The history of payment cards
In the payment industry there is currently a lot of options to pay for goods and services, ranging from paying by a payment card, paying directly from your account to the recipient´s account (“A2A”) or buy-now-pay-later (“BNPL”) amongst others. Each of these payment alternatives have different characteristics associated with them, some of which are good and others that are less so, and in this post we will shortly discuss the payment card and its origins. The payment card, which is one of the most commonly used forms of paying in the entire world. A study referenced by Statista calculates that there were around 440 billion transactions taking place on payment cards throughout 2019, where the lions share made up of transactions with a Visa card (estimated at 185 billion transactions). For this post we will refer to a payment card regardless of whether it is a debit or credit card but it should be noted that most of the payment card transactions, at least in the US, are taking place on a credit card. Predecessors to the plastic payment card that is used today first started developing in the beginning of the 20th century with the first consumer charge card issued by Western Union in 1914. Shortly after its inception, many department stores followed suit with their own consumer charge cards issued by separate retailers to customers with good credit rating. The consumer charge card was a rectangular piece of paper containing the account number, the name and address of the company responsible for paying the charges as well as a signature line. Due to the operational risk associated with store clerks manually copying the account number onto the register, this type of paper card was shortly improved upon with the creation of the ChargaPlate.
The ChargaPlate could only be used in stores that had signed up to a specific retailer-owned network (similar to today´s Visa and MasterCard, although owned by the retailers themselves). There were differnet networks located in different geographical locations. An example of such a network is the Retail Service Bureau of Seattle which included more than one thousand retailers by 1936. A few years later, in 1949, Diners Club was created with the aim to create a card that would be accepted in all of the restaurants of New York. The card was still paper-based and was not really a card in the traditional sense of the word, as it initially contained a foldable list of all the restaurants that accepted Diners Club. The company had issued, at its peak, 1.3 million cards in America. During the 50´s, Diners Club had little competition from other card networks but this ended in 1958 when American Express entered into the fray and launched their own card which was made of plastic. The benefit of using plastic was that it is more durable and can be embossed similarly to the ChargaPlate (pictured above) which helped reduce mistakes in the billing process. Marketing methods in the Diners Club vs AmEx battle In the early days of Diners Club and American Express both acquired customers by sending unsolicited cards to their customers home addresses. American Express, for example, mailed out eight million membership applications. Dramatic credit losses followed suit for both companies (sources say that there was a 25% increase in credit losses for Diners Club) proving that focussing on onboarding customers by lowering credit standards results in an increase of credit losses. In the early days of payment cards there were many different card issuers in the US during period between 40s-60s, but many of them were either unsuccessful and unprofitable, and therefore shut down shortly after inception. An exception to this however is the Bank of America issued card BankAmericard which was one of the largest banks in the world at the time. The BankAmericard was also made of plastic and contained embossed account information.
Similarly to the marketing efforts by Diners Club and American Express, Bank of America sent out the card to all of its depositors in the state of California and issued around 2 million BankAmericards over the following 13 months (credit losses as well as customer & merchant fraud rates likely followed suit). Geographical growth
In order to grow its business, BankAmericard started developing a licensing system to expand its geographical reach, which was useful as its customers were crossing state lines and wanted to use their card all across America. The licensing system enabled other banks to issue their own cards using the BankAmericard accounting software and receive trainings on how to deploy it successfully. In doing so, the BankAmericard merchant acceptance rate and number of customers increased exponentially.
It is also in this licensing system where the need for an interchange function was created as cardholders from one bank could use their card to make purchases at merchants represented by other banks, generating the need for settlement and clearing services. In the system, the acquiring bank was required to mail their drafts directly to the issuing bank for payment minus a discount fee, which was referred to as the interchange reimbursement fee. And it is through this licensing system, first operationalised by BankAmericard, that a number of licensees broke off and created a new entity named the National BankAmericard Incorporated, from which the VISA network would ultimately be born.
All of the details in this blog post originate from the book Electronic Value Exchange - Origins of the VISA Electronic Payment System by David L. Stearns.