Credit cards have long been the go-to mechanism to pay for purchases without cash. And while the use of credit cards has long been associated with electronic systems, the purchase of goods using something other than money or coins dates back to as early as 5,000 years ago.
Read on to know about the history of payment processing using credit cards, when banks adopted them, and what kind of regulations are in place to ensure the proper use of credit cards.
When Did Credit Cards Start: Ancient History
The first type of credit card came in the form of clay tablets used by the Ancient Mesopotamians 5,000 years ago to facilitate transactions with the people of the Harappan civilization. Other transactions used credit tokens in various forms, from shells to metal medals and coins and allowed ancient buyers to run a tab with the sellers they frequented. These agreements involved setting up a revolving line of credit that could be paid as soon as the buyer was able and often had no definite repayment dates.
In the 1800s, transactions in the American West were facilitated using credit coins and charge plates that provided credit to farmers and homesteaders. The system allowed farmers to forgo paying for purchases until they earned money from harvested crops or sales of cattle.
In the early 1900s, credit tokens underwent another change when they were adopted by US department stores and oil companies. These companies started to issue their own proprietary cards which were the direct precursor of modern-day credit cards. Unlike modern-day cards, these cards were issued and accepted only at issuing merchant stores and often served as exclusive credit lines that encouraged customer loyalty.
The Closed -Loop System
Banks started issuing their own cards in 1946 and this was also the time when the closed-loop system was used. This system involved the bank, merchants and the buying public. Merchants that issued credit lines to customers forward purchases to their partner banks. The banks paid the merchants upfront and were then responsible for obtaining payment from the customers. The first known card to use this system was the Charge-It card by John Biggins. The cards were designed to be used locally in Brooklyn and were exclusively for bank customers. A few years later, Franklin National Bank of New York launched a similar charge card which was designed for use by its loan customers.
A few years after that, the Diners Club Card debuted in 1950 and allowed cardholders to make purchases on credit. These purchases had to be paid at the end of each month. Because the card was designed for travel and entertainment, it attracted a lot of attention. After a year, the card was already in the hands of more than 20,000 users.
This was followed by the launch of the American Express card by the American Express Company in 1958. Prior to the card, the company had also introduced travelers’ checks and the idea for a credit card was already in the pipeline before Diners Club launched their card. American Express would soon be ready for use in other countries. They also switched to plastic cards in 1959 and within five years the card was in use by more than 58,000 merchants in the country and overseas.
Banks and Revolving Credit
Banks would soon move on to cards with revolving credit. This meant the users did not have to pay their purchases every month and instead they could roll their remaining balance over to the next month. Bank of America launched its own credit card in 1958 with this rolling system. It became the first general-purpose credit card, useful for making almost any kind of purchase. By 1976, BankAmericard would be spun off, fused with other banks and renamed Visa. By this time, the card also had widespread international use.
In 1966, the Interbank Card Association (ITC) came out with the MasterCard which is still one of the major credit cards globally used today. Discover Card, another major player was launched in 1986 by Dean Witter Financial.
From Magnetic Strips to EMV Chips
Magnetic strips were first introduced to credit cards in the late 1960s when IBM developed a standard for magnetic strips allowing them to store and transmit card information electronically. Prior to this development, cashiers had to take imprints of the card to capture the information needed to process payments. This copy would be forwarded to processing centers where the customers’ credit card information was entered into a larger system that was accessible to the bank. In the last decade, more and more credit card companies shifted to using EMV chips. These chips were more secure because they generated one-time codes for every transaction.
Credit Card Regulation Through the Years
Credit cards are financial tools and therefore subject to government regulation to prevent fraud while ensuring the protection of user data. The Fair Credit Reporting Act of 1970 was enacted to protect user information. Another piece of legislation, the Unsolicited Credit Card Act prohibited card companies from sending card solicitations without customers’ requests. In 1974, the government enacted the Fair Credit Billing Act which was later amended as the Truth in Lending Act to curb abusive billing practices by banks. The Equal Credit Opportunity Act was enacted in the same year which prevented discrimination in issuance of credit based on gender, race, nationality, or religion. Additional consumer protection was enacted with the Fair Debt Collection Practices Act in 1977.
Credit cards have also seen their fair share of competition in recent years. For one, more and more people are using debit cards which allow for cashless payments with funds drawn directly from the consumer’s bank account. The development of online lenders, as well as digital currencies and e-wallets, means that people can pay for purchases electronically through the simple transfer of payments from one online account to another. However, despite these new innovations credit cards remain very much in use especially by a large segment of the global population who are comfortable with the relative familiarity of credit cards. Credit cards are also versatile enough to be used even for online transactions which means that despite all-new electronic advancements in payment systems, credit cards will likely be around for years to come. Now you are aware of when credit cards started. Apply with Payline Today to have your business accept credit cards.