will pay for themselves.

~~~
URSpider94
That's patently untrue as a blanket statement. I NEVER use my debit cards for
purchases, only my credit cards. I pay all of my bills in full every month. I
use my credit cards because I'm not risking the security of my primary
checking account in online transactions, and also because I've collected ~
$2000 in rewards in the first half of this year alone by using my credit cards
...

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divenorth
There has to be a better way.

