Credit Card History – Major Developments and Milestones In Credit Card Industry
Today a bulging wallet snugly fitted in your pocket can only mean a stack of nicely kept multiple credit cards meant to take advantage of enticing and endless promotions offered by credit card companies. Gone are the days when cash was king. Today, from buying lunch to flying on Lufthansa, plastic payment cards are used. The payment cards represent ‘convenience’, ‘buy , pay later’,’easy money’, ‘social standing and high net-worth (in case of certain kinds of premium credit cards)’.On the gloomier side, they also represent ‘delinquencies and bankruptcies ‘.
The credit card pool is humongous;most dive, few swim,several struggle and most drown. Humans are rational beings but unreason triumphs when it comes to credit cards,sugary and fatty foods and recreational drugs as per a study featured and analysed in Economist- ‘The triumph of unreason?’.The human instincts are subverted by the instant pleasures these things provide even though they leave a bad after taste.
Even though credit card debt can leave an indelible scar on one’s finances, more and more people opt for instant gratification. This is only proven by the fact that the US total outstanding revolving credit as of April 2014 stood at $870 billion according to a publication by Federal reserve . The total number of credit cards in USA stood at 1.5 billion as of Aug 2012 and the number is increasing rapidly too. Credit cards have come a long way, leaving behind trails of landmark developments. So let us look into credit card history- Who invented credit cards, how they evolved and how they are slowly replacing physical money.
Credit Card History:Edward Bellamy’s Looking Backward
The idea of alternative to cash can be traced back to 1887 in an Utopian novel’Looking Backward‘ written by Edward Bellamy. It talks about a system of wealth distribution where physical money is eliminated and credit cards are used for procuring things.
“A credit corresponding to [a citizen's] share of the annual product of the nation is given to every citizen on the public books at the beginning of each year, and a credit card issued him with which he procures at the problic storehouses, found in every community, whatever he desires whenever he desires it. (pp. 72-73)“
The above excerpt from the book talks about a fixed credit in line with annual product. That means there was a credit limit as we have in our modern credit cards and debit cards.
I agree with Trent from TheSimpleDollar where he analyzes and talks about historical traces of credit card in ‘Looking Backward’. It is really fascinating and surprising to know that the concept of credit card was not introduced by a reputable banker or a nerdy intellect but an Utopian Science fiction writer who didn’t even complete college. And hats off to Edward Bellamy for predicting substitution of credit cards for hard cash, so long ago.
Credit Card History: Charge coins
As per sources, charge coins came before charge plates.These came into existence in late 1800s and prevailed till early 1900s. These were issued by fine departmental stores. Credit on account was extended to creditworthy customers in form of coins and they were designed in such a way that, they could easily fit on a key chain or tucked inside a woman’s purse. These were basically made out of metals like copper, aluminium and steel. These charge coins came in different shapes and sizes; some round, some triangular and some, uniquely shaped. These cards contained the name and logo of the issuer or the merchant and a customer identification number. Coins were convenient as the charge account number could be easily stamped on the sales slip.
These imprints provided 4 benefits:
- It reduced the time, as previously, numbers were manually copied.
- There was no room for error in copying
- The form of numbers was standardized
- Transactions could be authorized and authenticated
According to Jeacle and Walsh, “The charge coin was a small and easily portable numbered metal coin that the customer presented when making a credit purchase. The number of the coin was also used as the customer’s account number in the store’s debtors ledger. These coins enabled the efficient management of a far greater number of customers and helped reduce the possibility of individuals fraudulently charging goods to a customer’s account”
The main disadvantage of charge coin was that it didn’t contain the customer name and could have been used by anyone who could lay his hands on it.This possibly led to theft, mistaken identity and fraud.
There is a book namely ” Catalogue of Charge Coins, When Credit Cards Were Coins” by Steve Alpert which is supposed to be the definitive guide to charge coins.
Credit Card History: Charge Plates/Charga-plates
Charge plates or charga plates were the successors of charge coins and they were developed by The Farrington Manufacturing Company of Massachusetts to handle the limitation of absence of customer name and address on charge coins. Like charge coins, charga plates were also issued by large departmental stores. These plates were mainly made out of aluminium. The customer’s name and address was embossed on the plates. To record a transaction, upon presenting the plate by customer at point of sale, the plate would be fixed into a manual hand-held press by merchant, which would in turn imprint the customer’s information onto a sales bill.The flip side of the plate contained a paper card with the name of the store and a slot for customer’s signature. The protective pouches for these cards were made out of leather. The stores used to notch the edge of the plate to indicate expiry or validity of the plate. And naturally these rough edges were known to tear fabric and nylons.The use of charge plates reduced errors and also speeded up the book-keeping process. It is fascinating to know that this system of charga plates was successful and 93,000 plates were issued within the first month by the store which first implemented the system. 1950s ended the era of charge plates.
Credit Card History:Oil Companys’ Courtesy Cards
Stan Sienkiewicz, in a paper named ‘Credit Cards and Payment Efficiency‘ written for Philadelphia Federal Reserve talks about courtesy cards issued by oil companies in early 1900s. The main limitation of these cards was that they were accepted in few locations and were accepted only by merchants who issued them. And the charges had to paid in one shot every month.
Credit Card History: Advent of Air Travel Cards
The limitations of charge plates inspired innovation and led to the inventions of Air Travel Card by American Airlines and Air Transport Association.They introduced a numbering system which not only identified the customer account but also issuer of the card. A 15% discount was offered to customers who bought airline tickets with Air Travel Card at any accepting airlines. The system was synonymous to modern credit card system where in, the customers could buy and pay later. It is fairly safe to assume that the Air Travel Cards reached-out and resonated with the audience and by 1940, they were accepted by 17 different airlines. In October 1948, Air Travel Card became the first charge card to be internationally accepted by all members of International Air Transport Association.
Credit Card History: First bank card ‘Charge-It’and first ‘Bank Credit Card’
According to MasterCard, the first bank card namely ‘Charge-It’ was introduced by Banker John
Biggins in Brooklyn locality.The Biggins’ bank would reimburse the merchant the charge forwarded to him whenever the customer makes a purchase at the merchant. Then the bill amount is collected from the customer. The process was simple as the card holders were also customers of Biggin’s Bank.
In 1951, the first Bank Credit Card was introduced by New York’s Franklin National Bank. Only account holders at the bank had the privilege to use this card.
Credit Card History: The First Credit Card
Diner Club and American Express:
The first ever credit card was introduced by Diners Club. There is story behind the conception of this idea of introducing a card for making restaurant bill payments, entertainment and travel by Frank McNamara, owner of Diners Club. It all started in 1949 when Frank McNamara was at New York’s Major’s Cabin Grill for business dinner. Frank realized he had forgotten his wallet only when the bill arrived. This situation inspired Frank to think about an alternative to carrying cash. The idea materialized into the first ever credit card when Frank McNamara and his partner, Ralph Schneider returned to the restaurant in 1950 and paid the bill via a cardboard card. Technically,this was a general purpose charge card (each month the bill had to be paid in full) which was accepted by several merchants in several locations.
American Express joined the band wagon by introducing its Green card. This was based on a 3-party system namely ‘closed-loop’. Here there were 3 parties to the agreement:
- The consumer
- The merchant
- The card issuer
In this system, all aspects of the transaction are authorized and handled by the issuer of the card. That means the credit card issuer will process the transaction, pay the merchant, send the bill to customer and also receive the payment.
Even though several large banks introduced similar ‘universal’ cards with revolving credit feature, they weren’t hugely successful as merchants didn’t want to risk by signing up with multiple issuing banks and they also didn’t entice customers as they were restricted in acceptance and geography.
In 1958 Bank America Service Corporation, established by Bank of America introduced BankAmericard Fresno, California. BankAmericard was a successful business venture as far as modern credit card is concerned and later it evolved into Visa system. 60,000 customers received unsolicited offers from Bank of America via mail.
The Hilton Hotels travel and entertainment card was re-branded and was called Carte Blanche in 1958. There were several ups and downs in Carte Blanche’s path. Initially Carte Blanche was bought by First National City Bank from Hilton in 1966. First National City Bank sold it to Avco in 1968 and then Citicorp re-acquired Carte Blanche. Even though it was considered to be a prestigious brand, it fell short due to small member-base. Diners Club card and brand was acquired by CitiCorp in 1981. Citigroup, which was formed in 1998 by merging CitiCorp and Travelers Group introduced Diners Club Carte Blanche card in 2000. This was a premium Diners Club card.The original Carte Blanche card has been phased out but Diners Club Carte Blanche card is still running strong.
Then, sending unsolicited active credit cards became a common marketing technique. But this technique backfired on card companies and this was labeled “The Chicago Debacle”. Before 1966, more and more companies wanted a share of Chicago market.They would mail pre-approved, fully functioning unsolicited credit card offers to customers. This attracted criminals and corrupt employees of Postal Service who intercepted thousands of cards. The people of Chicago were outrages as they started receiving bills for purchases they never made. This could be assumed as one of first large scale identify thefts that ever happened in those days in United States.
The practice of sending unsolicited pre-approved cards which led to financial fiasco was ousted in 1970 by law but by then 100 million credit cards were already in the hands of U S population.
Credit Card History: MasterCard
In 1966 Interbank Card Association(ICA) created a national credit card system by establishing a
group of credit-issuing banks. The point worth noting is that, ICA is not nominated by a single bank. To run the association, member committees were formed and they governed and authorized rules and regulations, clearing and settlements, billing process, measures to mitigate risks and so on.
In 1968, what followed is ICA’s initiative to spread it arms outside of US in big way. It formed an association with Banco National in Mexico. In the same year, they ventured into Europe by forming an alliance with Eurocard. By 1970, ICA had spread out its tentacles to the furthest countries including Australia and Africa. ICA’s name was changed to MasterCard as a reflection of its commitment to international growth.
These two brands of payment cards, Visa and MasterCard were based on’open-loop’ system or four party transaction where-in four parties are involved;the merchant, acquiring bank, issuing bank and the customer. Under the ‘open-loop’ system, the transaction data has to be shared with thousands of members.
Credit Card History: First Credit Card outside of US
Under the Glass–Steagall Act, the American banking system wasn’t that efficient and this opened up opportunities for people who traveled around the country to use their credit cards in places where they couldn’t transact directly with the banks. The concept of revolving credit was taking shape in US and there were countless options available to individuals from corporate user credit cards to store cards.
But the first credit card outside of the US was launched by Barclaycard in the UK in 1966.
In 1970, competition from MasterCard urged Bank of America to form its own association. The members within the association had the privilege to issue BankAmericard. This association was called National BankAmericard, Inc. or NBI.
Credit Card History: Evolution of Credit Card Processing
It all began in 1970 when NBI (National BankAmericard, Inc.) got sued by Worthern Bank & Trust Co. of Little Rock, AR. The member banks of NBI had to maintain exclusivity in offering NBI’s BankAmericard and this put Worthern Bank at competitive disadvantage as it could not become a member of MasterCharge. Worthern Bank’s subsequent threat ( to appeal against NBI in Supreme Court after it lost its initial appeal), changed things and NBI (in response to the U.S. Department of Justices’ opinion and recommendation) agreed to change its rules. Now members of NBI could become members of MasterCharge. MasterCharge followed suit.This process came to be known as ‘duality’ and had a big impact on the credit card industry.
In the same year, the paper-based system was scraped as it was inefficient. To handle transactions in a better way, an electronic payment system in two stages was
introduced both by National BankAmericard and MasterCharge.
Stage 1:Authorization Systems: In 1974,National BankAmericard, Inc. (NBI) called their refurbished electronic on-line authorization system ‘Base I’ and MasterCharge named their “on-line” authorizations ‘INAS’.
Stage 2:Electronic clearing and settlement: In 1974,for on-line electronic clearing and settlement, NBI instituted ‘Base II’ and MasterCharge instituted INET.
What does future hold?
We already have almost a century of credit card history. Will the credit credit cards reign for another 100 year? It is difficult to say because at this point in time, it is not very difficult to imagine a world without credit cards as mobile payments is gaining traction. Mobile payments technology intends to replace your credit card with mobile phones. In a fascinating fact revealed by 9to5mac, iTunes has four times as many active accounts as Amazon and most are backed by credit cards. So it is safe to assume that Apple is very well positioned to move into mobile payments. Google Wallet is another threat to physical credit cards. Google wallet is an application for cell phone or any other mobile device which allows you to store virtual versions of items found in a physical wallet like credit cards.
Like I mentioned earlier, billions of people use hard plastic cards and to replace those with, whatever new technology will take a bit of time. For argument sake, let us say the physical cards could be scraped easily but what about the millions of machines installed at Points of sale that are meant to read these cards?
I have covered major mile stones and key developments in credit card history till 1980s and I am sure lot of developments happened in 90s and 2000s. Add your bit to the story in comments.