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Plastic MoneyConstructing Markets for Credit Cards in Eight Postcommunist Countries$

Alya Guseva and Akos Rona-Tas

Print publication date: 2014

Print ISBN-13: 9780804768573

Published to Stanford Scholarship Online: September 2014

DOI: 10.11126/stanford/9780804768573.001.0001

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Conclusion

Conclusion

Chapter:
(p.231) Eight Conclusion
Source:
Plastic Money
Author(s):

Akos Rona-Tas

Alya Guseva

Publisher:
Stanford University Press
DOI:10.11126/stanford/9780804768573.003.0008

Abstract and Keywords

The conclusion highlights the common problems that market makers in all of the countries faced, but it also emphasizes the differential successes and sometimes different paths and sequences of events that accompanied the development of card markets in the eight countries. It also notes that in several of the countries, most unambiguously in China, the central purpose of the card market shifted from providing a tool of convenience to customers to offering an instrument of economic control for the state. The discussion then turns to theoretical issues of social order and market emergence, and emphasized the implications of this analysis for the study of globalization, postcommunist transitions and markets

Keywords:   generative causes, functional causes, market puzzles, state control over the economy, social order, market emergence, globalization, postcommunist transitions, actors, valuation

Imagine you're going down the street and you see a billboard or an advertisement for a concert that you're interested in. You simply write Mobito a message from your telephone with the simple code from the advertisement and specify the number of tickets and press send. Then comes the request for payment, you approve, and you get the tickets in your e-mail or directly to your phone.

VIKTOR PEŠKA, DEPUTY CHAIRMAN OF MOPET, CZECH MOBILE PAYMENTS COMPANY FOUNDED IN 20101

Developmental biologists design controlled lab experiments with the goal of understanding the mechanisms and processes that guide the development of organisms. Most social scientists are not as privileged, because our ability to design experiments is limited. For the most part, we stick to observations. Postcommunist transitions have provided researchers with an unusual opportunity to observe credit card markets develop from their inception, in conditions not unlike the ones in a lab experiment: a new, standard product (the credit card) is introduced simultaneously in several environments that share many important characteristics. The fact that both the trajectories of credit card market development and the resulting markets differed among the countries we studied, and in significant ways departed from the American blueprint, is a measure of the limitation of global pressures, a tribute to the varying power of local environments in shaping the course of market development, and evidence of the overall plasticity of markets. Closely following markets from their birth allows us (p.232) to analytically separate mechanisms that help put markets into gear (we call them generative rules) from mechanisms that underscore how established markets function (functional rules). The undeniable advantage of focusing on markets in their early formative stages is the opportunity to capture generative rules that in mature markets become taken for granted and invisible. The unfolding of markets in the postcommunist world has been a process, spectacular in scale, that has taught us valuable lessons about what markets are and how they come about.

The creation of card markets in the eight countries we studied began with an attempt to transplant the American born-and-raised credit card brands, Visa and MasterCard, onto postcommunist soil. The American card market acted as a performative ideal type: it both served as a template of understanding of what such a market should entail and promoted actively the replication of this type of market in these countries. American and other global actors played key roles in this process. The very first cards in all of the countries were linked to foreign exchange accounts, but they later inspired the emergence of various domestic and local card brands, with varying longevity. Multinational banks swept the banking systems in Central Europe and Bulgaria but were kept at bay in Russia, Vietnam and China, and to a lesser extent in Ukraine. Foreign credit bureaus, with the blessing of the World Bank, disseminated know-how on interbank information sharing, and in several countries they played an even more direct role in credit reporting by opening domestic credit bureaus in partnerships with local players.

But in many instances local actors pushed back in response to globalizing pressures, and even in Central Europe, where governments put up little resistance to globalization, global forces had to act through nation-states and national institutions as retail finance everywhere remained for the most part confined to national boundaries. At one extreme, we find China, which refused to open up its financial sphere, despite formally joining the WTO and enduring continuous protests from Visa and MasterCard, and instead developed an independent national card system, UnionPay. In an ironic twist, UnionPay is now pursuing its own globalizing strategy of pan-Asian expansion. Russia's goal in attempting to create a domestic payment card system was similar—subordinating consumer finance to the needs of national security and sovereignty in the face of increasing global pressures. Payment cards born as a financial service to deliver the small convenience of (p.233) easy payment and quick access to credit by private vendors are now poised to become an instrument with which national governments can better control and monitor the economic activities of their citizens. With the help of cards, governments not only are able to disburse social benefits payments, from child support to pensions, and collect more taxes, but can also use card transaction data as a new source of information about citizens, and they can restrict how the poor use welfare payments or how entrepreneurs spend their government loans. Even in countries that have wholeheartedly embraced foreign influence, such as Hungary and the Czech Republic, governments have been experimenting with special-purpose payment cards, such as the Széchenyi card in Hungary, issued for small and medium-size businesses that participate in the government's subsidized enterprise loan program, or the S-Card in the Czech Republic, launched to distribute welfare and disability payments.

It is perhaps not surprising then that the final results in our eight countries turned out to be quite different from the original, US blueprint. For instance, the American market began with charge cards and soon moved to credit cards whereas debit cards emerged more recently and managed to overtake credit cards only a few years ago.2 In our eight countries, although all bank cards were persistently called credit cards in popular parlance, ATM and debit cards led the way and credit cards have taken root only with great difficulty. In fact, not even the payment function of these cards has proved as popular in these countries as in the United States or other countries such as Sweden. Whereas in the United States in 2010 less than a fifth of all consumer dollars were paid in cash,3 in the countries we studied, even in the most advanced markets, cash is still king and people use their cards more for cash withdrawal than for payment, frequently equating their cards with their demand deposits in the bank (referring to “storing money on cards,” “withdrawing money from cards,” and so on). The vast majority of cards in the United States, with the exception of corporate cards, were issued to individual consumers who either initiated an application or responded to a bank's preapproved offer. In postcommunist countries, employers and the state helped banks to coercively mass-issue cards to employees and recipients of various social benefits. Even the ritual of using a card varies somewhat: in the United States, credit cards rarely require a PIN, but in the new markets, the PIN is de rigueur. The American market has also been slower to embrace smartcards that have a computer chip embedded (p.234) in them, because so much has already been invested in magnetic stripe technology. The four EU countries in our sample have pledged to switch to chip-only cards in the near future, and the other countries are also charging ahead with the new technology. Designed to cross national boundaries effortlessly, cards are without doubt a formidable globalizing force, but a flexible and malleable one as well. Card markets, like cards, are plastic.

Differences in Outcomes and Development Trajectories

If the countries we observed all look different from the United States, in many ways they also look different from one another. They vary by card penetration and use. Vietnam and Ukraine are on the low end, the Czech Republic and China are on the high end, and Hungary, Poland, Russia and Bulgaria are somewhere in the middle. In the Czech Republic and Hungary, Visa and MasterCard logos can be found on almost all debit and credit cards. In Poland and Bulgaria too, Visa and MasterCard dominate; but in Poland, PolCard survives for now, while in Bulgaria, Borica as an independent card brand has folded. In Russia and Ukraine, various local card brands survive despite the dominance of Visa and MasterCard, and the states continue to pursue the idea of creating national card payment systems. In Vietnam, international cards are rare, and most debit cards are domestic, proprietary cards of the issuing bank. In China, most cards carry the UnionPay logo and multinationals are effectively shut out, despite the WTO rules and admonishments.

The creation of these eight markets also took different paths. In none of the countries was the market able to “build itself.” In all of them, third parties had to step in to define who the principal participants were and to force these actors to solve the payment and credit puzzles that the banks were not capable of solving on their own. Self-interested, competitive actors left to their own devices appeared to be powerless in bringing about necessary legal and organizational changes, despite most of them agreeing that these changes would benefit the market as a whole. In all of the countries, the state was a key player, although the degree of its intervention varied depending on its capacities and the political context. In some countries, banks also got help from the juggernaut of Visa and MasterCard and large private employers.

Cast of Characters

(p.235) One important role the state has played in the financial sector is that of gatekeeper. In financial services, the barriers to entry are high compared to most other markets. States decided on the cast of characters that could offer financial services. They determined what conditions actors needed to meet in order to enter the new market, and what part foreign players could play. In all of these countries, the state resolved to limit the list of players primarily to commercial banks, and to limit nonbanking institutions such as monoline credit card companies, consumer finance companies, gas station networks and telecommunication companies to walk-on roles, or as happened in many countries, it decided to keep them entirely off the stage. What counts as a commercial bank, what the requirements to charter a bank are, how much capital it must have, what services it must offer, what it can own, how it must operate, how it is supervised and so on are the rules that states have set and enforced according to their political goals and capacities.

In all of the countries, the first commercial banks were created following the same recipe: they were the results of the disaggregation of the socialist-era monobank into its various functions, and the subsequent transformation of those specialized financial institutions into well-rounded commercial banks. Except in China and Vietnam, where the population before 1990 was largely unbanked, these reforms gave socialist-era savings banks a large initial advantage in the postcommunist retail banking market. After the first banks were set up, the stage was populated with additional actors—newly licensed domestic banks or foreign institutions that either opened branches under their own names or acquired existing domestic banks.

China has made the licensing of domestic banks very strict and resisted strongly the entry of foreign banks. In Vietnam, the state has pursued a similar approach. Both China and Vietnam were successful at holding the line on who can enter the market, but only the former was able to keep those on stage fully subordinated to its directorial instructions. Russia's government has also been protective of its domestic banking industry, severely limiting the presence of foreign banking capital. Yet, in a surprising move, it allowed an almost unlimited proliferation of domestic banks in the late 1980s to early 1990s, with very low barriers of entry and very loose regulation, essentially letting the newly minted banks fight it out in the Darwinian world (p.236) of free competition. Many of these banks were small, undercapitalized and short-lived, which undermined the people's overall trust in banks and, ultimately, in the card system too. Ukraine set out on a similar path, although banks did not multiply there at the same frenetic rate as they did in Russia. In the first part of the 1990s, the Bulgarian government also made it much too easy to start a bank, until it suffered a catastrophic financial crisis and had to get in line to join the European Union.

Cooperation

Where socialist-era retail banks dominated, they fiercely resisted cooperation with other, smaller and newer banks. The states were able to impose cooperation, but the degrees of their success differed depending on their ambitions and capacities. China, with its banks under tight state control and none of them significantly larger than the others, was an exception; cooperation did not even emerge as a problem. Beijing standardized card technology and infrastructure, and established a powerful credit registry, all part of a systematic strategy of market building. Vietnam did not have the capacity to follow China's developmental approach and, until recently and partially reflecting its lower level of economic development, did not consider retail finance an important enough reason for the state to engage in proactive market building.

The Russian and Ukrainian states initially had neither the interest nor the capacity to take the lead. Growing fascination with the Chinese model and the rise of economic nationalism, however, has propelled Russia and Ukraine down a similar course during the past several years. Both are now pushing to build their own version of UnionPay, but Ukraine trails significantly behind Russia, in both motivation and state capacity. Yet the already established presence of foreign banks and the big multinational card companies in Russia and Ukraine makes the development of an independent national card system much more difficult now than it would have been a decade ago. Despite the heavy involvement in card issuance and standardization, the Russian and Ukrainian states failed to effectively promote interbank cooperation on information sharing. Both countries legislated credit reporting, but effectively forwent the unique opportunity to force cooperation on the largest banks.

(p.237) Bulgaria began active state engagement by building its national card system, Borica, and then assumed a more passive role by focusing on measures required for the stability of its financial system as a whole. In Central Europe, the nation-states played a lesser role, with the Hungarian government the most active in the region and the Czech the least. Eventually they ceded some of their tasks to the multinational card giants. With EU accession, a new powerful political player came into play. In an attempt to integrate national card markets, the European Union is hoping to take advantage of its size and launch its own alternative to Visa, MasterCard and UnionPay.

Establishing Value

The value of debit and credit cards was not immediately obvious to either cardholders or merchants. Apart from experiencing inertia and being averse to giving up the anonymity of cash, cardholders did not want to pay for the right to use their own money, even though the first cards offered only simple debit and ATM functions. They were even more reluctant to borrow at high rates, and they were worried about unauthorized charges, especially, because at the beginning they were held fully responsible for them. Banks were unwilling to protect their customers from those losses, partly because it was costly, and partly because they felt it could create a moral hazard by encouraging people to act irresponsibly. Moreover, banks were caught in a classic dilemma: unless all of them adopted a policy of setting limits on their clients' liability, those banks that did would attract a disproportionate number of careless or fraudulent customers. Merchants, even the largest ones in some countries, also resisted card acceptance: they did not welcome the transparency that made tax evasion more difficult, nor did they want to incur the merchant discount, and the additional hassle of card processing. The banks therefore initially advertised cards as an elite product, something that could make people look more like the prosperous Westerners whose lifestyles postcommunist consumers coveted. They pointed out to local merchants the appeal of foreign tourist consumers, a more convincing argument in the more affluent, Central European countries, where tourism was more robust.

In the end, these markets resorted in large measure to coercion to break the reluctance of potential cardholders, and they mobilized the help of large employers. Under the umbrella of salary projects, banks opened accounts (p.238) for workers and had their wages directly deposited while arming people with ATM and payment cards. In Russia, Ukraine, Vietnam, China and Hungary, the state played a particularly important role in this respect, making millions of its employees, as well as the recipients of various social benefits, such as students and the elderly, available to banks as cardholders. In Bulgaria, Poland and the Czech Republic, large foreign and domestic private employers also pitched in. But it quickly became clear that forcing people to own a card is not the same as getting them to use it. Many people had no intention of paying with their bank card and used it just to withdraw money at ATMs. This practice created the largest problem in Vietnam, where it resulted in serious losses for banks.

Subsequently, coercive pressures were also put on merchants to accept cards. In China, Ukraine and Russia, the governments tried to foist card acceptance on merchants by legal mandate. Nevertheless, even in China, where the state had more power and where the market grew fastest, implementation of the mandate required additional, delicate negotiations with the stores. In Central Europe, large, mostly international retail chains also contributed to getting the necessary critical mass, but they played a lesser role in East Europe and Asia.

Coercion created value by changing the terms of the calculation drastically. Salary projects altered the context of evaluating card ownership. Having a card was now tied to being an employee and being paid, and the value of one's job became part of the value of the card.

On the banks' side, the thorniest issue of evaluation was the assessment of how risky customers were, because the customer's projected future behavior is a key component of the price of the loan. It was especially difficult to make this judgment for credit card applicants. The puzzle posed by information asymmetry was overcome in different ways. In the United States, the main method was a sophisticated and highly automated screening process that relied on statistically derived credit scores; but this technology, though it now appears in all of the eight countries, played an important role in the 2000s only in Central Europe, and even there it never became the main instrument of assessing card applicants. Banks were much more likely to employ some form of liquid collateral, such as a security account, or to take strong sanctions against people who failed to pay.

Employers were also central in all these countries as guarantors of conscientious card use. In Asia, Russia and Ukraine, they largely shouldered the (p.239) responsibility for their employee's cards, relieving banks of much of the usual risk of issuing cards. In Central Europe, employers aided banks in screening customers by supplying references, and with the written consent of the cardholder, employers helped banks recover losses by garnishing wages.

Credit registries in Central Europe and China, just as in the United States, also offered an inexpensive way to punish defaulting customers. Collateral and sanctions narrowed the discretion of cardholders and the risk that banks were taking. This made the calculation of the cardholder's value for the bank easier.

Globalization

Stepping back from card markets, we now turn to some of the wider implications of our work, addressing theories of globalization, market transition and the market. Our research was partly inspired by the vast sociological literature on globalization. Globalization is best viewed as the totality of a large number of projects directly or indirectly aimed at the integration of nation-states into a transnational order. One of the most visible projects is allowing people to conduct economic transactions around the world by providing a means of payment in lieu of their domestic money.

In the 1990s, sociologists were much impressed by the seemingly unimpeded sweep of global forces.4 In 1995, sociologist George Ritzer described the global spread of credit cards as the harbinger of the rise of American consumerism in the rest of the world.5 According to Ritzer, cards carry the rationalizing impetus of efficiency, calculability, predictability and control, along with displacement of personal relationships by nonhuman technology, a process he labeled McDonaldization, after the fast-food chain.6 As we have shown, the performative ideal type of the credit card market—its blueprint—indeed embodies many of these characteristics. Yet we have seen that this rationalization has fared differently in various countries, making more headway in Central Europe and much less in East Europe, Vietnam and China, and nowhere did it proceed by the sheer force of the market. The use of statistical credit scoring technology—the McDonaldization of consumer credit assessment—to deliver loan decisions in a mechanized fashion to serve a mass clientele quickly and at a low cost following a scientifically designed process—the way hamburgers are cranked out—was not (p.240) fully victorious even in Central Europe. Where it was used, it was to aid human judgment or to identify extreme cases. Bad data and too few cases, exacerbated by banks' unwillingness to share information, made automation difficult, just as running a McDonalds is impossible without reliable and ample supplies of standard-quality beef and potatoes. The need for market expansion posed a special problem for automating credit card decisions. Offering cards to new and riskier social groups meant that data from earlier transactions were of limited relevance.

Mechanization was adopted, wherever it was, primarily for reasons of legitimacy and control. Using state-of-the-art decision-making technology shielded bank officers from blame if the decision turned out to be wrong. Mechanization, just as in a fast-food restaurant, also increased management's control over the production process. By cutting the discretion of credit card officers and fully documenting each step in the computer system, managers could monitor lending closely, just as managers in fast-food restaurants can keep short-order cooks under permanent surveillance. Bank management, however, had to balance the contradictory pressures of increasing the customer base and reducing risk, a conflict often played out as a struggle between the marketing and risk management departments. In the EU member states, mechanization was also hampered by legal directives aimed at curbing automated decision making and protecting data privacy. The McDonaldization of banking thus ran up against serious obstacles. There were, of course, other ways to achieve the necessary control beside rational calculation. The history of the credit card illustrates the fact that rational calculation is unnecessary when more direct forms of control are available. If cardholders must have a security account or if their employer will help with collection or if nonpayers can be excluded from future lending, there is little need for fancy probability models to predict individual credit default.

A growing body of research has pointed out the various ways that local conditions remain recalcitrant to the onward march of globalization. James L. Watson, for instance, has shown that even McDonald's must adapt to local cultures.7 Students of the US card market have also noticed that developed countries have not copied the US blueprint. David S. Evans and Richard Schmalensee, commenting on European card markets, note that even though strong convergent forces have brought those markets closer to the US model, institutional differences persist. Ronald J. Mann has found (p.241) that markets in Japan and West Europe show differences that seem to reflect the unique historical circumstances under which they developed.8

Because the debate between globalists and localists hinges on the differences and similarities between handpicked outcomes, it is an argument difficult to settle. There are three ways in which this comparative finalism hinders any resolution. First, there is no agreement on the level at which one must scrutinize similarities and differences. From a bird's-eye view—looking at broad processes—globalization is much more plausible than from a worm's perspective. Under a microscope, even two Big Macs can be shown to be different, just as a careful reading of two different credit card contracts in the same country may reveal differences. Second, even if debaters agree on the relevant level, it is unclear which differences matter and which do not. If McDonald's does not sell beef patties in India, is that more important than the similarities of the production process or the physical space of the restaurant? If credit cards work the same way in Poland and Hungary, does it matter that Polish banks can rely on a credit bureau with full reporting while Hungarians, until recently, could not; or does it matter if some Polish cards are issued under domestic logos? Third, even if there is consensus about what the important differences are now, it is still uncertain whether they are temporary vestiges soon to be brushed aside by the triumphant march of globalization, or intractable obstacles in its path. How can we tell if the seeming predominance of domestic brands in countries such as China and Vietnam is temporary and will soon be squeezed out by multinationals, or a stable and defining feature of those markets?

We move beyond this debate by offering a different methodology. In this book, we did not start from comparing existing card markets. Instead, we began with a set of problems or puzzles that these markets had to solve in order to triumph.9 All of these problems were understood by the main players—in our case, the banks, and in China, the state—who spearheaded the effort of market creation. We then followed these markets over two decades, showing how they developed differently and why. Thus the relevant level of focus is where the action of globalizing intent (in our case, market building) is concentrated. The important differences are the ones that pertain to the operability of the market, and our historical approach of describing the mechanisms unfolding in time can identify how elements are changing, even if changes are rarely a linear progression. Indeed, they can be reversed (for instance, as happened in Vietnam, where banks began to dismantle (p.242) their ATMs, or in Russia and Ukraine, where the states are attempting to revert to domestic cards) or they can take unexpected turns (as they did in China at the turn of the millennium with the launching of UnionPay).

The Postcommunist Market Transition

The literature on postcommunist market transition, another line of research that motivated our project, asks a question similar to the one preoccupying the literature on globalization: are the countries that abandoned communism headed toward a common destiny of market capitalism or will they create their own local variety of market economy? In this book, we shifted the focus of inquiry from national economies to markets for a specific product (the bank card). By asking questions about the national economy rather than about particular markets, the transition debate could easily dispose of two of our three questions—Who are the actors and how is value established? In the context of the national economy, the answer to each question is rather trivial: the actors are all economically active citizens, and value is prosperity broadly conceived. Although in the long run both turned out to be important questions—Who can be integrated into the economy? And what exactly does prosperity entail?—within the narrow time window open for the transformation of these economies, both of these questions could be overlooked. The third question, on cooperation, was either obscured by the transition literature's preoccupation with competition—the element that had been missing from socialist economies and that was seen as the key ingredient to making markets work—or considered a matter for legislation, regulation or deregulation. In fact, much of the transition debate took the perspective of the state and construed the government as the principal actor entrusted with the general framework for all the specific markets that make up a national economy.

In shifting our view to the market of a specific product, we did not lose sight of the state, but the main characters became different. At this level, our three questions became the appropriate guide for explaining market building. If one thinks of the national market as an aggregation of many markets, we can give a more nuanced, market-by-market answer to whether postcommunist countries create a new form of capitalism. Looking at particular markets, it is also easy to see that not only can the socialist past be a burden for market building, a hindrance to overcome, but it can also be of assistance. (p.243) A large state sector in Hungary, a strong, commanding state in China, and the legacy of bloated socialist enterprises in Russia aided card markets in spreading payment cards.

Through the lens of the payment card market, we can also appreciate the difficulties that these economies encountered, not just in supplying cards but also in creating demand for them. Markets never simply respond to existing demand; they have to shape it, train it, educate it, and occasionally conjure it up entirely from thin air. Only when homing in on a certain product can we recognize the enormous effort that entrepreneurs exert to establish the value of what they want to sell.

Finally, the transition debate envisioned a national economy in which all markets follow the same logic of balancing supply and demand by setting prices based on competitive selfishness. The sagas of the card markets, however, show that for markets to arrive at this state, they have to solve a series of problems distinctive to their product and social context. Whom to let in, how to mix cooperation with competition and how to evaluate the product are peculiar to each market and predate the familiar drama of competitive, selfish, rational players.

Markets

Economic models proclaim their ability to explain and predict the behavior of markets, but their analytical power is limited to stable markets, resting on certain assumptions made true, if true, by generative rules. But this stability is a matter of degree. Unlike textbook markets, markets in real life are unstable and constantly shifting, coming to rest for periods that may last decades, years, or only months or weeks. When a market reaches a level of stability, it appears normal and natural to its participants. It is then that an economic model of rational action can capture the logic of how markets operate. Such a model follows a marginalist approach: given the conditions, this is how the market players behave or ought to behave.

We started with a set of five puzzles specific to credit cards that served as barriers to market emergence and development but could not be solved by competitive, self-interested actors: (1) the chicken-or-egg problem of two-sided markets, (2) the dilemmas of cooperation involved in standardization, (3) the puzzle of strategic uncertainty created by information asymmetry, (p.244) (4) the predicaments of information sharing among unequal players, and (5) the quandaries of market origination and expansion. The first, third and fifth puzzles thwarted the development of the market because they prevented banks and clients from developing ways to value and evaluate credit cards. The second and fourth puzzles stunted the market because their solutions required cooperation among banks that was not in the short-term self-interest of the most influential players, who would rather have eliminated their rivals than created a competitive market. But solving these two puzzles also aided valuation. Standardization made cards more valuable for card owners, and information sharing made it easier for card issuers to evaluate potential customers and price card products.

These five puzzles that market creators understood well but struggled with were resolved with more or less success in all of the eight countries. To the extent that markets depended on social forces and not just on economic incentives in solving these puzzles, the markets are socially embedded and market exchange is a form of social action. Understanding markets well involves retracing their development trajectory back to their point of origin because, as aptly argued by Greta Krippner, “congealed into every market exchange is a history of struggle and contestation that has produced actors with certain understandings of themselves and the world which predispose them to exchange under a certain set of rules.”10 Jens Beckert articulates a similar idea: “the development of the macrostructures prevailing in markets needs to be understood as a political, social, and cultural process which can be explained only by following the historical development of the evolution of specific markets.”11

Paradoxically, the more effective generative rules are in putting markets into gear, the less visible these social forces may eventually become and the more disembedded the market may appear. In other words, the better these puzzles are solved, the less actors have to think about them, the more they can take for granted the conditions delivered by generative rules and the more they may focus just on playing by the functional rules. No wonder generative rules get no credit. Instead, the myth of self-generating competitive markets is perpetuated further. In this book we make the case for the behind-the-scenes role of generative rules (which often work tirelessly on tasks of gargantuan proportions) in order to give credit where credit is due.

Although limited in application, economic models are nevertheless very useful. First, as a descriptive device, they can shed light on the functional rules of a market if certain expectations are met about who the players are, what (p.245) ways they are willing to cooperate and what the actors value. Those three factors are treated as exogenous, and they present the constraints within which markets function. If banks supply cards, if common card infrastructure and information sharing are available, if people value the convenience and liquidity that cards offer and if merchants see cards as either a necessity or an opportunity to boost their sales, then a card market can work. The analytic function of economic theories is not just to supply what Max Weber called an ideal type, a simplification and clarification of reality, and not only to reveal the necessary preconditions that markets require; it is also to provide cognitive coordination, a common language for participants to use in thinking about a market.

Next, as a prescriptive tool, economic theories can help the coordination of action among market players. By prescribing what to do, they can narrow the universe of actions that people are likely to take, making markets more predictable. If credit scoring is considered the best practice in selecting credit card applicants, not only will banks abandon the use of credit committees, but they will also expect other banks to do the same. All lenders switching to numeric credit scores will allow them not just to compare clients within their own portfolio but, as the best methodology becomes established, also to anticipate how their clients will be evaluated by other lenders.

Last but not least, as an ideological instrument, economic theories establish the market's legitimacy. By laying out how rational actors in pursuit of legitimate goals may reproduce the market, and thus showing how a market is optimal given the circumstances, they shield the market from political and moral objections. For instance, they shift the focus away from discussing the social consequences of electronic surveillance, the income inequality underlying the need for consumer credit or the social costs of indebtedness. It is in this sense that economic theories protect these markets and contribute to their overall stability. Performativity of economics is laid bare here: for its theories to work, the market must be stable, and this very stability is advanced by those theories.

The Future

Markets exist in time. They emerge and grow, but may later decline, disappear or morph into new markets. If you reach into your pocket, you are likely to find next to your wallet, containing your payment card, a cell (p.246) phone. The pocket-size mobile phone is a more recent invention than the flat plastic rectangle. It began to spread only in the 1990s, when improved technology requiring less battery power made it possible to shrink large bricklike mobile phones into palm-size devices. Yet technology alone did not make the mobile phone market. Nor did it spring forth from people's natural propensity for truck, barter and trade. Just as with the card market, building the market for cell phones had to overcome many challenges. Similar to getting people to use cards, getting more people to buy and use cell phones became easier the more phones were already in use. Yet, in contrast to card markets, where there are two distinct constituencies, the cardholders and the merchants, each with their own objectives and constraints, in the phone market the same phone user is alternately the caller and the recipient of a call. Standardization is another problem that the makers of card and cell phone markets have in common, as Europeans with their GSM phones and Americans with their CDMA devices experience when they are on the other continent. Furthermore, if mobile phone bills are paid days or weeks after the service was rendered, phone companies are essentially required to extend implicit credit and therefore face the same problem of information asymmetry that banks and other lenders grapple with. During the last two decades, cell phones have been spectacularly successful and now are ubiquitous in all of the eight countries we studied, and it is quite possible that in the not so distant future, the bank card in one's pocket will be entirely replaced with a mobile phone as the new instrument of payment and, possibly, consumer credit.

The process of mobile payments elbowing out credit and debit cards is spreading in Asia, but in Africa, where most people do not have a bank account and bank cards never took root, cell phones are already the payment instrument of choice. In Kenya, two-thirds of the adult population sends money through short text messages, supplanting bank cards with SIM cards. Money is credited on SIM cards either by their owners depositing cash at a telecom outlet or by receiving a transfer from another phone. One can pay by sending a message, thus debiting the SIM, and cash can be collected at a telecom outlet, where the amount is subtracted from the phone. In poor areas, several people, each with their own SIM card, can share a single handset. The system, called M-Pesa—M for mobile followed by the word for “money” in Swahili—is run by Safari.com, a telecom company that grew out of the state-owned Kenya Posts and Telecommunications Corporation. (p.247) Since 2007, the government privatized Safari.com through public stock offerings and it is now a private corporation that operates as a de facto monopoly.12 It is unlikely that Kenya will ever build a payment market based on plastic cards with magnetic stripes, just as postcommunist countries never bothered with paper checks.

As an emerging market for a new form of payment, the mobile payment market has to construct necessary infrastructure and define the players, co-operation and value in new ways. For instance, the use of cellphones makes it possible to bypass the banks altogether, as happened in Kenya, and to bring in new actors, from phone service providers to technology companies such as Google and Apple, each with its own system. Competition notwithstanding, the new actors need to agree on new technology standards for phone readers and for the interface between the phone and the hardware that processes the payment. The question must be settled of whether to exploit the regular phone connection by sending text messages, as in Kenya or as the Czech mobile payment company Mopet would have us do, or to use a contactless reader that communicates with the phone via a simple two-dimensional barcode, through radio frequencies or using a version of Near Field Communication technology that reads a phone from a two-inch distance. Moreover, there must be cooperation on encryption and identification, and the players must agree on new rules of payment and data privacy. If mobile payment allows people to spend money they do not yet have, credit registries must be redesigned to accommodate new players. Last but not least, people and merchants must be convinced that this new payment instrument is useful for them and is worth the extra cost that they ultimately will have to bear.

Smartphones will not be just a replacement for cards. They could allow for new functions that cards can never have: they may keep instant tabs on one's account, register payment patterns, warn if items cost less online or in a nearby store and allow merchants to send instant coupons and reminders to their customers. Even small shops will be able to award loyalty points and keep tabs on customers at a low cost. Receipts can be issued electronically. Unlike cards, smartphones know where you are; they can take pictures, send and receive information and store much more than a handful of numbers; and they are integrated with the owner's e-mail, web browser, spreadsheet and countless other applications. Because phone companies know where their customers are at any moment and have a complete list (p.248) of their calls, finding nonpayers will be easier than it is for banks. If all that comes to pass, in a few years we may look at bankcards with the same sense of nostalgia or incomprehension that today we experience at the sight of cassette tapes or a rotary phone.

When new markets are emerging is when entrepreneurial capitalism is in high gear. Even when market construction involves adapting a model that has been successful elsewhere and does not entail fashioning a market never seen before, entrepreneurs face much uncertainty and a series of interrelated puzzles. Markets stall unless these puzzles are successfully solved. Following markets from their inception and along their developmental trajectories makes visible the hands that craft markets and enable them to work. (p.249)