Cover Story 

 Charge It!
A Historical Overview of the Bankcard Industry

by Phil Britt

   Credit cards have been an integral part of the American economy since the late 1960s, but the history of charge cards themselves actually dates back much further.
   According to Visa U.S.A., Western Union issued the first charge card prior to the U.S. entry into World War I. In 1914, the company distributed metal plates to preferred customers enabling them to defer payment on services.
   Shortly thereafter, according to Visa, a variety of businesses, including hotels, department stores and oil companies, provided cards that could be used to buy goods and services from the issuing company.
   MasterCard traces its history back to the 1940s when several U.S. banks started giving their customers specially-issued paper that could be used like cash in local stores.
   But it wasn�t until 1950 that the �universal� charge card was issued in order to facilitate purchases at a wide variety of business establishments. That�s when Diner�s Club issued a card to businesses that could be used at retail establishments. Retailers accepting the card paid a fee to Diner�s Club.
   The following year, Franklin National Bank in New York became the first financial institution to issue a credit card. Several other banks followed Franklin�s lead within the next 12 months. However, these cards were good only at local merchants, so profitability was very limited.
   BankAmericard, the forerunner of today�s Visa card, was probably the first bank-issued card that could be considered successful. The card, first issued in 1958 by San Francisco-based Bank of America, was good throughout the state of California and was the first to allow revolving credit, rather than requiring payment in full at the end of a month�s grace period. Monthly finance charges were added to unpaid balances.
   It wasn�t until 1966 that Bank of America, through the BankAmericard Service Corp., started licensing banks outside of California to issue its card, making the brand national.
   The cost of the card program was then shared among member financial institutions. In August of that year, a group of financial institutions formed the Interbank Card Association (ICA), which later became MasterCard International.
   By the end of the 1960s, most financial institutions had converted their proprietary programs to BankAmericard or Master Charge.
   In 1968, ICA began to globalize by forming an association with Banco Nacional in Mexico. Later that year, they formed an alliance in Europe with Eurocard. The first Japanese members also joined that year.
   In 1970, BankAmericard transferred control and ownership of the BankAmericard program to the banks that issued the cards, forming National BankAmericard Inc. (NBI). By the start of the 1970s, more than 1,400 banks offered either BankAmerica or Master Charge credit cards.
   Another important development in 1972 was the introduction of magnetic stripes on U.S.-issued cards for speedier and more accurate authorization. Three years later, NBI introduced the first worldwide electronic card authorization system, BASE I, cutting authorization time from five minutes to less than one minute and making authorization available around the clock.
   In 1974, NBI formed International Bankcard Company (IBANCO) to administer the BankAmericard program internationally. Later that year, the company unveiled BASE II, the first electronic clearing and settlement system, enabling merchants to transmit transactions electronically, cutting paperwork and speeding up the payment process.
   However, according to Visa officials, the BankAmericard name still had too much of an American flavor for overseas users. So in 1976 the name was changed to Visa, a word common in many languages. NBI was renamed Visa U.S.A. and IBANCO was changed to Visa International. Similarly, ICA changed its name to MasterCard in the late 1970s.
   Visa introduced the first electronic dial terminal at the point-of-sale in 1979. These terminals were the forerunners of electronic data capture (EDC) point-of-sale terminals, which virtually eliminated the need for paper deposits.
   MasterCard issued its first gold card in 1981. Visa issued its first premium card the following year. Both were targeted to high-value customers.
   Most of the recent developments for both bank card associations has involved adding electronic capabilities, especially as e-commerce has evolved and smart cards have started to emerge.

Discover, American Express Histories

   Beyond the bank cards, as MasterCard and Visa are widely known, there are a couple of other widely distributed charge cards that are accepted by many of the same merchants who take Visa and MasterCard.
   Discover Card was a relatively late entrant to the game, starting as part of the Sears Consumer Financial Corp.�s Dean Witter Financial Services Group in 1986. The financial group also included an insurer and other consumer financial companies.
   In the 1990s, Sears officials chose to refocus on the retailing business and jettisoned the financial network. Discover and the rest of the Dean Witter Group became an independent company in the spring of 1993. The company launched the NOVUS Network two years later.
   Dean Witter merged with Morgan Stanley in May of 1997. The combined entity was known as Morgan Stanley Dean Witter until recently, when the �Dean Witter� was dropped for simplicity�s sake.
   American Express got its start Oct. 1, 1958, when it launched in U.S. and Canada. With the company�s background in the travel business, the card was first accepted at restaurants and hotels. The company also successfully lobbied the Civil Aviation Board to enable airline travelers to purchase tickets with credit cards. By the end of the year, 253,000 American Express cards had been issued.
   The following year, airlines, railroads and bus lines began accepting the card for payment. This was also the year that American Express introduced the industry�s first plastic card. The company had 600,000 active cards by the end of 1959.
   Cruise lines started accepting American Express cards in 1960, followed by major oil companies in 1962. With the addition of the oil companies, the card became a profitable division for the company for the first time. In 1962 American Express also began providing detailed expense records on the back of charge receipts to help in substantiating records.
   Three years later, American Express limited cardmember liability against fraudulent card use, an industry first. It wasn�t until 1970 that legislators adopted the consumer protection law that limits cardholder liability.
   The company introduced its first premium card in 1966. However, it wasn�t until 1972 that the American Express card gained much of the acceptance of the Visa and MasterCard brands. That was the year that Macy�s became the first department store to accept the card and that 36 Broadway theaters did as well. American Express was accepted at medical facilities in the U.S. and Canada four years later.

The Payment Process

   To most people, a credit card transaction appears simple: You hand the card to a merchant who swipes it through a machine, a receipt is produced, you sign the receipt, then keep the yellow carbon copy, while the merchant puts the white copy in a drawer.
   However, the process is much more involved. The credit card transaction process actually contains several different parts and isn�t completed until payments are made to all participants.
   At a typical merchant, the transaction goes from the point-of-sale terminal to the merchant�s data center (with multi-location or multi-lane merchants) to the phone company, to the credit card company, or to a third party processor, then back to the merchant. Those transmissions include requests for authorization from the merchant to the acquirer or acquirer�s processor. The purchaser doesn�t get the carbon slip to sign unless the transaction is approved. With some systems, like the �quick pay� gasoline pumps that are becoming increasingly popular, there�s not even a paper slip to sign. Merchants who sell products and services online and accept payment via the Internet also don�t provide anything for the purchaser to sign.
   Upon completion of the transaction, online or offline, the merchant submits the transaction data to its acquirer or acquirer/processor. From there, the acquirer submits the transaction data to the appropriate card association, which then passes the information on to the card issuer or card issuer processor.
   The association debits the issuer for the amount of the transaction and credits the acquirer for the same amount. The debits and credits don�t include the discount fee, which is deducted from both sides of the transaction (see Transaction World Magazine�s December 2001 issue, volume 1, issue 11, for more information on discount rates and the payment process). Once this step is completed, the acquirer has been paid and the issuer holds the transaction.
   The acquirer credits the merchant�s checking account for the amount of the transaction, usually within 48 hours. If it�s a paper transaction, this credit may be made at the same time the merchant submits the transaction to the acquirer or acquirer processor. The issuing bank debits the cardholder�s account. It issues monthly or transaction related statements to the cardholder. The cardholder receives a billing statement showing the transaction at the end of the billing cycle (typically every 30 days). The cardholder can elect to pay the bill in full, or make partial payments. Though statements list minimum payments, the reality is that, in most cases, the cardholder can make no payment, though he�ll be subject to an additional charge the following month.
   You can see from the above that the simple process isn�t so simple � one reason we have such a robust industry (and we all have jobs)!

Phil Britt is president of S&P; Enterprises, Inc. Mr. Britt is a regular contributor to Transaction World Magazine
and has been published in various banking and financial publications.

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