This was a discussion at the 1995 Berkshire Hathaway Annual Meeting (Q38 & Q39) that I thought was both interesting as well as one that could, and does, occur today. And the book Buffett and Munger were recommending in the excerpt below was A Piece of the Action : How the Middle Class Joined the Money Class by Joseph Nocera.
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AUDIENCE MEMBER: Edward Barr, Lexington, Kentucky. I had a two-fold question.
Number one, you mentioned American Express earlier. And I was curious as to whether the fact that credit card usage is only 10 percent of all transactions, and that may continue to grow for some time going forward, was a factor in your decision?
And the other part of the question pertains to the durability and permanence of the banking franchise with regard to alternative delivery channels that may appear over the next few years, including the possibility of the Microsoft/Intuit merger.
WARREN BUFFETT: Well, the specific number you mentioned about credit card usage and so on, that’s not a big factor with us. We think credit cards are both here to stay and likely to grow, to some extent.
Although at some point you start reaching limits, at least in terms of [outstanding credit card debt] that make any sense.
But the credit card field is a very big field. The question is, is who’s got the edge in it? Because everybody is going to want to be in it, and they already are. And there are a lot of different ways you can play the game if you’re in the credit card business.
And you better have some way of playing one part of the game, preferably a large part. But you better have some way of playing one part of the game better than others or natural capitalistic forces are going to grind you down.
I mean, it’s a business that people are willing to change their minds about what they do in. I mean, if you offer somebody a credit card that gives them some advantages that don’t exist on their earlier card, people are quite willing to shift cards.
So, you need some kind of an edge in some particular segment of the market. So, the growth aspects overall of the market are not a big factor with us.
It’s really a question of figuring out who’s going to win what game, and who’s going to lose what game.
And what was the second question again on that?
AUDIENCE MEMBER: The second question pertained to the permanence and durability of the banking franchise.
WARREN BUFFETT: Oh yeah, sure.
AUDIENCE MEMBER: And whether alternative delivery channels over the next few years may erode the durability of that, including the Microsoft/Intuit merger.
WARREN BUFFETT: Well, that’s a good question. You’re certainly seeing the value of bank branches diminish significantly. It used to be a point of enormous pride with managements, in how many branches they had.
And it was, you know, often political influence and everything else was called into obtaining branch permits.
The world will change in banking, probably in some very major ways, over a 20 or 30-year period. Exactly what players will benefit and which ones will be hurt is a very tough question.
I don’t think I’d expect really significant change in banking over the next five years, but I’d certainly expect it over the next 20 years.
And there are a lot of people that have their eye on that market, including Microsoft, as you mention.
It may be to their advantage to hook up with the present players. I mean, I know it’s certainly something that gets explored. But they may figure out a way to go around the present players, too. And that’s one investment consideration.
Charlie?
CHARLIE MUNGER: Yeah. The interesting player that went around the rest was Merrill Lynch. Merrill Lynch went heavily into banking with its cash management accounts. And I don’t think it’s the only innovation that’ll come along.
WARREN BUFFETT: What’s the name of that book?
CHARLIE MUNGER: You know, I’d forgotten, that’s a marvelous book.
WARREN BUFFETT: Yes, there’s a great book.
CHARLIE MUNGER: Maybe Molly remembers. What was that book you gave me? It was the history of the credit card.
WARREN BUFFETT: Was it Joe Nocera’s? Yeah, Joe Nocera was the author.... It’s a terrific history of the credit card business.
And if you read that you will get some idea of the amount of change that can occur in something like the movement of money. And my guess is that if there’s another edition of it in 20 years, there’ll be plenty more to write about.
CHARLIE MUNGER: By the way, that is a fabulous book. Most of the people who are here will not be able to put it down. I mean, for a book about an economic development, it captures the human background in a very interesting way.