Purchasing on credit isn’t a new concept – it’s been going on for centuries. But the use of modern day credit cards is still relatively new, with the first widely issued cards being released about 50 years ago. Although the earliest credit cards can be traced to Europe in the 1890s, it wasn’t until decades later (in the US) that the concept started gaining widespread acceptance.
The First: Diners Club Card
The first widely issued credit card, the Diners’ Club card, began gaining popularity in the 1950s. Although it was technically a charge card (not a credit card) since customers had to pay the entire amount in full when billed by Diners’ Club each month, it provided the first opportunity for a wide scale audience of consumers to access and use credit. A customer could apply for a Diners’ Club membership and eat without cash at any restaurant that would accept Diners’ Club cards, then pay later.
Developed in the late 1940s by NY businessman Frank McNamara, the concept started when McNamara, realizing he forgot his wallet at a restaurant, decided there was a need for another form of payment when cash wasn’t available. Shortly after, he met with his lawyer, Frank Schneider, to discuss a simple idea: form for a club for diners who could sign for a meal and settle the bill later.
In February 1950, McNamara and Schneider became the first diners to say “charge it” at Major’s in NY. Over the next year, McNamara enrolled 27 establishments into his plan and offered $3 memberships to 200 of his friends and acquaintances. The Diners’ Club (becoming Citicorp in 1981) was an instant success and grew to 20,000 members by the end of 1950. By 1952, franchises were set up in Canada, France and Cuba, and in 1955, Western Airlines became the first air carrier to accept payment with the Diners Club card.
Soon to Follow: American Express
In 1958, American Express (a company already well known for it’s travelers checks) followed suit and issued a card for paying travel and entertainment expenses. It was accepted at participating restaurant, hotel and airline merchants. The original model focused on the travel and entertainment charges made by business people, which involved significant revenue from merchants and customer membership fees. However, it wasn’t until 1987 that American Express issued a credit card that allowed customers to pay over time.
More Players: Bank of America (Visa) – MasterCharge (MasterCard)
In 1959, Bank of America introduced the first ‘revolving charge card’ called the BankAmericard. Introduced in California, it offered widespread merchant acceptance – allowing charges to be made at more locations and to be paid off over a longer period of time. It wasn’t until 1966 that Bank of America started forming licensing agreements with other banks that allowed cardholders in different states to charge purchases. This enabled them to issue credit cards on a widespread basis and settle transactions among different participating banks.
One year later, in 1967, four California banks formed the Western States Bankcard Association and established the MasterCharge program to compete with Bank of America’s BankAmericard. It wasn’t until 1979 that the program was renamed MasterCard. The BankAmericard was also renamed around the same time (in 1977) and called VISA.
The Credit Card Industry Grows
As the credit card industry grew, banks interested in issuing credit cards became members of either the Visa Association or MasterCard Association. Their members shared program costs, making bankcard programs available to even small financial institutions. Later, changes to the Association bylaws allowed banks to belong to both Associations and issue both types of cards.
Over time, the processing of credit accounts became more complicated and the responsibility was outsourced to processing companies. This new way of business effectively reduced the cost for banks to issue credit cards and expanded the industry even further. Visa and MasterCard developed rules and standardized procedures for handling the paper flow in order to reduce fraud and misuse of cards. The two associations also created international processing systems to handle the exchange of money and information and established an arbitration procedure to settle disputes between members.
Eventually, in 1981, Diners Club was purchased by Citicorp. And in 1985, a new player entered the arena: Discover Card. Originally part of the Sears Corporation, Discover Card Services sought to create a new brand with its own merchant network. Since then, the company has successfully created the largest independent credit card network in the US – issuing the first “no annual fee” and “cash back” credit card programs to consumers.
A 2004 antitrust court ruling against Visa and MasterCard initiated by American Express, Discover and retailing giant Walmart have changed the exclusive relationship that Visa and MasterCard have enjoyed with banks. Up until now, they’ve owned a virtual monopoly over the credit card industry. But since the new ruling, banks and issuers are able to provide customers with American Express or Discover cards, in addition to a Visa or MasterCard.
The credit card industry has evolved – and continues to evolve today. Over the past decade there’s been an explosion of special features developed to attract new customers in this increasingly competitive industry. Standards that used to be commonplace, such as annual fees, are almost completely obsolete. And new benefits, such as 0% APR credit cards and reward programs are becoming the rule – not the exception. Where are we going from here? Only time will tell. But one thing is certain, more changes are sure to come…