A History of the Credit Card
Credit and debt are an overarching theme of American life. Today, an American family carries an average of eight different credit cards, and debt levels are at an all-time high (Evans & Schmalensee 2005). Modern Americans embrace the idea of “buy now, pay later,” but how did this theme of payment by credit begin? The official history of credit cards begins in 1951, with the distribution of the first card that consumers could use to make purchases and repay the debt over time. But the use of credit as a form of payment has been around for centuries.
Credit in the Ancient and Early Modern World
The first recorded use of credit dates back nearly 3000 years ago to ancient Babylon and Egypt (Evans & Schmalensee 2005). In these civilizations, buyers who did not have the necessary hard money to pay for goods could purchase items from certain merchants and agree to pay for them at a later date. The merchant recorded the debt, and installment or full payments were required within a certain period of time.
The use of credit continued throughout history, as merchants utilized a variety of methods to keep track of their customers’ debts. For example, during the eighteenth century in the U.S. and Great Britain, tallymen became an important part of credit history (Evans & Schmalensee 2005). The tallymen would sell clothes to customers in exchange for small, weekly payments. In order to keep track of the shoppers’ debts, the tallymen kept long wooden sticks with notches on one side representing the payments made and notches on the other side representing the amount of money still owed. Other types of credit tokens, such as metal plates and coins, were also used to keep track of debt in ancient and early modern times.
First Credit Cards
The first credit cards originated in the United States during the 1920s. Enjoying the booming economy of the era and hoping to attract more customers, individual companies began issuing cards to their customers that would allow them to make purchases at the store or company and pay the money back at a later date. While these cards could be used only at the store that issued them, some companies began accepting each other’s credit cards during the late 1930s. This was the first use of third-party payment, where the company that issued the card would pay the merchant that accepted the card. The customer would then pay back the card-issuing company. Third-party payment would later become the primary operating method of bank credit cards.
Diner’s Club Card
In 1950, Frank McNamara, founder of the Diner’s Club, issued the first universal credit card in the United States (Mandell 1990). While credit cards had existed in some form prior to this date, the Diner’s Club card was the first card that could be used universally at several businesses. Holders of a Diner’s Club card could eat at a participating restaurant and pay for the food and service with their card. The Diner’s Club would then pay the restaurant the amount owed, and the credit card holder would later repay the Diner’s Club for the debt. While the 1950 card was technically a charge card, meaning that the customer was required to repay the entire amount when billed by the Diner’s Club, it officially became a credit card in 1951, allowing the customer to repay over time.
Soon after, the Franklin National Bank of New York also began to issue credit cards for customers approved through a credit screening process (Mandell 1990). The cards could be used for a variety of retail purchases in the New York metropolitan area. Participating merchants would copy the customer’s information onto a sales slip and submit it for repayment from the bank. The bank would then repay the merchant, minus a flat fee reduction for covering the loan. This basic type of bank credit card would evolve into today’s standard bankcards.
American Express, Visa, and MasterCard Arise
By the late 1950s, many banks and merchants were beginning to recognize the value of plastic credit cards. For merchants, accepting cards resulted in fewer instances of fraud or processing errors, and customers tended to spend more when using credit cards. (Interestingly, this fact is still true today; on average, customers spend approximately 112% more when using credit cards than they do when using cash [Evans & Schmalensee 2005].) For banks, credit cards were a source of constant revenue via interest charges to customers and loan coverage fees paid by merchants.
In 1958, the American Express Company, building upon its successful traveler’s cheque business, issued a charge card that could be used for travel and entertainment expenses. The card was marketed largely toward business travelers, and payment was required in full when the cardholder was billed. It would not be until 1987 that American Express would abandon the charge card concept and issue credit cards that allowed cardholders to repay their debt over time (Evans & Schmalensee 2005).
In 1959, the Bank of America issued the first truly universal credit card that garnered widespread merchant support. The card was first issued only in California, but by 1966, Bank of America had formed licensing agreements with a number of nationwide banks, enabling it to issue cards across the country and settle transactions with the participating banks (Evans & Schmalensee 2005). In order to compete with the BankAmeriCard (later renamed Visa in 1976), four California banks joined together to form a banking association and issued their own credit card in 1967 (this card would be named the MasterCard in 1979). Visa and MasterCard became known as “bankcard associations” and operated their credit cards through a network of member banks. While most banks were initially required to join either the Visa or MasterCard association, changes to the bylaws in the 1980s allowed banks to issue both types of cards to their customers (Mandell 1990).
The Present and Future of Credit Cards
Today, Visa, MasterCard, American Express, and the relatively new Discover dominate the credit card industry. Discover arose out of the Sears Corporation in 1985 and sought to challenge the bankcard association domination that Visa and MasterCard enjoyed by operating cards out of its own merchant network. While Visa and MasterCard have maintained a stronghold on banks for most of the history of credit cards, an antitrust ruling passed down in 2004 allowed banks to begin issuing Discover and American Express cards, in addition to Visa and MasterCard (Evans & Schmalensee 2005). Merchant acceptance and issuing banks have gradually increased for Discover and American Express, and the two cards are now strong competitors. As the credit card continues to evolve in the coming years, only time will tell what the future payment landscape will look like.
-- Posted May 7, 2007
Evans, David S. & Schmalensee, Richard. 2005. Paying with Plastic: The Digital Revolution in Buying and Borrowing. MIT Press.Mandell, Lewis. 1990. The Credit Card Industry: A History. Twayne Publishers.