Top of the Morning: 250 years of US innovation - Credit Cards

Hi everyone, Dan Cassidy here. Welcome back to top of the morning on the UBS Market

Moves Podcast channel. For today we are going to continue with our 250 years of U.S.

innovation series, title of this latest edition of Great Future in Plastics, which examines

how credit cards evolve from a simple piece of plastic into a global payment system.

I am joined today here in studio by Jeff Harwood, the lead contributor to this latest piece.

Jeff is from the UBS Chief Investment Office, covers financials, the banks, asset managers,

payments and processors. Jeff, it's great to have you with us. Thank you for dropping by.

Thanks Dan, thanks for having me.

Just to give our listeners a bit of context, Jeff, can you speak a bit to the history of

the credit card, how this all materialized, the infrastructure put in place, and its overall

impact to global commerce? Yeah, sure, it's actually a really fascinating story because

the launch of the general purpose credit card was actually not some well thought out idea or like

well thought out broad deployment. This was more of a novel experiment. So the credit cards

kind of had existed with the diner's card, but that was only four restaurants and specific

kind of companies. The general purpose credit card was an idea from Bank of America where they

just deployed 60,000 credit cards in 1958 in Fresno, California. And so people just woke up.

They had credit cards in their mailbox. Didn't really know what it was, but Bank of America had

worked in the background to create a network of merchants that would accept those credit cards.

And so it became a general purpose credit card. However, Bank of America didn't have any

underwriting standards. There was no application for the card. There were no credit checks.

And so as people started to use these cards, loan losses started to pick up much higher than what

Bank of America expected. So you think maybe they just shut it down. It wasn't a good idea.

But they found that residents in Fresno actually really liked the idea of this general purpose

credit card. So Bank of America tightened their underwriting standards. They got smarter with

the product. And after a couple of years, it actually became profitable. And so the company decided

to expand this idea into other markets and to other geographies. At the time though, there were

still rules limiting banks operating across state lines. So what Bank of America had to do was license

out this Bank of America card idea to other banks in other states and other geographies.

And so what they actually did was build up this network of acceptance, which eventually evolved

into what we know today as visa. And then at the same time, this was going on like the 60s and 70s,

another competing network was being built at the same time that became mastercard. And so over time,

these two networks grew scale bigger and bigger, more and more acceptance. And so what the

section meant from a macro standpoint is we were still in kind of this post war economic expansion.

And the development of this visa and mastercard network really helped to boost consumer spending.

So it extended and helped grow that GDP expansion. And in addition to that, it also brought more

activity into the formal economy. So there was less cash transactions, more card transactions.

This led to actually incremental tax revenue as well. It's a fascinating history. You think about

issuing 60,000 credit cards without any due diligence. What could go wrong, right? And it's

interesting to hear about how some of these big companies are interconnected in some ways from

the early days. If we fast forward a bit to the COVID-19 pandemic coming out of that in the early

2020s, which of course severely impacted the flow of global commerce and how consumers shop. Jeff,

how did the concept of the credit card evolve or adapt to a changing world?

Yeah. So when COVID first started, there was really a dip in spending because nobody really knew

what was going to happen. Everyone was a little more cautious. And then as we got more comfortable,

spending kind of spiked. And it really spiked in that e-commerce area because not as many people

were going out. We weren't going to stores or restaurants as much. So e-commerce really, really spiked.

But we didn't really think about that all that much at the time. And that really just highlighted

the capabilities that the networks have built out over decades of acceptance, both domestically

and globally. And it really just highlighted the ubiquity and the scale of these networks.

And the ease at which transactions could move from the in-person economy to e-commerce,

just highlighted what Visa and Mastercard have enabled over decades of scale.

So Jeff, if we look ahead, how might the payments business evolve from here? What might

these credit card networks look like down the line?

Yeah, there's a lot of focus lately on stablecoin, nearly what kind of use cases there are there.

Two that really make sense relate to cross-border transactions. So remittances, if you're sending

money to family members across borders, it's easier to use stablecoin potentially than it is

to use traditional methods. Also, just managing for and exchange. So on the commercial side of

companies are doing cross-border transactions. It might be easier, especially if they're focused

in areas with higher FX volatility. Maybe stablecoins or their digital currencies might be more

efficient than traditional Fiat currency. And again, Visa and Mastercard are more of enablers in

this space. They're already working in stablecoin, especially in some of those high volatility areas.

So they're kind of a first mover and the scale that they have is really just, it creates a wide

moat and it creates a better ability for them to enable some of these technologies. Beyond stablecoin

and digital currencies, agentate commerce is also really interesting. And again, we saw recently

Visa announced a partnership with an AI agentate commerce type company. And so we think given just

the scale and the capabilities the companies already have, we think they're going to be an

enabler in that space as well as more agentate commerce tools and services are launched.

Well, it will be interesting to see how this all plays out though. Jeff, thank you for

dropping by to talk about the latest edition of the 250 Years of U.S. Innovation Series from

the UBS Chief Investment Office. Again, focusing today on credit cards. A great catching up with

you, Jeff. Appreciate it. Thank you. And just want to point out to you our listeners if you would

like to learn more about this edition or read the others. As I mentioned today, we covered the

seventh edition of the series leading up to the 250th birthday of the United States of America.

Please be sure to locate the resources on the website, UBS.com slash Celebrating Dash,

U.S. Dash Innovation. From UBS Studios on the Ancassity, thank you for joining us.

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