How plastic money works

A credit card is essentially a system of payment allowing the cardholder to use a pre-approved credit facility. The card-holder is granted credit after an account has been approved by a credit provider, and is given a credit card with which the cardholder is able to make purchases from merchants accepting that credit card up to the credit limit. When a purchase is made, the cardholder legally agrees to pay the card issuer. From the merchant’s perspective, being able to offer its potential customers the ability to use credit cards can be very attractive because the card issuer guarantees to pay the merchant the moment the trans-action is authorised, regardless of whether the cardholder defaults on their credit card payment (except for legitimate disputes which can result in charge-backs to the merchant). Besides changing the cardholder interest, the bank charges a commission to the merchant on each purchase.

The forgetful diner

The concept of a card functioning as money is relatively new in the history of money. The idea of using a card to make payments was first mentioned in Edward

Bellamy’s 1887 novel “Looking Backward”. It wasn’t until the 1920’s though that a variety of individual stores and hotels issued “charge” cards to customers to purchase goods on credit, but only at the issuing store.
The universal card
However, the concept of a universal credit card really only took off a few years later. The idea of issuing a card which could be used to purchase goods on credit from a multiple of vendors is said to have been thought out in 1949 when Frank McNamara, head of the Hamilton Credit Corporation, went out to eat with two friends at Major’s Cabin Grill, a famous New York restaurant situated next to the Empire State Building. At the end of the meal, McNamara discovered that he had forgotten his wallet. The story goes that McNamara came up with a new idea – a credit card that could be used at multiple locations. The three diners decided to form a new company – the Diners Club. The innovative part of the new concept was that the Diners Club would be a middleman between the vendor companies and their customers. Instead of individual companies offering credit to their own customers, the Diners Club was going to offer credit to individuals for many companies (and then bill the customers and pay

the companies). Previously, vendors would make money with their charge cards by keeping customers loyal to their particular store, thus maintaining a high level of sales. The Diners Club needed a different way to make money since they weren’t actually selling anything. To make a profit without charging interest (interest-bearing credit cards came much later), the companies who accepted the Diners Club card were charged 7 percent for each transaction while the subscribers to the credit card were charged a $3 annual fee. The first Diners Club credit cards were given out in 1950 to 200 people, mostly friends and acquaintances of McNamara, and were accepted by 14 restaurants in New York. Diners Club would pay the restaurant and the cardholder would repay Diners Club. The original cards were not made of plastic; instead, the first Diners Club credit cards were made of cardboard with the accepting locations printed on the back. By the end of 1950, 20,000 people were using the Diners Club card.
Though Diners Club continued to grow and by the second year was making a profit, McNamara thought the concept was just a fad. In 1952, he sold his shares in the company for $200,000 to his two partners. The Diners Club card continued to grow more popular and didn’t have any competition until 1958 when both American Express and the Bank Americard (which later became VISA) entered the market.
“Don’t leave home without it”
Established in 1850 in Buffalo, New York,

the American Express Company was initially not a financial services company but an “express” delivery business transporting parcels, freight, gold and currency across an expanding USA. Soon the company would scale down its parcel and freight delivery business in favour of creating and selling its own financial products. The company made its name by developing travellers’ cheques but following the success of the Diners Club cards, American Express launched their own credit cards in 1958. In 1959 they be-came the first company to issue plastic credit cards.
A growing trend
In 1958, Bank of America launched its BankAmericard credit card in California. Some years later it struck one of their branch managers, who observed clerks in a back room preparing customers’ monthly bills, how much time and money was spent preparing and collecting bills that were often for small amounts. He wondered whether the process could be efficiently centralised, with the bank’s computers preparing the bills after hours. By 1965 the bank began concluding licensing agreements with other banks to use their BankAmericard, forming a network system across the USA. The network enabled its member banks to issue credit cards on a widespread basis at a lower cost and to settle transactions amongst themselves. In 1976, the organisation changed its name to VISA. A similar network, first set up by a group of banks to counter BankAmericard later renamed itself Master Card.