Investors' Bookshelf: Paying With Plastic

Paying With Plastic: The Digital Revolution in Buying and Borrowing, by David Evans and Richard Schmalensee. The MIT Press, November 1999; 373 pages.

They are part of our cultural landscape: "Master the Possibilities," "It's Everywhere You Want to Be," and, of course, "Don't Leave Home Without It."

These familiar slogans, burned into our brains by multimillion dollar advertising campaigns, are in the forefront of a revolution that is changing the way we spend money. And if the phenomenal increase in the use of payment cards -- credit, charge and debit cards -- continues, we could be a cashless society by 2050, according to the authors of a new book called Paying With Plastic: The Digital Revolution in Buying and Borrowing.

Released in November by The MIT Press, the book traces the history of money from the days when shells were used for trade, to the advent of coins and paper money, to today's payment cards. U.S. consumers hold more than 720 million payment cards, such as Visa, MasterCard, American Express, Discover and Diner's Club, which they can use at more than 15 million businesses around the world. With the growing popularity of commerce over the Internet, which almost always requires the use of a payment card, these cards will be used more and more in the future. Consumers are increasingly using these cards instead of paper money or checks, say Evans and Schmalensee, who envision a time within the next 50 years or so when paper money could be obsolete.

The two men, economists by trade, have been researching the payment card industry for years. Paying With Plastic is a distillation of that research, tracing the history of the industry in detail.

Unfortunately, the book is tainted by the pro-industry slant that Evans, who is senior vice president of National Economics Research Associates Inc., and Schmalensee, dean of the Sloan School of Management at the Massachusetts Institute of Technology, have adopted. Both men have worked as consultants for Visa USA since 1991 and in the acknowledgments go so far as to thank Paul Allen, executive vice president and general counsel of Visa USA, for his encouragement and financial support. Visa is repeatedly referred to as the "king" of payment cards, and while the data may prove this true, the reader has to wonder who would have achieved royalty status if MasterCard were footing the bill.

Visa let the authors have free rein with its data. And data are what these two guys love. There are so many statistics in this book that the reader's eyes can't help but glaze over. While the quantitative information would be a gold mine for research projects and college term papers, the average reader is bound to get lost. To their credit, the authors do break up the text with a lot of tables, graphs and even a few cartoons.

The book deals with every aspect of the payment card industry, from its humble beginnings in Manhattan when Diner's Club cards were used by a few patrons of select restaurants to today's near-universal acceptance of payment cards for any kind of transaction -- even McDonald's(MCD) takes payment cards. The authors touch on the problems and risks inherent in starting the industry as well as on the current challenge card companies face as they attempt to increase volume in an already-saturated market.

Evans and Schmalensee also discuss the antitrust cases against the industry. While some people believe competition is impossible because Visa and MasterCard are wed in a joint venture, the authors say that kind of thinking does not take into account the special nature of the industry. In fact, it is highly competitive, they maintain, as the two scramble to increase the number of both cardholders and merchants who take the cards.

In fact, the relationship between cardholders and merchants is the central theme of this book. A "chicken-and-egg" dilemma faced the fledgling industry: Merchants would not accept the cards if few consumers used them, and consumers wouldn't use the cards if few merchants accepted them. To resolve the situation, unsolicited cards were mass mailed to create an initial consumer base. As more consumers carried them, more merchants were willing to take the cards. This is an interesting story, but it is repeated ad nausem, sometimes two or three times in a single chapter.

In fact, repetitiveness is a major problem in this book. The final chapter, dubbed "And They Don't Take Cash," is just a rehash, adding nothing new. The book could have done without it altogether (mercifully, the chapter is only six pages long).

What is missing from this book is a substantive discussion on the high rate of debt some consumers amass using these cards. As cheerleaders for the industry, the authors go on and on about how the cards benefit consumers, who can buy what they want now and pay for it later, and merchants, who can sell more expensive things to consumers who don't have the cash to pay for them. Of course, they do touch on those who get into problems somewhat when they discuss the high rate of chargeoffs many payment card companies must take when consumers are unable to pay their bills.

Repetition and uneven analysis make Paying With Plastic a chore to read. So, unless you have a dogged fascination with statistics and numbers, or must pull together a big research project on payment cards for your boss, you'd be better off to leave home without it.

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