On my last family holiday, I branched out on easyjet to visit Berlin. Whilst there, I suddenly realised that my camera simply could not do without a tripod – because, obviously, all my tourist photos of the Brandenberg Gate and Alexanderplatz were missing the most important part (me, waving). So I stepped into one of those giant discount electronic stores and searched for the cheapest, lightest, and most fold-down-able tripod available. I managed to find one that cost €4.99* – which delighted me no end, because South African debit card conversions had made for a very budgeted branching-out.

I arrived at the till and presented my debit card. At which point, the much-pierced teller took one look at it, handed it back, and wagged a tattooed finger at me. Turns out, they don’t accept Visa cards in that store. They, ah, only accept American Express.

At which point, I got properly annoyed. Up to that point, in my mind, the whole Visa/Mastercard/AmEx logo on my card was just luck of the draw. The guy issuing the card at the Enquiries desk would just pick one, hand it to me, and that was that. So how dare this German department store reject my purchase on the basis of a decision made by a bank clerk?!

Apparently, Germans don’t take too well to that particular kind of customer complaint. Especially when delivered in loud english. So I changed my face, handed over a €5 euro note, and left rather hurriedly.

But I have now nursed the anti-AmEx grudge. And seeing as the world of business is largely preoccupied with vagaries of Chinese economic data this morning, I thought that it might be a good time to do a bit of research into credit card companies.

What Do Credit Card Companies Actually Do: A History

It’s a good question. Because when you swipe your card (debit or credit), aren’t you just arranging for an EFT into the merchant’s bank account? I guess that’s always been my in-my-head explanation for what’s going on. But really, I had no idea.

So here is the fascinating story of how we suddenly arrived at credit cards:

  1. In the 1950s, there were no credit cards.
  2. But that didn’t mean that there wasn’t any credit – just that most companies and individuals had multiple lines of credit at specific retailers. So maybe you’d have a line of credit at a Wal-Mart-equivalent for your monthly shopping, and then you’d pay them on the 1st. And also one at the hardware store. And the butcher.
  3. Then someone clever at Bank of America (Joseph P. Williams), who had been doing customer research, noticed that all these people were cruising around with all these lines of credit at all these different shops. And he saw an opportunity for efficiency.
  4. IDEA!!!
  5. Instead of multiple lines of credit at different places – why not just offer people a single centralised line of credit, backed by the bank? That way, the bank gets to keep any late-payment interest.
  6. And actually, more importantly, why not go to the retailers who will now get to relinquish the admin of credit collection and offer them this service for a fee? The party line: “We’ll front you the money, take on the burden of collection, and in exchange – you accept a nominal fee on every credit card transaction you accept? You can even think of it as an early-settlement discount?”
  7. Brilliant!
  8. Let’s try it in California.
  9. Unfortunately, this was followed by a less-good idea:
  10. “Hurrah. Credit Cards for every Californian!! Let’s just mail it to them in the post!!!”
  11. At which point, the banks realised that while there may be goodwill extended to the grocer for making good on his line of credit (after all, if he cuts you off, you still need to eat…) – but owing a bank money for purchases on a card that they sent you in the mail… That’s a stretch.
  12. About 22% of the credit cards issued went delinquent.
  13. So that part was a fail. And Bank of America made some heavy losses.
  14. But once they’d cleaned up that process (and fired Mr Williams), BofA realised that they had a good thing going.
  15. And they launched across the US forming alliances with other banks to offer one centralised type of credit card (BankAmericard). (Sidebar: I think BofA would have liked to do it itself – but Federal Law restricted what expansion could be done by banks into other states).
  16. In the late 1960s, BankAmericard expanded outside of the US through more inter-bank alliances – at around the same time that HSBC, Wells Fargo and a few other banks were arranging their own alliance for a similar program (which would ultimately become Mastercard).
  17. Eventually, Bank of America realised that it couldn’t control everything if it was having to rely on alliances with all these other banks in order to issue credit cards.
  18. So a new international corporation was established to manage the issuing of credit cards, and the brand was relaunched as VISA.
  19. Voilà: Visa and Mastercard.

The point is: Visa and Mastercard became centralised lines of credit. This allowed places that would never normally have sold anything on credit (like restaurants) access to a whole new market of credit-paying customer. And instead of each store doing background checks and collection – this service would be conducted by Visa or Mastercard through its card-issuing members (banks).

In return, the merchant would accept a small discount from the quoted purchase price: ye olde credit card charge**.

Where Does American Express Come In?

AmEx really became famous for inventing the traveller cheque, after AmEx president J. C. Fargo travelled to Europe with traditional letters of credit and got rejected everywhere but the major cities. Before that, AmEx was mostly an express mail service that offered money orders in opposition to the US Postal Service.

In the 1980s, American Express got excited about Investment Banking (it was the thing to be!), and acquired the investment bank Lehman Brothers Kuhn Loeb. Lehman Brothers was eventually spun off into its own entity in 1994, and went on to become famous for being the 2008 Financial Crisis and trying to steal money from nonprofits (see yesterday’s post).

But it was in the late 1980s that AmEx released its first proper credit card. And to gain market share, they went on a spree of offering special discount charge rates (which were pretty close to zero) to retailers that agreed to accept only AmEx credit cards.

Obviously -Visa and Mastercard complained. But they didn’t really need to. Probably because of that policy of zero-charges for exclusive merchants, American Express was forced to charge higher fees to places that weren’t exclusive (4% versus the 1.5%-2% being offered by Visa and Mastercard). So many non-exclusive merchants stopped accepting AmEx cards.

That was no good for a new card – so AmEx was forced to become a little more competitive and lower its fees.

Nevertheless, that perception of American Express bullying the small retailer that can’t afford to be an exclusive AmEx merchant has never really gone away. Which I guess is why more of us still have Visa and Mastercards. And it’s not entirely fair, because AmEx fees are significantly lower than those charged by PayPal (so I’ve read) – and yet we all love Paypal…

FYI though – AmEx charges are generally slightly higher than those of Mastercard and Visa (probably because the AmEx network is smaller, so there is less spreading of costs…).

Here’s a Basic Credit Card Charge Breakdown…

Whenever you swipe your card, or pay for something online, there is a fee charged. Some of that fee gets absorbed by you, some of that fee gets absorbed by the person you’re paying. But in any credit card transaction, there are usually three recipients of that fee:

  • Your bank – for making the transfer out of your account;
  • The merchant’s bank – for accepting the transfer into the merchant’s account; and
  • Visa, Mastercard or AmEx – for providing the network.

Either Way, Just Remember

Whenever you’re in a discount electronic store in Germany, you need to pay with American Express.

For everything else, there’s Mastercard.

And Visa.

*And you have to love ze Germans – because I still have it, and it still works!

**Incidentally, realising this now fills me with rage. Once upon a time in my youth, I waitered at The Greek Fisherman in the V&A Waterfront in Cape Town. And every time one of my tables paid via credit card, the restaurant would deduct money from my tips – because of “insurance”. And they’d do it to all the waiters. I mean – could it be more wildly unethical – making the serving staff carry the credit card charge? No one eat there.