Credit Cards: History

The history of plastic card use.

In 1914, credit cards were issued by a small number of hotels, oil companies, and department stores. They were meant to be used only at the issuer's business. These cards served purposes of: Identifying a customer with a charge account, providing a mechanism for keeping records of customer purchases, increasing customer loyalty, and sales.

After the World War I, the use of such cards continued to grow until the Great Depression era.

During the World War II, most firms did not use credit cards due to the wartime credit restrictions.

However, in 1949, things changed. Alfred Bloomingdale, Frank X. McNamara, and Ralph Snyder thought that credit cards would be a lot more useful if it was possible to use them at more than one place. They conceived a plan for a new type of credit card. A notable aspect of their plan was the introduction of a third party into the credit equation. Their company would become the middleman between te consumer and the merchant, extending credit to one, providing customers for the other, and charging both for their services. This new dimension changed the nature of the credit card business. Unlike the retail and gas station credit cards, theirs would be the a 'universal' one. They first focused on the restaurants, believing that people who ate in a variety of restaurants would find such a card service very useful. Diner's Club card was the result of this operation.

In 1951, commercial banks entered the credit card business. In 1951, Franklin National Bank of New York developed its credit card plan. By 1955, this number had grown to more than 100 banks with credit card plans.

In 1958, the world's first travel and entertainment card, American Express, the traveler's check giant, and Carte Blanche, the private credit card operation of the Hilton Hotel Corporation, also joined the credit card business. That same year, Bank of America and Chase Manhattan also launched credit operations.

In 1958 and 1959, many banks introduced a new credit card plan which featured the option of repaying balances on an installment basis. This feature made credit cards more attractive to card holders, when, on the other hand, the card business became more profitable for the banks due to the interest applied on unpaid balances. By 1970, more than $7 billion of interest was charged to card holders.

In 1966, Bank of America licensed its new BankAmericard across the United States. Several other banks joined forces to form a second national card system, known as the Interbank Card Association. The companies now needed to establish a similarly large cardholder base to support these new large-scale operations.

In the late 1960s, both Bank of America and Interbank launched a series of carefully calculated mass mailings of unsolicited credit cards, initiating a period of tremendous growth in the credit card industry. Both companies succeeded in siging up millions of cardholders in a very short time. In 1976, BankAmericard changed its name to Visa to develop a more international image.

By 1978, more than 11,000 banks has joined one or both of these networks. Annual sales topped $44 billion, and 52 million Americans had at least two bank credit cards. Fifty banks issued over half of all bank cards in the United States.

In 1970, Master Charge, had enjoyed a solid lead over BankAmericard in both the domestic and international markets. But at the end of the decade, Visa's innovative and aggressive marketing enabled it to pass its rival. From 1969 to 1981, the number of participating Master Charge banks increased from 4,461 to 12,504, while the number of participating Visa banks increased from 3,751 to 12,518. (In 1980, Master Charge changed its name to MasterCard. By the late 1980s, Visa had increased its lead over its rival to more than a third.)

In this decade, the expansion phase of the credit card business was accompanied with the rising credit card fraud. Many people were billed and hounded for charges made on cards they never ordered or received. The government enacted a number of bills to address this problem, beginning with the Federal Trade Commission's 1970 banning of mailings of unsolicited credit cards. The Fair Credit Billing Act, passes in 1972, designated the Federal Reserve Board as the first formal regulatory body for the industry, with complete jurisdiction over billing practices. Federal Privacy Act, enacted the following year, provided protection for credit customers from unauthorized use of their credit records. And in 1977, the Equal Credit Opportunity Act became law, prohibiting the use of race, sex, creed, national origin, or marital status as criteria for issuing or denying credit.

Growth also brought consolidation as the industry came to be dominated by an increasingly smaller number of banks and credit card companies. Capitalizing upon their superior marketing ability, larger banks such as Citibank and Continental Bank of Chicago steadily increased their market share at the expense of smaller banks.

By 1986, more than 55% of all families possessed a bank card - more than three times the number for 1970. The number of participating banks had climbed from 71 to 90%.

1980s also saw the introduction of a new major competitor, the Discover Card - launched in 1986 by Sears.