By Hardekopf, Bill
Business Credit , Vol. 112, No. 5
The credit card industry is undergoing a major transformation as a result of the Credit CARD Act and significant policy changes by issuers. Credit card loans are much more expensive as issuers make changes to bring in the most revenue possible through interest rates and fees. This is not a new development, but part of the evolution of credit cards. It is interesting to look back at the history of credit cards to understand the piece of plastic that has become the worldwide method of payment.
Until the 1950s, people paid cash for most products and services. There were a few local attempts at credit cards. Some individual stores and gas stations offered charge cards and a few major retailers and hotels offered credit to their most valuable customers. But carrying around multiple cardboard cards or paper identifications was cumbersome and inconvenient as they were useful at only one location or in a limited geographic area. Early users liked the ease of purchasing with credit, but it took time for banks and retailers to catch up and develop a convenient system with widespread acceptance.
It is hard for some of us to imagine a payment system without credit cards. Fifty years later, credit cards are the primary form of payment and are accepted almost anywhere in the world, including McDonalds and the Internal Revenue Service. You can even pay your mortgage or rent and most of your monthly bills with them.
According to the Federal Reserve, demand for credit increased with the growth of urbanization and mass production of consumer goods. One of the main limits of growth was the lack of sufficient information to judge the creditworthiness of a consumer, limiting the number of potential customers that could get credit. This changed with the emergence of national credit reporting agencies. Credit agencies introduced a better assessment of risk that helped to make credit cards more widely available to all groups.
Here are some important dates and developments in the evolution of credit cards:
1946: Jon Biggins, of Flatbush National Bank of Brooklyn, invented Charge-It, the first bank credit card between bank customers and merchants.
1950: The Diner's Club charge card was created by Frank McNamara and became the first widely-used credit card. McNamara, a manager of a small loan company in New York, thought the card would be an easy form of payment for salesmen to use for travel and to entertain clients. McNamara solicited participation in this new service to both subscribers and restaurants. The cards were made of paper stock and charged no interest. Cardholders paid a $3 annual fee, and the companies who accepted the card paid 7% per transaction. The service took off and it soon became a nationwide network.
1958: American Express offered its own charge card for travel and entertainment expenses. In 1959, it upgraded from cardboard cards, creating the first credit card made of plastic.
1959: The revolving balance was allowed. Cardholders no longer had to pay their bill in full at the end of each cycle.
1966: Bank of America introduced the first general purpose card, the BankAmericard. Because of restrictions on operating across state lines, Bank of America licensed the BankAmericard to other banks outside its area of operation. Business grew and became complicated and difficult to manage. Bank of America spun off BankAmericard into a separate entity that became the Visa network, which changed its name to Visa in 1976.
Success brought competition. In 1966, a national credit card issuing system was created when credit-issuing banks joined together to make the InterBank Card Association. This became MasterCard.
As the bank card industry grew, banks were able to join both the Visa and MasterCard associations and offer both types of cards. Joining these associations offered standardization and a processing system that reduced the costs for banks and allowed for growth of the credit industry. …