Building new markets: a comparison of the Russian and American credit card markets
Department of Sociology, Boston University, USA
Correspondence: Alya Guseva, Department of Sociology, Boston University, 96-100 Cummington Street, Boston, MA 02215, USA. E-mail: aguseva{at}bu.edu
Based, in part, on original fieldwork in Moscow, Russia, in 1998, 1999 and 2004, this paper focuses on two markets at their conception points—the American credit card market of the late 1950s and 1960s and the Russian credit card market of the 1990s. Emerging credit card markets need to solve two problems: the problem of uncertainty inherent in lending and the complementarity problem of simultaneously attracting merchants and cardholders. American banks jump-started the market by mailing unsolicited cards to thousands of unsuspecting and unscreened individuals. This resulted in staggering losses, but helped to attract merchants. American banks eventually solved the uncertainty problem through formal institutional means: they shared account information with third parties (credit bureaus) and based pre-screening on the calculation of risk, which made bank–customer relationships completely impersonal. The dominant way to disseminate cards in Russia is through payroll agreements with enterprises, whereby the employees are issued cards secured by their salaries directly deposited to the bank. Not only does the rapid increase of cardholders attract merchants, but payroll projects also solve the uncertainty problem through two-stage embeddedness: banks rely on employing organizations to mediate their relations with cardholders. As a result of dissimilar solutions to the uncertainty and complementarity problems, the structures of Russian and American credit card markets differ as well.
Key Words: Credit cards • uncertainty • new markets • JEL classification: N20 Financial markets and institutions, General, International, or Comparative; L22 Firm organization and market structure: markets versus hierarchies, vertical integration; L14 Transactional relationships; contracts and reputation; networks
1 Merchants are attracted by lower risks of bank credit (they are reimbursed fairly quickly, and it is the lender, not the merchant, that is responsible for defaults and fraud), increased sales as cards make buyers less frugal, simpler bookkeeping as bank takes care of a large portion of it, and a relative safety that comes from storing less cash. The price is a discount fee on every purchase. It was originally around 7% (Mandel, 1990), but can nowadays vary somewhere between 2 and 3% for bank credit cards and is a little higher for charge cards such as American Express or Diner's (Evans and Schmalensee, 1999).
2 There is another way for a lender to protect itself against possible defaults—raising interest rates to account for possible losses. But neither sanctioning nor raising interest rates is an optimal solution. Sanctioning is costly and it does not compensate lenders for losses; while raising interest rates gives rise to the problem of adverse selection (Stiglitz, 2000).
3 In a situation of a monopoly this problem does not arise. Although not very likely, a one-bank network is conceivable.
4 One can imagine a sizable market consistent of a large number of independently operating individual suppliers each catering to a limited number of loyal customers. A credit card market can fit into this scenario under one condition: if the overall market development is orchestrated by an interested third party that can coordinate small-scale efforts of a large number of individual banks.
5 The first mass distribution of bank credit cards was preceded by the introduction of charge cards, Diners' Club. The programme, however, was limited in two ways: Diners' cards were marketed towards higher-income professionals; and they could only be used in restaurants. Bank cards defined themselves as a mass product and reached to a much wider audience of cardholders and diverse merchants. Several local bank card programmes were started beginning in the 1950s, including the one by Franklin National Bank of Long Island introduced in 1951. However, due to their local nature, the programmes could only achieve limited economies of scale (Wolters, 2000), and many were soon abandoned.
6 Credit card purchases could be made in the Soviet Union since the late 1960s. A limited number of stores (usually those that accepted payments in foreign currency) were equipped to service foreign cardholders. None of the Soviet citizens possessed cards till the late 1980s.
7 These are usually bank's own corporate clients. Additionally, banks sometimes offer payroll projects as a way of attracting a new corporate client.
8 See also ‘Plastikovye Kartochki v Cherepovtse’ (Plastic Cards in the Town of Cherepovets), Platezhi. Sistemy. Kartochki. 1998; 4, pp. 12–20.
9 Evidence suggests that even after a year of receiving salaries directly deposited to their debit card accounts, people tend to use them to withdraw cash from ATMs and an average of only about 15% of all card transactions are cashless. The obvious exceptions are towns where cash is scarce, and where employees do not have a choice but to charge.
10 Employees of different banks' security departments, whose function it is to screen prospective customers, often cooperate informally. But the effectiveness of this cooperation depends on dyadic personal relations. Such information exchange does not encompass the whole market, is non-mandatory, and for those reasons not very reliable.