Cash or Charge? 50 Years of Paying With Plastic.

CAMBRIDGE, Mass.--(BUSINESS WIRE)--Dec. 8, 1999--

If the holiday shopping season conjures up images of Betty and Wilma racing out the door of their Bedrock cave yelling, "Chaaarge!," you're not alone.

And if you're like most consumers, you have at least one of the more than 720 plastic payment cards used to pay for goods and services at more than four million merchant locations in the United States and another 11 million around the world.

Legend has it that Alfred Bloomingdale, grandson of the founder of the department store, was having lunch with a colleague, Francis McNamara, in a Manhattan restaurant one day in 1950. When the bill was presented, Bloomingdale realized, to his chagrin, that he'd left his wallet and checkbook at home. No way to pay. "What if there was a way to guarantee the restaurant that I could pay?" he mused. McNamara, later joined by Bloomingdale, created Diners Club in 1950 by giving cards away to consumers and signing up restaurants in New York City.

The Year 2000 marks the 50th anniversary of the Diners Club Card -- the first buy-anything-anywhere charge card. A new book explores how it all came about -- Paying With Plastic: The Digital Revolution in Buying and Borrowing (MIT Press, 1999) by David Evans and Richard Schmalensee. Evans is senior vice president of National Economics Research Associates Inc. and Schmalensee is dean of the MIT Sloan School of Management. Together, they've produced a highly readable and non-technical piece based on their eight years of research on the economic, technological and institutional forces that have shaped the payment card industry.

Today, of course, credit cards are both a boon and a curse. They're regularly blamed for leading consumers down the path of ruin making it easy to live beyond one's means while enticing people to buy things they don't need, particularly during the holidays. Evans and Schmalensee disagree, and are quick to point out the many benefits that payment cards provide to consumers.

"The majority of credit card transactions in this country aren't financed at all when consumers pay them off on a monthly basis," said Schmalensee. "So the credit card is simply acting as a payment mechanism. It's a tremendous deal -- you don't have to carry cash or a checkbook and you are, in effect, getting a free loan of up to two months."

When people pay down their balance every month, they're using credit cards to great advantage, economizing on the amount of money they'll have on hand at any point in time. And for the consumers who use the financing feature of credit cards -- especially this time of year -- they're still reaping the benefits of the system. It takes less time and is more convenient to use a credit card than it is to secure a home equity loan, and items can be paid for over a few months or a few years.

Evans and Schmalensee say that a good chunk of the credit extended to card holders in this country is used to finance entrepreneurs -- and they cite a 1993 Federal Reserve/Small Business Administration survey that shows that 40 percent of small business owners borrowed against their credit cards. That's good news for business owners, and for the economy in general.

"To the critics, we say that the thing about credit cards is, like any other product, people can do bad things with them," said Evans. "Lots of people drive cars, and a few people drive them too fast. It's much the same thing with credit cards."

The success of the Diners Club "charge card" -- known as a "travel and entertainment" or "T&E" card -- prompted several banks to try their hand. Most failed miserably, although a few successfully introduced local cards for their own customers. It wasn't until 1958, when the American Express Card came on the scene, that Diners Club had any serious competition. That same year, Bank of America, Carte Blanche and Chase Manhattan Bank all entered the payment card business.

So began one of the more controversial -- and unique -- industries in the country today, one which revolutionized how and when people pay for goods and services. Paying With Plastic elaborates on all the bumps and obstacles along the way: Creating an industry where none existed before, solving the "chicken and egg" problem where merchants would not take cards if few consumers used them and consumers would not use cards if few merchants took them, and competing in an industry that does not fit neatly into any of the standard economic models. The book explores the evolution of money, the growth of the payment card industry (it's been called the "stealth capital market"), and the difference between charge, credit and debit cards. It offers the expert opinion on smart cards and the future of money.

When they look to the future of credit cards, Evans and Schmalensee see the Internet, which will account for an increasing portion of all transactions.

Those transactions will not be made by cash and will probably not be made by check, either, they say. As more and more commerce is conducted over the Internet, those transactions will be completed by one of the existing card systems which uses the digits, not the actual card. They also see an increased use in debit cards -- where money is automatically withdrawn from a checking account -- and a slower, but steady rise in the use of "smart cards," cards embedded with a chip that contains information which may or may not be programmable.

That's the future, but first there is another frenzied holiday season to address. As one tries to survive at the mall, with the pile of catalogs, or at the computer terminal, it may be wise to heed the experts' advice. "The cheapest way to buy things is to use your credit card and pay it off right away," said Schmalensee. "If you're disciplined, that's the way to go, because you get up to two months of float. Read Paying With Plastic, so you can remember that in February, when the bills arrive."

National Economic Research Associates Inc. (NERA) is an international economic consulting firm founded in 1961 to provide clients with practical research and analysis of economic, and financial issues arising in litigation, regulation, public policy and management.

The MIT Sloan School of Management, based in Cambridge, is one of the world's leading business schools conducting cutting-edge research and providing management education to top students from more than 60 countries.