The history of credit cards
By Jay MacDonald and Taylor Tompkins | Published: July 11, 2017
To fully appreciate the modern convenience of the credit card, simply insert your chip card, pause while it processes, and consider what it replaced.
Prior to plastic, money as a means of exchange for goods and services was cumbersome, if not outright dangerous. Beginning as far back as 9000 B.C. with cattle and camels, currency took some truly odd shapes, from cowrie shells, bronze and copper imitation cowrie shells and gold and silver nuggets to Chinese deerskin notes and Native American stringed wampum beads.
From the beginning, credit cards offered significant advantages over all forms of money: They’re pocket size, easily portable, relatively secure and have no intrinsic value in themselves. What’s more, true credit cards buy you time to pay your bill, typically with a modest fee attached.
Here’s a brief look back at the fascinating evolution of the credit card:
The dawn of credit cards
According to historian Jonathan Kenoyer, the concept of using a valueless instrument to represent banking transactions dates back 5,000 years, when the ancient Mesopotamians used clay tablets to conduct trade with the Harappan civilization. While still cumbersome, a slab of clay with seals from both civilizations certainly beat the tons of copper each would have had to melt down to produce the coins of that era.
Fast-forward to America circa the 1800s. During westward expansion, merchants would use credit coins and charge plates to extend credit to local farmers and ranchers, allowing them to forgo paying their bills until they harvested their crops or sold their cattle.
In the early 1900s, a few U.S. department stores and oil companies took credit one step further by issuing their own proprietary cards, the precursor to modern-day store cards. Such cards were accepted only at the issuing merchant and designed less for convenience than to promote customer loyalty and improve service.
Bank-issued charge cards originated in 1946 when a Brooklyn banker named John Biggins launched the Charg-It card. Charg-It purchases were forwarded to Biggins’ bank, the middleman that reimbursed the merchant and obtained payment from the customer in what came to be known as the “closed-loop” system. Purchases could only be made locally and only bank customers could obtain a Charg-It card. Five years later, New York’s Franklin National Bank followed suit, issuing its first charge card to its loan customers.
With postwar America on the go, two dining and entertainment charge cards quickly followed.
The Diners Club Card, which debuted in 1950, was inspired a year earlier by an “a-ha” moment when a customer named Frank McNamara forgot his wallet while attending a business dinner at New York’s Major’s Cabin Grill. Months later, McNamara and his partner, Ralph Schneider, returned to the restaurant with a small cardboard card and a proposal that resulted in the Diners Club Card.
Used mainly for travel and entertainment, the Diners Club Card claims the title of the first credit card in widespread use. Although its purchases were made on credit, Diners Club was technically a charge card, meaning the bill had to be paid in full at the end of each month. By 1951, Diners Club had 20,000 cardholders.
The American Express card, which launched in 1958, had an altogether different provenance. Formed in 1850 as a competitor to the U.S. Postal Service, American Express had introduced money orders in 1882, invented traveler’s checks in 1891, and contemplated a travel charge card as early as 1946, before Diners Club beat it to the punch.
American Express would soon claim milestones of its own by expanding its reach to other countries and introducing the first plastic card in 1959, replacing cardboard and celluloid. Within five years, 1 million American Express cards were in use at 85,000 merchants, foreign and domestic.
Bank cards and revolving credit
Major banks would soon launch their own consumer cards, but with a welcome twist. Instead of users having to settle their bill in full each month, bank cards would truly become credit cards by offering revolving credit, which allowed cardholders to carry their monthly balance forward for a nominal finance charge.
Bank of America was first out of the gate in 1958, mailing unsolicited BankAmericard credit cards to select California markets. In 1966, BankAmericard went national to become the nation’s first licensed general-purpose credit card. It would be renamed Visa a decade later to acknowledge its growing international presence.
Also in 1966, a group of California banks formed the Interbank Card Association (ITC), which would soon issue the nation’s second major bank card, MasterCard. Now known as Mastercard Worldwide, the nation’s first card association competes directly with a similar Visa organization, both of which are run by boards comprised primarily of high-level executives from their member banks.
Unlike their nonbank competitors, the bank card associations operate in an “open-loop” system that requires interbank cooperation, as well as transfers of funds. While banks initially had to choose between the Visa and MasterCard association, changes to association bylaws have since allowed banks to join both associations and issue both types of cards to their customers.
Regulation and litigation
As the popularity of bank and nonbank credit cards exploded in the 1970s, so did legislation aimed at addressing consumer complaints against this fast-growing industry. Among the regulatory course corrections:
- The Fair Credit Reporting Act of 1970 restricted the collection and use of credit report data.
- The Unsolicited Credit Card Act of 1970 prohibited issuers from sending active cards to customers who hadn’t requested them.
- The Fair Credit Billing Act of 1974 amended the Truth in Lending Act to rein in abusive billing practices and enable consumers to dispute billing errors.
- Also in 1974, the Equal Credit Opportunity Act was passed, disallowing lenders to discriminate against any applicant based on gender, race, marital status, national origin or religion.
- The Fair Debt Collection Practices Act of 1977 amended the Consumer Credit Protection Act to prohibit predatory debt collection practices and rework the debtor’s bill of rights.
The debut of the Sears Corporation’s Discover Card at the 1986 Super Bowl resulted in major litigation when Discover filed an antitrust suit against MasterCard and Visa for unlawfully preventing their association banks from issuing Discover cards. The six-year litigation ended in 2004, when the U.S. Supreme Court declined to hear the defendants’ appeal, effectively allowing banks and other card issuers to issue multiple card brands.
Passage of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, aka the CARD Act, provided greater transparency for consumers and eliminated or reduced a range of card issuer transgressions involving interest rate hikes, late fees and over-limit fees in the depths of the Great Recession.
Technological innovation and transformation
Since 1960, when IBM introduced magnetic stripe (or “mag-stripe) verification to credit cards, technological innovations have occasionally stolen center stage in the cashless payment play.
The card form factor itself broke out of its mold in 2002, when major card issuers rolled out key fobs and the “mini me” gym bag keychain card with names like MasterCard SideCard and that eyecatching kidney-shaped switchblade, Discover2Go. Card personalization allowed users to slap their favorite photo onto the face of their card (who can forget Spaghetti Jimmy?). MasterCard and Visa both launched interactive cards with tiny powered LCD screens that generated a one-time passcode at the push of the card’s other novelty, either a button or a mini-keyboard. Aromatic cards issued by Germany’s Commerzbank and Japanese card giant JCB were once the rage overseas. And even jewelers caught card design fever, turning credit cards into wearable art.
The arrival of radio-frequency identification (or RFID), which enabled touchless ID verification between cards embedded with an RFID chip/antenna set and a merchant’s RFID card reader, fueled an out-of-wallet fashion trend that included contactless bracelets, wristbands and watches. Card manufacturers also explored more exotic biometric solutions to cardholder verification, including facial, iris, hand and finger scans, voice prints and even RFID chip implants.
Eventually, the search for card security brought about a global switch from mag stripe and RFID to the EMV computer chip cards pioneered by Europay, Mastercard and Visa. The advantage of EMV: It is a more secure ID verification and payment solution. The disadvantage: It still relies on a physical card.
The future of credit cards
What will credit cards look like in 25, 50 or 100 years? Judging by the changes we see around us today, from rapidly evolving online and mobile payment technologies to home appliances that monitor and digitally reorder their own contents, card payments will likely be increasingly integrated into our lives in new and creative ways.
As a harbinger of payment options to come, Apple introduced Apple Pay in 2014, the first mobile payment technology in widespread use. It’s certainly possible that today’s teens may never use a physical credit card, preferring the convenience of the card payment app embedded in their smartphone.
Within 50 years, it’s equally likely that some unique, 100-percent theft-proof physical identifier, such as the vein pattern in your hand or even your DNA, will replace the mag stripe and chip as your credit card payment verification. Fast-forward a century and we may even become our own credit card, our physical forms instantly identifiable by video recognition and artificial intelligence at shops, banks, restaurants and entertainment venues.
Should technology one day render the physical credit card obsolete, it will have completed its mission to make the exchange of goods and services as convenient as humanly possible.
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