Everything Everywhere Daily: History, Science, Geography & More - The History of Credit Cards (Encore)

Starting point is 00:00:00 The following is an encore presentation of Everything Everywhere Daily. One of the most ubiquitous forms of payment in the world today is credit cards. The odds are good that you have one, and most probably have one on your person right now. But how did it come about that you could pay for something by just giving someone a piece of plastic? And who exactly came up with the idea? Learn more about credit cards, where they came from, and how they work on this episode of Everything Everywhere Daily. What if your perceptions about the past were wrong? throughline is a podcast that takes you back in time to uncover the parts of the story that may have gone unnoticed.

Starting point is 00:00:52 It effectively turned day into night. And how it shaped the world now. Time travel with us every week on the ThruLine podcast from NPR. As with most everything I talk about in this show, the idea of credit has a very long history. The code of Hammurabi, one of the oldest systems of laws in the world, has sections on how to do with credit. It put maximum interest rates on loans of grain and silver. Credit was something that was usually done on a very personal basis. The ability to extend credit to someone was dependent upon your relationship with them and your trust in them. In fact, the word credit comes from

Starting point is 00:01:34 Middle French, and it was originally used to mean belief or faith. If you extend credit to someone, it is literally a belief in the ability of that person to pay you back. This is the way that credit worked for centuries. An individual store would extend credit to individual customers based on their relationship and trust. This sort of system might still exist someplace like a pub or a bar where a regular might have a tab that they pay at the end of the month. This system of individual lines of credit being established for individual customers by individual businesses was very inefficient. The process of making credit more efficient was begun in the late 19th and early 20th centuries, with major department stores like Macy's and Wanamakers.

Starting point is 00:02:15 Their wealthiest customers didn't want to handle money directly, so they were given paper cards or brass tokens that they could present at checkout. The cashier would then make note of the purchases, and the customer would then get a statement at the end of the month. This form of credit wasn't intended to be a loan like many credit cards are today. The amount had to be paid in full at the end of every month. What this system had over previous systems is that the individual cashier didn't need to know the person who presented the token.

Starting point is 00:02:44 The store would issue the token. and any employee could then accept it. In 1935, the Charga Plate system was unveiled by the Charga Plate Group out of New York. It was a rectangular metallic plate that was about the size of a dog tag, and like a dog tag, it had embossed letters showing the name and address of the customer. In most cases, the metal plates were kept at the store rather than in the hands of the customer. They were then pulled out when the customer made a purchase. This certainly made processing paperwork easier, and again it was in advance,

Starting point is 00:03:14 but the system still only worked at a single store. Another innovation came from the Air Transportation Association, which issued the Air Travel Card in 1935. The card had a unique number associated with each account, not just a name and an address. The card was first used by American Airlines, but by 1945, it was adopted by 17 different airlines. Moreover, they began allowing people to purchase tickets on installment. Eventually, the Air Travel Card became used universally in the airline industry, and the card is actually still in use today. There were major limitations, however.

Starting point is 00:03:49 While the air travel card could be used at multiple airlines, that's still all it could be used for. The thing which was needed was a card which could be used anywhere, something which could be accepted by any merchant. The inspiration for this occurred in 1949 in New York. Frank McNamara was having dinner at the Major's Cabin Grill where he was entertaining clients. He had forgotten his wallet, so his wife had to end up paying the bill.

Starting point is 00:04:14 He thought that a multi-purpose charge card that could be accepted at any merchant would solve this problem. He talked about it with the restaurant owner and then with his lawyer, Ralph Schneider. McNamara and Schneider got to work developing such a card, and one year later they had another meal at the Major's Cabin Grill, and this time they paid for it with a paper card and a signature. This became known as the First Supper, and it was the beginning of the first multi-purpose card, the diners club. The initial idea for Diner's Club was that it would be used in restaurants in New York, but the idea quickly expanded to other businesses. The card was not a credit card per se, but a charge card.

Starting point is 00:04:54 The difference is that a charge card has to be paid in full at the end of each month. The business model for Diner's Club was to charge card holders $5 per year and then charge merchants a 7% fee. In 1958, American Express, a 100-year-old company that was in the business of issuing money orders and travelers' checks, offered their own card. It was so popular that a quarter million cards were requested before the card actually launched. Like Diner's Club, the American Express card was initially just a charge card and did not have a revolving line of credit. Both American Express and Diner's Club were basically in the business of payment processing. They weren't banks,

Starting point is 00:05:32 and they weren't in the business of giving loans. The first bank to issue a payment card tied to a line of credit was the Franklin National Bank in Long Island, New York. In 1951, they allowed card holders to pay the entire bill at the end of the month, or they could pay interest on the outstanding balance if they chose to do so. The card was extremely popular, and within a year, they had 28,000 customers and 750 businesses signed up. The problem was it could only be used locally. The card wasn't any good if you left Long Island. The final step in the creation of a modern credit card, tying a card to a revolving line of credit that could be widely accepted, was taken by Bank America in 1958. They issued what they called the Bank America card. They picked Fresno,

Starting point is 00:06:19 California as the city where they would launch the card because 60% of the residents in the city were their customers. They basically gave cards to anyone and everyone. They even gave cards to people who didn't sign up for one. There were no credit checks because there was no way to do credit checks. They quickly had 2 million cardholders and 20,000 businesses signed up, but they quickly discovered the drawbacks of such a card. They had enormously high rates of delinquency. In the first year, the rates of non-payment were 22%. The launch was pretty much a disaster, but they were profitable by 1961. They never released the fact that they quickly became profitable, so they would keep competitors away. Despite the early problems, they did manage to solve the problem.

Starting point is 00:07:05 that so many cards faced. Cardholders didn't want to pay for a card that merchants didn't accept, and merchants didn't want to accept a card that people didn't use. They began licensing the card to different banks around the country. In 1976, they eventually consolidated all of the Bank AmeriCard licenses under a single brand they called Visa. In 1966, some competing banks created a card known as Master Charge, which was later merged with the card issued by Citibank. The Master Charge System was later renamed Master Card, which is one of the largest card systems in the world today. Also in 1966, the first credit card outside of the United States was issued by Barclays in the United Kingdom when they issued the Barclay card. As the credit industry matured, legislation went along with it. In 1970, legislation was passed, which prevented banks from just sending out credit cards to people who didn't even apply.

Starting point is 00:07:59 They could only send out applications for cards from that. point forward. Much of the advancement in the technology of credit cards was designed to cut down undelinguent payments. Originally, cards were processed by taking a physical paper imprint of the embossed card. The paper would then be processed, but at the point of purchase, there was no way to verify if the card holder actually had a valid line of credit. Because there was no credit check, credit card fraud was rampant. In the 1980s, cards began being shipped with a magnetic stripe on the back. This could be used with a processing machine at the merchant, which could verify if the credit card was in fact valid. Today, this is usually performed by a chip embedded in the card. The chips

Starting point is 00:08:42 are called EMV chips, and the EMV stands for EuroPay, MasterCard, and Visa, the three companies which sponsored the standard. MasterCard just announced that they will be completely phasing out magnetic stripes in their cards by the year 2024. Even if credit card companies could verify a card for a given transaction, they still had no real way to validate if someone should be extended credit. In 1989, the FICO score was developed, which allowed for credit issuing agencies to know someone's credit history. FICO stands for Fair Isaac Corporation, which was the company that developed the system. The subject of credit scores is probably worthy of an entire episode of its own in the future. Today, the visa system alone processes 150 million transactions

Starting point is 00:09:29 per day, and they have the capability to handle many, many times more that number. Credit card networks, like Visa and MasterCard, also handled debit card transactions, which are linked to bank accounts, as well as ATM networks, making cards to be an all-purpose financial instrument. The next frontier for credit cards is on smartphones. Systems such as Apple Pay and Google Pay allow for cards to be processed on an individual smartphone. Smartphones allowed for increased security as they don't expose credit card numbers, and they can use biometric security such as fingerprints or facial recognition.

Starting point is 00:10:04 Smartphones use what's called near-field communication to communicate with a card reader, which is why you don't have to swipe or insert anything. One of the incentives for people to get credit cards has been frequent flyer programs. The first frequent flyer program was actually created in 1981 by American Airlines. The first program to be tied to a credit card was in 1987. Continental and Eastern Airlines teamed up with Marine Midland Bank to issue the Continental Travel Bank Gold Master Card. Today, 191 million people in just the United States alone have credit cards.

Starting point is 00:10:37 They have a total of $820 billion in outstanding credit card debt, which is actually down substantially since the start of the pandemic. Likewise, credit card default rates in the first quarter of 2021 were the lowest that they've been in over 30 years at 1.87%. Thanks to credit cards, today you can travel to almost every country. on earth and pay for goods and services in almost any currency. So long as you use them responsibly, they can be an incredibly handy way to manage your purchases. The associate producer of Everything Everywhere Daily is Thor Thompson. If you'd like to support the show, please donate over at

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Everything Everywhere Daily: History, Science, Geography & More - The History of Credit Cards (Encore)

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