Plastic credit – who’s fault (a potted history of the payment card)

When you are recovering from the expenditure over the holiday period and you receive the credit card bill you may wonder whose fault it is for the plastic we use to make purchases.

Credit in various forms and mechanisms has been around since the early days of people conducting transactions. However it is widely regarded that the inventor of the first bank issued credit card was John Biggins of the Flatbush National Bank of Brooklyn in New York. In 1946, Biggins invented the "Charge-It" program between bank customers and local merchants.

In 1950, the Diners Club issued their credit card in the United States. The Diners Club credit card was invented by Diners' Club founder Frank McNamara and it was intended to pay restaurant bills. A customer could eat without cash at any restaurant that would accept Diners' Club credit cards. Diners' Club would pay the restaurant and the credit card holder would repay Diners' Club. The Diners Club card was at first technically a charge card rather than a credit card since the customer had to repay the entire amount when billed by Diners Club.

American Express issued their first credit card in 1958. Bank of America issued the BankAmericard bank credit card later in 1958.

By 1959 many financial institutions had begun credit programs. Simultaneously, card issuers were offering the added services of “revolving credit.” This gave the cardholder the choice to either pay off their balance or maintain a balance and pay a finance charge.

During the 1960s, many banks joined together and formed “Card Associations,” a new concept with the ability to exchange information of credit card transactions; otherwise known as interchange. The associations established rules for authorization, clearing and settlement as well as the rates that banks were entitled to charge for each transaction. They also handled marketing, security, and legal aspects of running the organization.

The two most well-known card associations were: National Bankamericard and Mastercharge which eventually became Visa and MasterCard.

By 1979, electronic processing was progressing. Dial-up terminals and magnetic strips on the back of credit cards were introduced thus enabling retailers to swipe the customer’s credit card through the electronic terminal. These terminals were able to access the issuing bank card holder information. This new technology gave authorizations and processed settlement agreements in a matter of 1—2 minutes.

Track 1 of the magnetic strips was designed to hold 79 characters, one less than the 80 columns on punch cards; the track 2 used 40 characters which contained the essential data required for a transaction and provide faster communication through dial up modems by reducing the amount of data sent.

The creation of chip and pin (the name given to the initiative in the UK) came about from the concept of smartcard technology, which was developed in the USA, and used an embedded microchip which was accessed through a 4 digit Personal Identification Number (PIN) to authorise payments.  Users no longer had to hand over their cards to a clerk, instead they inserted them into a Chip and Pin terminal, where they entered their unique 4 digit code, a message would be sent to an acquirer, via a modem, where they would check if the pin was correct, and if so, authorise the transaction.

In 1990 France introduced the use of chip and PIN cards based upon the French only B0’ standard. (For French domestic use only) and has cut card fraud by more than 80%

The technology was trialled in the UK starting in May 2003 in Northampton, its success there and high frequency of debit card users at the time, allowed HBOS to introduce the first cashback scheme. It was rolled out in the UK in 2004 to be the dominant way for the public to pay for items with the advertising slogan of ‘safety in numbers’ highlighting the personalised number aspect of the system. More than 100 countries use the technology online and offline, establishing its appearance as the dominant form of payment and being utilised by people all over the world.

References

http://www.fidelitypayment.com/resources/what_are_merchant_services
http://wiki.answers.com/Q/Who_is_John_Biggins_of_the_Flatbush_National_bank_in_Brooklyn_NY
http://www.cardsave.net/blog/the-history-of-chip-and-pin/
http://en.wikipedia.org/wiki/Chip_and_PIN
http://www.theukcardsassociation.org.uk/Advice_and_links/index.asp