Credit Cards - A Little History
Consumers and merchants have been exchanging goods using credit as currency for approximately 200 years. Modern day plastic credit cards have only become a way of life in the past 50 years, however. Oil companies and department stores issued their own proprietary cards as early as about 100 years ago. These cards were accepted only at the business that issued the card and locations were limited. These early credit cards were created to create customers.
The first bank card was released in 1946 by John Biggins, who was a banker in Brooklyn . The card was called "Charg-It." When a customer used it their bill was forwarded to Biggins' bank. This bank reimbursed the merchant and got the payment from the customer. The drawbacks were that purchases could only be made locally, and cardholders needed an account at Biggins' bank. The first bank credit card was created in New York 's Franklin National Bank in 1951. It was created for loan customers and also could be used only by the bank's account holders.
The Diners Club Card claims the title for the first general credit card receiving widespread use. It was created mainly for travel and entertainment purposes and was released in 1950. By 1951 there were 20,000 Diners Club cardholders. Diners Club Card purchases were made with credit but the bill had to be paid in full at the end of each month. America Express was formed in 1850. It focused on deliveries (and was a competitor to the U.S. Postal Service), money orders, and traveler's checks. In 1958 the company jumped into the credit card industry a purple charge card for travel and entertainment spending.
In 1959, the option of allowing a revolving balance was formulated. This released cardholders from the need of paying their bills in full at the end of each cycle. This created the accumulation of finance charges, but also gave customers more flexibility to manage their money. The general-purpose credit card was released in 1966 when the Bank of America established the BankAmerica Service Corporation. This franchised the BankAmericard brand (eventually became known as Visa) to banks nationwide.
A national credit card system was formed in 1966 when a group of credit-issuing banks joined forces and created the InterBank Card Association (ICA). The ICA is now what we know as MasterCard Worldwide. For a short time it was called MasterCharge. This organization competes directly with and is comparable to the similar Visa program. The new bank card associations are different from the earlier cards because they utilize an 'open-loop' system instead of a 'closed-loop' system. This requires interbank cooperation and enables fund transfers. Visa and MasterCard maintain open-loop systems, Diners Club and Discover Card are closed-loop.
As credit card processing has expanded and become more complicated, the need for outside service companies became apparent. These companies began to sell processing services to Visa and MasterCard association members. This effectively reduced the cost of programs for banks and has allowed greater expansion of this industry.