A Short History of Credit Card Processing
For well over a century, the concept of purchasing on credit has existed in the American marketplace. It began in the late 1800s with consumers using credit coins and charge plates to purchase goods. Credit card processing as we know it today, however, didn’t enter the mix until much later.
Beginning in the early 1900s, oil companies and department stores were the first to issue their own proprietary cards, which had limited use and were created primarily as a marketing tool to foster customer loyalty and improve customer service.
Charg-It, as the first bank card was called, was introduced in 1946 in New York by a forward-thinking banker named John Biggins. When a customer made a purchase with the card, the bill was forwarded to Biggins’ bank, which reimbursed the merchant and obtained payment from the cardholder. Charg-It’s drawbacks were that it was very localized and customers had to bank with Biggins.
The Diners Club Card® was launched in 1949, appropriately enough, by a businessman who was caught short without funds following a business dinner at a New York eatery. Frank McNamara and a partner established the first credit card in widespread use, albeit primarily for travel and entertainment purposes. While Diners Club Card purchases were made on credit, it was technically a charge card because the customer had to pay the bill in full at the end of each month.
American Express® came out with its own card in 1958, following up the next year with the first plastic credit card. It was purple and, like Diners, was used for travel and entertainment expenses. Amex later issued local currency credit cards in other countries, and it wasn’t until the 1990s that it expanded into an all-purpose credit card.
Unlike today’s credit card processing system, these early cards operated on a closed-loop system involving the consumer, merchant and card issuer — no merchant accounts, no merchant services providers and no credit card processors needed. The concept of maintaining a revolving balance wasn’t introduced until 1959 and, with it, came finance charges.
Bank of America brought its general-purpose BankAmericard to market in 1966; it later became known as Visa®. That same year, a national credit card system known as InterBank Card Association was formed by a group of banks. Originally named MasterCharge, it eventually became the MasterCard® brand.
Around this time, the credit card processing industry evolved as outside companies started selling processing services to Visa and MasterCard association members, reducing the banks’ role in settling accounts with cardholders and paying merchants. Visa and MasterCard established rules and standardized procedures to reduce fraud, created international processing systems to handle the exchange of money and information, and set up an arbitration procedure to settle disputes.
Latecomer Discover®, originally part of Sears, joined the fray in 1986, unveiling its card during the Super Bowl.
From cardboard to celluloid to plastic, the credit card has evolved steadily over the last half-century. Credit card processing has changed dramatically as well, from a closed-loop operation to the open-loop system that exists today. Recent technological developments have spawned alternative forms of payment and credit card processing — including online, wireless and mobile solutions — that will shape the future.