The history of credit cards

Recently, I read an article that introduced the origins of credit cards. It was very clear, and it was both financially literate and interesting.

Below is the history of my credit card.

In the early 20th century, the commodity economy developed rapidly, and various products were extremely abundant.

The biggest problem is that most people can’t afford so many new products.

Merchants then invented installment payments. For example, when you buy a car, you don’t have to pay all at once, you can pay in 12 monthly installments. This boosts sales.

The essence of installment payments is that merchants make short-term loans to consumers.

Although installment payment promotes sales, it is very troublesome for merchants, must regularly collect payment from consumers, and bear the risk of consumer default. Accounting has also become more complicated, and special staff must be arranged to manage installment accounts.

Merchants must also conduct customer surveys to determine which consumers are eligible for installment payments, which is also cumbersome.

In 1951, a businessman launched a consumer mutual aid organization Diners Club. As long as you join, you can get a membership card and spend with the card in the membership store.

For merchants, this card saves the step of customer surveys, only need to check out with Diners Club every month, no need to check out every customer, and there is no risk of consumer default. For consumers, with just one card, they can “buy now, pay later” and pay in installments at all member stores without having to register their personal identity at each store.

Due to the convenience of both parties, the card was so popular that within 12 months, it developed 42,000 members and was accepted by 330 merchants.

In 1958, Bank of America in California decided to borrow from Diners Club and issue its own membership card, BankAmericard. 

BankAmericard’s biggest innovation is that it allows consumers to defer their repayments and pay them back at a later date but at a high-interest rate. In contrast, Diners Club requires members to settle all dues that month. This design turned the loyalty card into a profitable small high-interest loan business, and it became the first credit card in the United States.

Within a year, the card was expanded to major California cities, and due to lack of experience and risk control, there were a large number of consumer defaults, with a peak of 22% of consumers not paying what they owed. Bank of America lost $20 million in its first year (about $170 million today).

Three years later, the card was finally profitable, and it developed into a lucrative business in the mid-’60s. Consumers are increasingly accepting the card and have a new requirement: wanting to use the card nationwide, not just in California.

This was a big headache for Bank of America because, during the Great Depression in the 1930s, Congress passed a law that restricted banks to only operate in one state and not across state lines. This is because U.S. banks are all private, and many small banks used to solicit deposits from different places at high-interest rates. Once they fail, panic and runs will be caused nationwide. Therefore, it is stipulated that banks cannot cross states and are regulated by state governments.

In 1966, Bank of America finally figured out how to expand across the country. It decided to set up an alliance, and the participating banks can issue BankAmericard, and develop merchants to settle monthly settlements with Bank of America, thus realizing cross-bank consumption. No matter where, as long as consumers see a store with a BankAmericard logo, they can go in and swipe their card to spend.

The problem caused by this is that when the cardholder of Bank A swipes the card at the merchant of Bank B, Bank B does not know the actual situation of the cardholder, but it needs to advance money for him, which is risky. In addition, the mutual settlement between different banks has become more and more complicated, and the efficiency has dropped sharply.

In October 1968, Bank of America convened a meeting of all member banks to discuss how to solve the above problems. Finally decided to set up an independent company, specializing in the inter-bank credit card business. All member banks issue the company’s cards and only settle with the company, but each bank can develop cardholders and merchants in its own name.

The credit card company was originally called National BankAmericard Inc. and changed its name to VISA in 1976, which is the origin of the VISA card.

Bank of America invented the credit card and dominated the early national credit card business, paying banks to join the consortium. Banks that were unwilling to pay started to develop their own credit cards independently.

In 1969, these banks other than Bank of America decided to join forces and set up their own card organization, Master, which is the origin of the Master card.

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