A Brief History of Credit Cards

Credit cards, as we know them today, have been around for just over half of a century. One of the first credit cards appeared in 1951 when loan customers of Franklin National Bank of New York were screened for credit and those approved were given a card they could use to make retail purchases. Participating merchants copied the customer information from the card onto a sales slip and the bank would credit the merchant account for the loan less a flat fee to cover the costs of providing the loan. In 1958, The American Express Company (a company built on the traveler's cheque business) began issuing a charge card for travel and entertainment charges which was accepted at participating restaurant, hotel and airline merchants.

Cardholders enjoyed the convenience of plastic charge cards (especially when on the road for business) as well as the line of credit offered by the new bank credit cards. Merchants found that credit card customers usually spent more than if they had to pay with cash (which is still true today – the average credit card purchase is 112% more than if cash is used). Accepting bank-issued cards was safer for the merchant than dealing with cash (more secure from internal and external theft and error) and less expensive than creating and maintaining a merchant-specific credit program.

Bankcard Associations
In 1959, Bank of America began issuing the BankAmericard within California, which was the first universal credit card with widespread merchant acceptance. Bank card associations began in 1966 when Bank of America formed licensing agreements with other banks. This enabled them to issue credit cards on a widespread basis and settle transactions among participating banks.

Also in 1966, a group of 14 US banks formed Interlink, a new bankcard processing association with the ability to exchange information on credit card transactions. In 1967, four California banks formed the Western States Bankcard Association and introduced the MasterCharge program (which was later renamed MasterCard in 1979) to compete with the BankAmericard (later renamed Visa in 1976) program. VISA and MasterCard are organizations that both issue credit cards through member banks and set and maintain the rules for processing. They are both run by board members who are mostly high-level executives from their member banking organizations.

As the bankcard industry grew, banks interested in issuing cards became members of either the Visa Association or MasterCard Association. Their members shared card program costs, making the bankcard program 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 to their customers.

Credit Card Processing Evolves
As credit card processing became more complicated, outside service companies began to sell processing services to VISA and MasterCard association members. This reduced the cost of programs for banks to issue cards, pay merchants and settle accounts with cardholders, thus allowing greater expansion of the payments industry.

Visa and MasterCard developed rules and standardized procedures for handling the bankcard 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.

Other Issuers Join the PartyAs mentioned earlier, American Express was among the first companies to issue a charge card. However, it waited until 1987 before issuing a credit card that allowed customers to pay over time. Their original business model focused on the travel and entertainment charges made by business people, which involved significant revenue from merchants and annual membership fees from customers. While these products are still in their tool chest, they have also developed numerous no-annual fee credit card products offering the same low introductory rates and reward programs as traditional bank cards.

Another relatively recent entry into the card business is Discover Card, originally part of the Sears Corporation. Discover Card Services sought to create a new brand with its own merchant network. The company has been quite successful at developing merchant acceptance, surpassing even Visa in worldwide acceptance locations. 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. Going forward banks and other credit card issuers will be able to provide customers with an American Express or Discover Card in addition to a Visa or MasterCard. While the bankcard associations have dominated the card business in the past several decades the tide may be turning with the new court rulings.

The credit card has evolved significantly in the past half century and will continue to change with technology as new frontiers in payments develop. What will the payments landscape look like in another 50 years? Only time will tell.

American Express -- An American Success Story

The American Express company is now 155 years old and going strong. The global financial services powerhouse is one of this nation's most recognizable brands around the world, in the same league as Coca-Cola and Disney. And, it is the power of this brand that has sustained the company through some difficult times.

American Express started out in 1850 as a freight and valuables delivery service for the rapidly expanding nation. The fledgling U.S. Postal service was quite unreliable at the time and only allowed shipment of letter-sized envelopes. This provided a business opening for the company to ship larger parcels and valuable items such as jewelry, cash, stock certificates and other merchandise. American Express began to realize more profit from a sector of their customer base which included banks and other financial institutions. Banks placed a high value on American Express' secure and reliable delivery service for inter bank transfers and drafts made between eastern cities and the growing western territories. American Express then began focusing their efforts on this sector and used their connections to eventually enter the financial services arena.

In the late 1890's, American Express decided to compete with the very banks they serviced by issuing money orders. This line of business took off rapidly and allowed the company to expand into Europe, where the American Express brand name became associated with security, capital and dependability. Soon thereafter, the company had major offices in London, Paris, Antwerp, Zurich and Berlin.

A major world event, the beginning of World War I, forced American Express into the travel services businesses. Over 150,000 Americans were stranded in Europe in 1914 at the outbreak of the Great War. These citizens flocked to the offices of American Express seeking funds after other European banks refused to honor their American letters of credit. American Express honored these letters of credit in full, which allowed American citizens to fund their passage back home.

In 1922, American Express jumped headlong into the travel services business by providing luxury steamship travel around the world, along with most other related services for passengers. And the traveler's check business meshed well with this well-heeled crowd of luxury globe hoppers. The travelers check business fueled the growth of the company over the next several decades based on the upfront fees and wise investment of the float income involved.

In the 1950's, American Express issued their first credit card, which caught on quickly in the booming post-war economy. In 1966, the company issued their first Gold Card, in an effort to cater to the upper echelon of business travel. Further product differentiation was achieved in the 1990's with the first Platinum Card.

American Express continues to be a powerful global brand through the present day with an incredible array of consumer products ranging from the Blue Card to the ultra exclusive Black Card (which isn't even advertised to the public, but is only issued by invitation only to the wealthy and famous). If you would like to review the products offered by this brand icon, please visit our American Express section.

Origin of the Credit Card

Do you know where your credit card comes from -- beyond the return address on the envelope from your card issuer? The approximately 2 billion credit cards in use today across the globe have an interesting history.

The idea of a credit card is not new. In fact, mentions of credit cards can be found from 1890, when some European merchants offered a credit card as a perk to better customers.

Still, the origin of the first wide-use charge account dates to the late 1940s, and is attributed to New York businessman Frank McNamara. The story goes that in the fall of 1949, McNamara went to pay the bill after entertaining a client at Major's Cabin Grill, only to realize he had left his wallet in another suit.

Luckily for McNamara, his wife was able to save him from potential embarrassment. But he continued to think about what happened and began to consider why a businessman could not freely spend what he could afford instead of just the cash in his wallet.

Fast forward a few weeks, and McNamara was sitting down with his lawyer, Frank Schneider, to discuss the details for a relatively simple idea -- a club of diners who would be able to sign for their meals at certain restaurants and then settle the bill at a later date. As his idea became a reality, McNamara enrolled 27 establishments in his plan, also offering $3 memberships in his diner's club to 200 friends and acquaintances.

McNamara and Schneider became the first diners to say "charge it" when they sat down to a February 1950 meal at Major's. The credit card industry recognizes the importance of this meal even though the Diner's Club card was not technically a credit card, since Diner's Club members were expected to settle their bills each month.

With 20,000 cardholders by the end of 1950, the Diner's Club was an instant success. By 1952, franchises has been set up on Canada, France, and Cuba, and in 1955, Western Airlines became the first air carrier to take payment by the Diner's Club card.

On the heels of Diner's Club, American Express introduced a card in 1958 for paying entertainment and travel costs. The next year, Bank of America issued a "revolving credit" card that could be used for a greater range of purchases and paid off over a longer period of time, with interest. But due to federal banking regulations, the card was only valid in California.

In 1966, Bank of America started forming licensing agreements with other banks that allowed cardholders in different states to charge purchases. The same year saw 14 other banks unite to create Interlink, a bank card processing agreement that allowed them to share credit card transaction information.

One year later, in 1967, four California banks established the MasterCharge program. Twelve years later, the program was renamed MasterCard to compete with the BankAmericard program (which was itself renamed VISA in 1977).

In 1981, the Diner's Club was purchased by Citicorp. Still, the origin of the credit card industry can be traced to Frank McNamara's innovation, which allows members to make payment for a purchase at a later date.