Stablecoins part 2 - rise and fall in credit
To help better understand how the landscape in stablecoins might shake out, I did a deep dive via Perplexity (which itself has changed the name of the game for research and content. I paste it at the end).
A few take aways from the outcome:
World War 2 and the rise of consumerism
Credit started as the instrument of the rich
Early innovators lost to the network
Consumerism, and I would say specifically that the economic growth post war and growth of consumer goods, television and modern advertising probably fueled this.
In this case credit became mainstreamed.
However it largely started out as a luxury good. Credit wasn’t meant to be debt so much as cashless purchase for the rich.
And as I referenced earlier and want to dive much deeper, the silos of either singular banks or singular stores offering credit gave way to a federation like Visa.
What will change and what will remain the same?
Federations, networks which have some chaordic mix of autonomy and constraint, tend to win out. Visa is a clear winner in the credit and payments concept.
It would be an interesting aspect to ask whether Visa remains the dominant network or the ground shifts as stablecoins emerge.
What about the future of credit?
To me there are a number of things shifting.
It could be that the luxury good will be yield bearing instruments that are more DeFi based that equities based.
The mass-consumer shift which hadn’t really been possible before is a reward system for not spending versus the dopamine rush of spending with a cherry on top of points.
Forced savings by fintech were great concepts. I just don’t know how successful they have been as a business or as an outcome for most people.
I have been shifting some of my spending, for example, to a debit card which converts out of USDC. Manually I am shift non USDC stablecoins which might be in lending protocols earning yields to pay for spending.
But the ideal experience is one where the yield is being optimized with minimal exposure to equity or speculation risk. In this case any spend is mostly eating down yield.
This is different from spending and I pay out yield to the banks for every dollar spent and unpaid past the first credit cycle.
Yield is the new luxury good I think instead of cheap luxury knock offs. The last couple of decades has seen a proliferation of mass market consumption, I would say in broad buckets, first by luxury goods going down market whether cars or handbags; second has been bespoke consumer goods via DTC.
It is hard and has low dopamine to save and invest.
The closest to date has been Robinhood which gamified gambling.
But no one has made NOT spending fun.
Perhaps this begins to change. I don’t know.
It’s a tad of a stretch but one can dream.
What does this mean in terms of the design that will win?
One way is working backwards from history, which I did touch upon in my earlier article:
The form factor of consumption will continue to be physical card or digital wallets, much like the current credit and debit cards are.
The engine that powers this will be complex, and perhaps more open, like a market network competing for flow and providing yield.
This will need tight regulation and probably even better oversight via blockchains and smart contracts to verify things such as the reserves….and likely not be credit for the a segment of the market.
For example, those who routinely pay off their credit cards in full don’t generate revenue to credit cards.
But the reverse could happen: the credit cards try to provide better yield across the different networks, deliver a meaningful amount back to customers, and take a percentage as a performance fee.
But to do this, there needs to be an open federation of providers, yet believable and enforceable governance and risk management for the network.
What’s interesting is that, typically, the network wants to be as closed and proprietary as possible to ensure both performance, regulations, and rent-seeking: the network effects can be compelling for a closed system.
As the underlying systems open up, however, the larger network, such as Visa, wouldn’t necessarily “leak” profits as long as they are rewarded for doing the right things, such as network growth, customer acquisition, yield and other performance.
Perplexity Research
Research into store Credit
source: https://www.perplexity.ai/search/give-me-a-succcint-overview-ofVup4F0CxSBm3GIAlJGl42Q
Store credit emerged in the early 20th century as a way for retailers to build customer loyalty and provide purchasing convenience. Department stores and oil companies were among the first to offer proprietary credit cards to their customers, allowing them to buy goods on credit[5].
Evolution of Store Credit
Early Days
In the 1920s, installment credit became popular for purchasing cars and large household items. This was followed by the development of hybrid credit plans by retailers in the 1940s, which eventually led to revolving credit[1].
Challenges
The main issues with early store credit systems were:
1. Inefficiency: Consumers had to carry multiple cards for different merchants[2].
2. Limited scope: Credit was often restricted to specific stores or chains[5].
3. Manual processing: Transactions were time-consuming, requiring manual imprinting and phone authorizations[5].
Birth of Visa
Visa, originally known as BankAmericard, was created to address these problems:
1. Unified credit system: Launched in 1958, BankAmericard aimed to provide an all-purpose credit card, consolidating multiple accounts into one[2].
2. Wider acceptance: By 1959, BankAmericard was accepted at 20,000 merchants statewide in California[2].
3. Standardization: The creation of National BankAmericard in 1970 led to a more organized system for managing interchange fees and expanding the network[2].
4. Technological advancements: In 1973, the precursor to VisaNet was launched, establishing the first electronic authorization and settlement systems[2].
Despite initial challenges, including high delinquency rates and fraud issues, Visa (rebranded from BankAmericard in 1976) successfully transformed credit from a localized service into a global, standardized payment system[2][3].
Sources
[1] A Brief History of U.S. Consumer Credit – Part 1 - Esusu https://esusurent.com/blog/a-briefhistory-of-u-s-consumer-credit-part-1-making-consumer-credit-mainstream/
[2] The Fascinating History of Visa and the Credit Card Industry https://einvestingforbeginners.com/the-history-of-visa-daah/
[3] The Rise of Credit Cards and the Fall of the New Deal Order https://legalhist.jotwell.com/therise-of-credit-cards-and-the-fall-of-the-new-deal-order/
[4] Store Credit Card Traps to Avoid - Investopedia https://www.investopedia.com/financialedge/0511/store-credit-card-traps-to-avoid.aspx
[5] The History of the Credit Card - SwipeSum https://www.swipesum.com/insights/history-ofthe-credit-card
The history of Visa is deeply rooted in the evolution of consumer credit, tracing back to the early 20th century when retailer credit first emerged. This overview will explore the journey from store credit to the birth of Visa as we know it today.
Early Forms of Credit
In the early 1900s, major department stores like Macy's and Wanamaker's introduced a primitive form of credit. They issued paper or brass tokens to their best customers, allowing them to make purchases and settle the bill by the end of the month[1]. This system catered primarily to wealthier customers who preferred not to use cash for their purchases.
By 1929, credit had become a significant part of retail sales:
One-third of all retail sales were financed Credit constituted about half of total sales for stores offering it[1]
The Birth of Modern Credit Cards
The landscape of consumer credit changed dramatically after World War II, driven by a booming economy and increased consumer spending.
The First Credit Cards
1950: Diners Club Card introduced in New York City, considered the first credit card[1] 1951: Franklin National Bank in Long Island issued the first card resembling modern general-use cards[1] 1958: American Express launched its first charge card[1]
The BankAmericard: Precursor to Visa
The story of Visa begins with the BankAmericard, launched by Bank of America on September 18, 1958[3][4]. Key developments include:
Created by Joseph P. Williams of Bank of America's Customer Services Research Group Initially launched in Fresno, California with a mass mailing of 65,000 unsolicited credit cards[4] Offered a $300 credit limit and was printed on paper[3]
Expansion and Evolution
1966-1970: National Expansion
Bank of America began licensing BankAmericard to other banks across the U.S.[4] This expansion was partly in response to the creation of Master Charge (now Mastercard) [4]
1970: Formation of National BankAmericard Inc. (NBI)
Bank of America relinquished control of the BankAmericard program A cooperative of BankAmericard issuer banks took over management[4]
1976: Rebranding as Visa
NBI rebranded the BankAmericard as Visa The name "Visa" was chosen by Dee Hock for its universal recognition across languages[4]
Visa's Growth and Innovation
Since its rebranding, Visa has continued to innovate and expand:
1986: Became the official credit card sponsor of the Olympic Games[5] Late 1980s: Partnered with Interlink to become the leading brand for debit cards in the U.S.[5] 1990s: Focused on implementing new technologies for improved speed, capacity, and security in payment processing[5]
Modern Era 2006: Announced plans to become a publicly traded company[4] 2008: Completed its initial public offering (IPO), raising US$17.9 billion[4]
Today, Visa stands as one of the world's largest payment networks, processing transactions through its VisaNet system at secure data centers capable of handling up to 30,000 simultaneous transactions and 100 billion computations every second[4].
Sources
[1] The History of Credit Cards - WTOP News https://wtop.com/news/2023/06/the-history-ofcredit-cards/
[2] The History of Credit Cards - Experian https://www.experian.com/blogs/ask-experian/thehistory-of-credit-cards/
[3] The Fascinating History of Visa and the Credit Card Industry https://einvestingforbeginners.com/the-history-of-visa-daah/
[4] Visa Inc. - Wikipedia https://en.wikipedia.org/wiki/Visa_Inc.
[5] Visa Card | Encyclopedia.com https://www.encyclopedia.com/finance/encyclopediasalmanacs-transcripts-and-maps/visa-card
[6] The History of the Credit Card - SwipeSum https://www.swipesum.com/insights/history-ofthe-credit-card