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 |  Subject: How Credit Cards Built A Plastic Empire  Fri Aug 12, 2011 5:44 am | |
| Credit cards are nearing necessity status in modern life. If you want to rent a video, book tickets online, or place an advanced order for something, there is a very good chance a credit card number will be required. Yet, credit cards are relative newcomers to the world of credit. In this article we will explore how credit cards evolved from flimsy strips of cardboard into a trillion-dollar empire. (To begin with the basics, see Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)
Life Before Cards
In the 1920s, cash and personal checks were still the main way for most people to purchase goods even though consumer credit did exist. Promissory notes were a more commonly used financial instrument than they are today, and store credit, something that had been extended to preferred customers since colonial times, took on a different appearance at the end of the 20th century.
As stores grew into interlinked corporations where no one employee could recognize every customer with a legitimate credit account, the companies began making cards that the customer could present at any outlet to buy on their credit account. The first companies to formalize their store credit into the shape of charge cards were gasoline companies and large-scale retailers. Esso, Sears and other companies began issuing cards that worked as charge accounts that were to be paid off in full each month.
Birth of the Credit Card
Many people assume that either Visa or Mastercard must have been the first credit card company, but in truth the concept predates both companies by a decade. Diners Club was actually the first credit card. It was created in 1949 by Frank X. McNamara, head of Hamilton Credit Corporation. Members paid an annual fee in exchange for a cardboard card that they could use at member restaurants and nightspots in Manhattan. The company made its money in fees and enticed more and more restaurants into accepting the card by showing how it would increase repeat business.
The concept was so popular that by 1951 the company had already signed up 20,000 members.
The World's First Credit Card
According to legend, in 1949 McNamara was dining with friends at the Major Cabin Grill in New York City. He finished his meal, but when the bill came he realized he had forgotten his wallet. His called his wife and she rescued him from the sticky situation, but he vowed never to be caught short again. To solve this problem, he created the Diners Club, and one year later, McNamara returned to the Major Cabin Grill with a small card made of cardboard. He signed for the bill and the credit card was born.
Banks, long known for snubbing micro loans and individual accounts, took notice of McNamara's early success with Diners Club. American Express, Franklin National Bank, and others started similar card programs to take advantage of the fee-based model that was working so well for McNamara. To make good money on fees, these cards needed a large user base, so the companies took the scatter-shot approach of mailing cards to everyone with an address in hopes of a hit. This, in turn, led to widespread fraud when consumers began getting bills on cards that they never received. To stem the tide, the Fair Credit Billing Act of 1974 was passed to protect consumers. (If you've been ripped off or spot an error on your credit card bill, read How To Dispute A Credit Card Charge.)
Buy Now, Pay Much Later
By this time, however, many of the cards had switched from a fee-based model where the balance was paid off monthly to a revolving credit system where interest was charged on the outstanding debt. They didn't abolish the fees, but they began making much, much more from the interest charges. More and more consumers flocked to plastic and the promise of "buy now, pay later".
Instead of having to go to the bank with a reason, repayment plan and a credit report to get a loan, people were offered small amounts of higher-interest credit at the flash of a card. Banks realized that consumer loans, taken en masse, could be just as profitable as corporate finance. (To learn how to avoid the pitfalls of credit card use, read Understanding Credit Card Interest and Six Major Credit Card Mistakes.)
The next section will cover the rise of the two industry heavyweights and the laws and court rulings that have shaped the this empire built on plastic.
Enter the Giants - Visa and MasterCard
In the 1970s Visa and MasterCard took the credit card to the next level by creating associations with member banks that worked together. Rather than acting as a middleman between vendors and consumers, Visa and MasterCard are the middlemen between large banks on one side and the consumers and vendors on the other. They also work with large department stores to offer the endless variety of store cards carrying low credit limits and high interest. (If you are carrying many different cards and paying high interest, read Expert Tips For Cutting Credit Card Debt.)
Visa and MasterCard's operations amount to:
Signing up more vendors and customers, and
Helping banks to re-package debt and sell it off as securities, thus clearing more credit to be issued in the form of cards.
Visa and MasterCard make most of their money from fees and interest charges.
History of Visa and Master Card
Visa International - Visa's growth from tiny local bank card to global credit titan began in 1958 in Fresno, California, where Bank of America launched the BankAmericard. In 1970 the company was incorporated in Delaware as BankAmericard Inc, and in 1973 the company launched the first electronic authorization system. In 1976 the company decided to drop the unwieldy BankAmericard name and switched to Visa. This was a very good move. In the decades that followed, the name would become Synonymous with "credit card" in the same way that "Kleenex" is synonymous with "tissue". The company continued to grow and by 1997 its sales reached $1 trillion, then $2 trillion two years later. In 2008, Visa went public and was listed on the New York Stock Exchange with the ticker symbol "V".
MasterCard Worldwide - MasterCard got its start in 1966 when several banks formed the Interbank Card Association. It was first called "Master Charge: The Interbank Card" but in 1979 the company followed Visa's lead and shortened the name to "MasterCard". In 1983 the company was the first to introduce the hologram security feature on its cards. The company went public with an initial public offering (IPO) in 2006. It trades under the ticker symbol "MA". It is headquartered, appropriately enough, in Purchase, New York.
The Beauty of South Dakota
Although the Fair Credit Billing Act of 1974 went against the credit card industry, several important cases have gone their way. In 1978, the Marquette decision allowed credit card companies to apply the interest rate of the state that the loan is issued in across state borders, effectively nullifying the higher usury laws of other states. This is why so many credit card companies moved jobs to South Dakota, a state that eliminated their usury laws to attract the jobs.
Consumers Stop Smiling
The next major victory for credit card companies came in 1996, in the case of Smiley vs. Citibank. Citibank won, and the ruling eliminated the cap on late fees, allowing card issuers to ramp up fees according to their own view of their customers credit worthiness. This didn't bode well for consumers, but credit card companies were pleased. Perhaps there is no better testament to the power and wealth of the credit card industry than Visa's record breaking $17.9 billion IPO. Obviously investors expect the profits of the credit card companies to remain strong. (Make sure you understand what you are signing up for; check out How To Read Loan and Credit Card Agreements.)
Credit Craziness
The history of the credit card is one of increasing convenience for consumers, but also of increasing concern. Credit cards make traveling much easier as well as everyday purchases. Personal checks may not be accepted outside your neighborhood and most people go their entire lives without writing a promissory note. That said, the price of that convenience is getting higher and higher. People are amassing more debt than has ever been possible in the course of history. Many people today are finding this debt, and its associated costs, difficult to handle as the interest and fees increase, and yet they continue to use the cards. Lobbying from credit card companies has also made it harder to escape credit card debts through bankruptcy. It is hard to see where the credit card addiction will end, but it is unlikely to halt as long as credit card companies are able to issue cards and sell their debts.
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