Plastic Money: Constructing Markets for Credit Cards in Eight Postcommunist Countries - Hardcover

Guseva, Alya; Rona-Tas, Akos

Hardcover

ISBN 10: 0804768579 ISBN 13: 9780804768573

Publisher: Stanford University Press, 2014

Synopsis

In the United States, we now take our ability to pay with plastic for granted. In other parts of the world, however, the establishment of a "credit-card economy" has not been easy. In countries without a history of economic stability, how can banks decide who should be given a credit card? How do markets convince people to use cards, make their transactions visible to authorities, assume the potential risk of fraud, and pay to use their own money? Why should merchants agree to pay extra if customers use cards instead of cash?

In Plastic Money, Akos Rona-Tas and Alya Guseva tell the story of how banks overcame these and other quandaries as they constructed markets for credit cards in eight postcommunist countries. We know how markets work once they are built, but this book develops a unique framework for understanding how markets are engineered from the ground up―by selecting key players, ensuring cooperation, and providing conditions for the valuation of a product. Drawing on extensive interviews and fieldwork, the authors chronicle how banks overcame these hurdles and generated a desire for their new product in the midst of a transition from communism to capitalism.

About this title

About the Author

Akos Rona-Tas is Associate Professor of Sociology at the University of California, San Diego and Research Associate at Met@risk, INRA in Paris. He is the author of The Great Surprise of the Small Transformation.

Alya Guseva is Associate Professor of Sociology at Boston University. She is the author of Into the Red.

Excerpt. © Reprinted by permission. All rights reserved.

Plastic Money

Constructing Markets for Credit Cards in Eight Postcommunist Countries

By AKOS RONA-TAS, ALYA GUSEVA

Stanford University Press

Copyright © 2014 Board of Trustees of the Leland Stanford Junior University
All rights reserved.

ISBN: 978-0-8047-6857-3

Contents

Figures and Tables, ix, 
Preface and Acknowledgments, xiii, 
List of Acronyms, xix, 
1. Paying with Cards, 1, 
2. The Transition from a Communist to a Market Economy, 25, 
3. Payment Puzzles, 53, 
4. Credit Puzzles, 75, 
5. The Construction of Card Markets in Hungary, Poland and the Czech Republic, 97, 
6. Russia, Ukraine and Bulgaria, 151, 
7. Vietnam and China, 203, 
8. Conclusion, 231, 
Appendix 1: Data and Methodology, 251, 
Appendix 2: Concentration in Banking Over Time, 255, 
Notes, 267, 
References, 293, 
Index, 311, 

CHAPTER 1

Paying with Cards

Enter a store in the United States. Any store. You will find logos on theproducts sold in the store. Some logos will be familiar and others will not.The brands will be appropriate to the store: you will find a Nike swoosh ina shoe store but not in a bookshop, and the Kellogg tiger will beckon to youin a grocery but not in a hardware store. There are, however, two logos thatwill show up in all of these outlets. One will be a four-letter word written inblue italics on a white background, the first letter sporting an orange splash:VISA. The other will feature a Venn diagram of two overlapping circles—onefire-truck red, the other mustard yellow—across which is written, asyou might have guessed by now, a compound word with an uppercase C inthe middle: MasterCard.

Now go to a foreign country. Any country. You will find the same twologos almost everywhere, from Shanghai to St. Petersburg, Sofia, Szczecin,and Székesfehérvár. The further you stray from the beaten path of globalization,the fewer of these two logos you will encounter, but you will be surprisedto find them occasionally even in small, rural villages in the poorestregions of the world. Though far from everyone in countries like Hungaryor Ukraine will use those two logos, almost everyone will recognize them.

Today, Visa and MasterCard, together with smaller brands such as DinersClub, American Express and Discover, stand with Coke, McDonald's, Microsoftand others as universally recognized brands. Credit cards are theepitome and a protagonist of globalization. As a new form of payment, theyembody the effortless and instantaneous flow of money, in the form of information,from anywhere to anywhere else in the world. Cards tear downnational boundaries by allowing travelers to pay easily, without the burdenof having to carry wads of cash and to exchange one kind of currency foranother. Today, traveling without a credit card turns simple transactionssuch as plane and hotel reservations into unduly cumbersome chores. Cardsalso make long-distance purchases possible. Without cards, the Internet, themost global of institutions, would never have been able to turn into a globalretail marketplace. The global nature of commerce demanded a global paymentsystem, and the large credit card companies built their own worldwideweb of authorization and processing, linking souvenir shops and banks allover the world.

It is not just Western cardholders whose convenience is served by the waythe credit card weaves the world into a global bazaar. Lives in the rest of theworld are also profoundly affected. Globalization expands the reach ofcredit card markets to the less affluent parts of the world, to places wherethose markets had not existed earlier—in the process transforming localpopulations into card-carrying consumers. In this book, we trace the courseof this transformation and the paths that emerging card markets carved inBulgaria, China, the Czech Republic, Hungary, Poland, Russia, Ukraine andVietnam. Our story is not, however, a straightforward account of globalization.We demonstrate that despite the overwhelming similarities around theworld in the appearance of credit cards (small rectangular pieces of plasticproportioned according to the golden ratio, with a magnetic stripe onthe back exactly 0.223 inches from the upper edge, and sometimes a smallembedded computer chip), and despite the undeniable ambitions of multinationalcard companies to present cards as a standard, "McDonaldized"product, postcommunist card markets neither developed according to a single"Western" blueprint nor proceeded in identical "postcommunist" waysin all of the eight countries.

Credit Card's Dual Role:Both Payment Mechanism and Instrument of Credit

The credit card stands at the intersection of two momentous changes in theworld economy. As a means of payment, the card is replacing cash as well aschecks (where they previously existed) with a piece of plastic and the digitalflow of information. The most recent step in a long historical progressionfrom beads and shells to gold coins and paper money, the payment cardmakes the link between value and its material vessel even more attenuated.At the same time, the credit card is also an instrument of accessing consumercredit. As such, it allows people to use money they do not yet haveto buy goods now and pay for them later, and it is a major force in the rapidexpansion of consumer credit and consumer culture. Thus, to understandcredit card markets, we must recognize that the credit card is not one buta combination of two products: the payment card and the consumer loan.

As a means of payment, the credit card helps displace cash from day-to-dayexpenditures, making payments more convenient, transparent andtraceable. As an instrument of credit, the card provides access to small-scalerenewable loans, enabling cardholders to enjoy purchases they would nototherwise be able to afford. Historically, the two products were seamlesslyfused into one in the form of a piece of plastic that fueled the twentieth-centurycredit card revolution in the United States. Conceptually, they aredifferent, however. Credit can exist without cards: in the United States, retailcredit has been around for much longer than cards, and examples aboundof economies where installment purchases, home mortgages and personalloans flourish but no cards exist, with payments being made exclusively incash or by check. Cards can also exist without credit: when a debit card isused, the money is immediately deducted from one's bank account, and theissuers of pre-paid cards do not extend any credit to cardholders; the cardserves only as an instrument of payment. In fact, as we show, the majority ofthe Visas and MasterCards in circulation in transitional countries are debitcards, so cards extend little or no credit to customers in these countries.

Each of the two products that the credit card represents—a personal loanand a payment tool—offers its own set of puzzles. For instance, as a meansof payment issued to individual holders and used in a variety of retail locations,the credit card has to be peddled simultaneously to consumers andmerchants, giving rise to the chicken-and-egg problem (or as we call it, thetwo-sided market problem). As an instrument of borrowing, the credit cardnecessitates solving another problem: the card issuers' uncertainty regardingthe future repayment of the loan.

Market Creation Versus Market Operation:Generative and Functional Rules

Today in the developed world, the payment card is a natural part of everydaylife. We take it for granted. It works effortlessly, quickly, conveniently andinnocuously. It can fulfill its functions precisely because it appears ordinary,reasonable and almost inevitable. When we pull out this piece of plastic, weknow what to expect. When a cashier or waiter takes our card, they knowwhat comes next. When a bank gives us a card, it can be fairly certain whatwe will do with it. Things can go wrong, such as when a card is declined atthe point of sale, or stolen and used fraudulently, running up a huge tab inseveral countries within days. But we expect these mishaps to be the exceptionand develop routines to deal with them.

To appear natural, markets such as the ones that allow us to pay usingplastic cards instead of coins or banknotes must have an explanation thatcaptures the way the market works. For instance, if we ask people why theyuse payment cards instead of cash or checks, we may be told that it is a moreconvenient way to purchase things. This explanation makes sense, but itwould be the right one only under several conditions. Paying with cardsshould not be much more costly than using cash, and card use should be secureenough to defend the cardholder from fraud. Another condition is thatthe electronic record of card transactions may not be used against the cardholderlater, say, by the tax authorities. Still another condition is that theremust be enough shops where the card is accepted so that it is worthwhile tocarry the card around. And the list goes on.

Generating the conditions under which this simple explanation makessense is what we refer to as market creation. Creating a market means constructingcircumstances that allow people to conduct business by voluntarilyfollowing rational functional rules. We call the principles that describemarket creation generative rules. The discipline of economics is interestedin the rational, functional rules that drive the behavior of market actors.These rules reproduce markets, but they only work within the margins setby generative rules. Economists focus particularly on one set of powerfulfunctional rules: those based on self-interested competition that is driven byprice signals and rational calculation. As economists move away from generalizednotions of the market and toward particular markets, they build morecomplex functional models to capture the specific features of those markets.

Reproducing a market is not the same as creating it anew, just as buildingroads follows a different logic than driving on them. The first logic involvesthe tricks of moving earth, laying concrete, mixing asphalt, painting centerlines and surface markings, cutting troughs for rumble strips and gluingdown Botts' dots. The second logic involves the rules of traffic and some basicknowledge of how to operate vehicles. Once the road is built, the generativerules fade into existing circumstances and the functional rules takeover. The road will still need maintenance—the filling of potholes, the repaintingof markings—but we would not be able to drive from San Diego toBoston if we had to consider each and every engineering feat, past or present,that made our journey possible. This is why getting a driver's licensedoes not include a test on road construction.

Traditional economics dispenses with this distinction between generativeand functional rules, in two ways. First, it assumes that the circumstancesthat serve as preconditions of markets are so general and universalthat they do not merit separate study. Any surface can serve as a highway:a rocky mountainside, a sandy beach and a snow-covered tundra can all bedriven on; drivers just need to make some minor adjustments. Whetherone is driving on rock, sand or snow, there is traction, albeit to varying degrees.The fact that people are rational optimizers who act independentlyon the best information available under some very general constraints, suchas scarcity of resources and available technology, will be sufficient to accountfor the existence of any market. Constraints, like slippery roads, will be accommodated.

Second, economists may acknowledge that conditions can vary considerably,and some necessary conditions may be absent or certain adverse conditionsmay be present, but they posit that evolutionary forces will propelcircumstances to align with rational functional rules. The traffic will createits own pathway and will maintain it. Its needs will force the existence ofproper roads. If this is true, we can always explain road design by understandingthe needs of traffic. We can account for the final characteristics ofthe road by keeping in mind that the engineers wanted the traffic to flowproperly. It is not just that we can provide an explanation ex post, but we canalso confidently predict ex ante that the right circumstances will materialize.If markets work by people competitively reacting to price signals, thenmarkets will emerge as people competitively respond to shifting price signals.In the first instance, generative rules are irrelevant; in the second, they cansimply be deduced from functional rules.

In the road example, the separation between generative and functionalrules is clear. Road construction and driving are two different activities,done by different people with different credentials, at different times. Inmarkets, this distinction is more blurred. The same actors who lay thefoundations of the card market—card-issuing banks and credit card companies—arethe ones who "drive" in that market (together with merchantsand cardholders). The building of markets and the operating of markets areharder to separate, and markets are often constructed on the go. If marketscreate the conditions of their own operation, which amounts to buildingroads by driving, there is no need for outside intervention. Deregulation,the removal of outside interference, is the most we can do. As we show inthis book, card markets do not spring up simply as a result of banks issuingcards to consumers; instead they require a lot of concerted market-buildingeffort on the part of banks and the state, as well as multinational corporationsand institutions.

There are stable markets in which the conditions are, at least for a time,relatively settled. To understand what happens in these markets, the researchercan fall back on functional rules. One can often create a rationalmodel, beginning with laying out the market's assumptions, inevitably followedby making some additional ones along the way, and proceeding toproduce an explanation of high logical consistency. The rationalization ofa market serves multiple purposes. It provides a simplified model of how itworks and sometimes even allows for limited prediction. It advises actors howto behave, and makes the market legitimate by demonstrating that it functionsin a reasonable and optimal manner given the circumstances. Moreover,a rational theory itself contributes to the stability of a market by providing acommon language and understanding of how things ought to work. Becauseof their emphasis on analytic clarity and consistency, rational theories areoften quite effective in coordinating people from different cultures and cognitiveworlds. By justifying markets, rational theories also protect them fromdestabilizing moral or political criticism. But markets are rarely as frozenas economic theories portray them. When conditions shift or entirely newmarkets emerge, the researcher needs to look for generative rules. Besides,entrepreneurs who engage in innovation must also consider generative rulesbecause entrepreneurship often revamps old markets or gives birth to newones, setting up new conditions and requiring new assumptions.

Our distinction between market creation and operation, between generativeand functional rules, is not new at all. This contrast is recognizedby both economists and sociologists. The incongruity of generative rulesand functional rules will appear to economists as market failure. One of thekey functional rules of the market is that the price signal drives supply anddemand. One way economists understand market failure is that the pricefails to include all important existing information about the product or service.Externalities are the costs and benefits that price does not capture.An example of possible market failure is food safety. Restaurants that cookunder unsanitary conditions may save money by doing so and thus outcompeteclean restaurants on cost, but only if they do not have to pay for thediscomfort and sickness of their customers. Yet unclean cooking not onlydamages the cook's reputation but also dampens people's overall enthusiasmfor eating out and thus harms all other restaurants. For this market to workproperly, food safety regulations and inspections must be in place; these conditions,which are not generated by the rules of price-guided, self-interestedcompetition, may make the market flourish once they are installed. Then astory of rational market competition, assuming working food safety regulationsand inspections, can be constructed. As long as the food safety problemis solved, these functional rules can have predictive power.

Sociologists are even more aware than economists that generative rulesare not necessarily those that can describe the operation of a rational market.One of the central ideas of economic sociology is that markets are embedded—thatthey depend on a series of social arrangements unacknowledgedby economists. This idea can be recast as the realization that the conditionsof rational economic action are generated by a different set of logics. Whenwe argue that economic transactions are embedded in social ties or institutionsor cultural understandings, we essentially argue that the circumstancesthat make economies function are generated outside the transaction, thatfunctional and generative rules are different. For instance, the classic exampleof Orthodox Jewish diamond traders in New York observes that theselling and buying of expensive gems require trust among the traders. Thiscondition, however, is not produced by the functional logic of the transactionthat strives for maximum profit and thus abets opportunistic behavior.The trust is generated by a separate logic, that of the religious communitycondition, however, is not produced by the functional logic of the transactionthat strives for maximum profit and thus abets opportunistic behavior.The trust is generated by a separate logic, that of the religious communitywith its power of socialization and sanctions. Yet once the puzzle of trust issolved—thanks to religion—a rational story of supply and demand, profitmaximization, and so forth can arise.

(Continues...)

Excerpted from Plastic Money by AKOS RONA-TAS, ALYA GUSEVA. Copyright © 2014 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of Stanford University Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: Stanford University Press
• Publication date: 2014
• Language: English
• ISBN 10: 0804768579
• ISBN 13: 9780804768573
• Binding: Hardcover
• Edition number: 1
• Number of pages: 344