A Land of Local Banks, Awash in Paper Checks
For many years, the cornerstone of the typical American's household finance was a local bank: people received paper paychecks, which were physically deposited at a brick-and-mortar bank. They also wrote paper checks to pay for a majority of their expenses, which were (until the consolidation of banks in the 1980's) processed through a banking system that often ultimately resulted in the physical delivery of a paper check back to the bank in the local community.
Consumer banking has changed rapidly in the past decade: more individuals receive their pay by direct deposit, and are recently moving to the ACH system to make electronic payments where paper checks were once used. The necessity of a brick-and-mortar bank within driving distance has significantly decreased - to the point where it is no longer necessary in practice.
Banking in America
There were originally a number of different kinds of banking establishments - commercial banks, savings institutions, thrifts, and credit unions. All were identical in their function, though slightly different in the precise nature of their operations.
Because of federal regulations, the ability of a parent company to operate banking establishments in multiple states was highly regulated, and very difficult, and banking was largely a local, in-state affair, and there were thousands of small banks across the nation.
In 1980, the banking industry was deregulated and the restrictions on interstate banking were relaxed considerably. There was a period of expansions and mergers resulting in a number of national banks that operated branch offices in multiple states. However, these often compete in markets with established smaller banks, to which many customers remain loyal.
The existence of so many banks has resulted in a highly inefficient system: aside of the obvious redundancies in function and staff, there is the matter of a multitude of transactions among a web of many players: the customers of a bank will issue payments to customers of hundreds of other banks, and merchant accounts will receive payments from thousands of other banks, and each banks.
Add to this that there has been a long reliance on paper instruments: checks, which must be handled and delivered, similar to letters sent through a postal service, to the appropriate bank for redemption. The system of businesses and agencies involved simply in processing paper instruments is immense and expensive.
Banks, Nonbanks, and Payment Cards
MasterCard and Visa began as private associations - but as of 1998, any financial institution eligible for FDIC coverage is permitted to join (federal law prohibits excluding them, except for specific reasons which are difficult to satisfy).
Examining Visa card issuers: 43% are commercial banks, 51% are credit unions, and 6% are savings banks. However, in terms of dollar volume, commercial banks account for 88.3%, credit unions 7.3%, and savings institutions 4.4%. Citibank is the largest issuer, with 40 million cards issued in 1997 for U.S. customers.
Some cards are rebranded: the AT&T universal card is issued by Citibank, Cambridge Savings Bank issues cards through MBNA, etc. On MBNA, their credit card revenues far surpass their banking revenues, and it's implied (though not accused) that they maintain banking operations only as necessary to remain qualified to issue credit cards.
Debit cards can only be issued by a bank to account holders, The author does not mention "gift" cards and other forms of prepaid debit cards, but I don't think those were popular when the book was published.
In addition to issuing cards, banks can also service card accounts for merchants, and many local banks do so for their business customers, though collectively they are not significant players in this end of the business.
Outside the United States
The US counts for over half of cards issues, the other half being issued overseas. The card issues have formed similar alliances with bank associations in foreign nations - these are generally similar to their domestic counterparts, but the structure of the industry in foreign nations affects the character and terms or the arrangement.
Outside the US, Visa accounts for 53% of cards, MasterCard for 29%, AMEX around 14%, Diners Club and JCB around 2%. American companies often entered foreign markets under their own steam, though they sometimes entered into joint ventures or acquisitions.
In Europe, debit cards are far more popular than credit cards, though they typically feature a small credit line (under $1000) to protect against overdrafts. In many instances, this is a matter of legislation intended to protect consumers from themselves.
Some examples of local idiosyncrasies in the European market:
- German citizens cannot borrow from any institution with which they do not have a deposit account, and are permitted to carry no more than three months' salary in total consumer debt.
- In France, a government-backed company organizes all the "technical and administrative aspects" of all payment cards issued to its citizens
- The UK is most similar to the American system, though American companies face stiff competition from local and regional payment cards
As a result, the consumers do not use much credit, and it is suspected that, even if the laws changed, it would take significant effort to change consumer attitudes and behavior about credit.