Swiping through the time…
From the crude cardboard Diner’s Club card to the heavy metal, chip-embedded Amex Black card you’ll find in wealthy wallets today, the fundamental premise behind a credit payment has remained the same: any method to buy now and pay later. So next time you wave your iPhone at an invisible forcefield near the Starbucks register, thus unlocking your latte, remember how far society has come with credit payments.
The First Store Cards
There were many millennia of credit payments given and received throughout history (including goats and bananas as collateral), but we are just jumping to the invention of payment cards as we know them.
In the late 19th century, neighborhood stores began issuing loyalty cards, allowing customers to run up a monthly balance which would be collected by the store at month’s end. The first credit card, as we know it, was the ‘Charga-Plate’, a small rectangular sheet of metal, about the size of a military ‘dog tag’ that came into circulation in the early 1930s. Embossed with the customer’s name, city and state, and holding a small piece of paper for a specimen signature, it was laid into an imprinting machine, underneath a charge slip, onto which an inked ribbon was imposed.
As the post-war economy started booming, so too did the need for alternative payment methods, with the first major innovation in the field arising when Frank McNamara, who was at a New York restaurant, forgot his wallet at home and had to ask his wife to pay the bill. A year later he returned to that same restaurant to pay with a small cardboard card, known as the Diners Club Card.
Patrons who held the card would charge their meal to the card and the restaurant would send the bill to Diners Club. In turn, Diners Club would send payment directly to the restaurant’s bank, taking a small commission for the transaction. In its first year of operation, Diners Club grew to more than 10,000 members and included 28 restaurants and two hotels that would accept monthly from their elite clientele.
Bank Cards & Interbank Cards
American Express began as a freight transport company but shifted focus to its money order and travelers check business, which provided a safe replacement for carrying large sums of cash. Eventually, American Express developed its first charge card in 1958, allowing customers to pay their bill monthly in exchange for an annual fee. Merchants who accepted the card would pay American Express a percentage of the amount being charged, a precursor to the practice widely used today known as interchange fees.
California-based Bank of America took it a step further, issuing a paper BankAmericard with a pre-approved limit of $300 to 60,000 customers in Fresno and rolled the card out state-wide by 1966. This first attempt ended up being a costly error in judgment, with delinquency rates over 20% and rampant fraud.
The concept of a revolving credit card that you could carry a balance on from month-to-month proved to be a success as America’s growing middle class grabbed on to this newest financial product that provided both convenience and an instant personal loan. Later, in 1976, the BankAmericard changed its name to “Visa,” a word that sounded the same in every language.
In response to the success of the BankAmericard, in 1966 a group of California banks formed a partnership known as the Interbank Card Association (ITC) and released the second most popular credit card, first called the Interbank card and later changed to Master Charge, which eventually became MasterCard in 1979).
Tech & Law
An IBM engineer named Forrest Parry is credited with affixing magnetic tape to the back of cards so that consumers could have their information “swiped” at a point-of-sale terminal. Magnetic tape was originally used to store audio information and Parry was tinkering with ways to have it contain cardholder information to put on a credit card. Legend has it that Parry’s wife, who was ironing, suggested he iron the tape onto the card and the swipe stripe was born.
While the credit card industry rapidly evolved in the 1960s, some fundamental issues needed to be addressed. For example, card issuers had diverse ways of calculating interest rates with little consistency or transparency. Fraudulent charges were a problem, and women typically couldn’t qualify for a card without a male co-signer (which was and is insane).
Card terms and conditions didn’t really exist. Lawmakers stepped in, starting in 1968, by passing the Truth in Lending Act, which would eventually be part of a larger Consumer Credit Protection Act. The Truth in Lending Act standardized how banks and card issuers calculated annual percentage rates (APRs). More laws were passed in the 1970s and became the groundwork for regulations that help protect credit card holders today.
Fighting Fraud and Forging Forward
With technological advances come those who try to exploit them. As credit cards gained in popularity, so did the swindlers who used their own methods to make false charges using others’ card information. The easy access of swiping a card meant thieves could use a card they found or stole. More sophisticated fraudsters developed a process known as “skimming” where a thief could skim the information with their own reader to steal the cardholder’s information.
A safer technology was developed in France in 1984 when microprocessors were embedded into cards that could be read by specialized payment terminals. By 1994, all credit and debit cards in France employed this technology which, combined with a PIN, or personal identification number, added extra layers of protection to the payment process.
By 1996, the first specifications for EMV chips were released, with subsequent versions released afterwards. One of the most significant advances in the credit card chip industry came with the advent of contactless payment systems where a credit card’s chip could be read by holding it near to an enabled payment terminal. This could be done with Near Field Communication (NFC), a type of radio frequency that was used so that a card’s chip and the point-of-sale terminal could “talk” to each other. Eventually, card information could be stored in smartphones and wearable devices and read by terminals using the same NFC technology.
The Future is…
Credit cards and their predecessors have remained a convenient form of payment for hundreds, if not thousands of years. As commerce has changed and evolved, so too have the ways in which credit cards have operated and been governed. Consumer demand for credit products continues to grow and credit card rewards, perks and other attributes outside of the basic function of making payments also continues to change to meet the changing needs of society.
Credit card money moves have also rapidly evolved in the last few decades, evolving from taking a card’s physical imprint to swiping, dipping, tapping or waving your information at a payment terminal. Contactless payment technology, which saw a surge in use due to Covid, will continue to grow in popularity as will mobile wallets and wearable devices. Biometric payments are the next wave of payment cards, with the secure trend already sweeping Europe and making waves in Asia.