1947: John C. Biggins of Flatbush National Bank in Brooklyn, NY, introduced a system called Charge-It
Customers used Charge-It cards to pay for goods
The bank would reimburse retailers and collect payment from customers
The system was limited to local businesses where merchants had to leave sales slips with the bank directly
Formation of Modern Credit Card Networks
Late 1960s: Emergence of bank card networks
Notable networks: Interbank (later MasterCharge, now MasterCard) and BankAmeriCard (now Visa International)
Networks facilitate transactions across a global scale
Card Transaction Process
Authorization: Confirming identity and creditworthiness of the cardholder
Clearing: Exchange of data defining ledger positions of all parties involved
Settlement: Actual transfer of money between banks
Key Players in Card Networks
Issuing Banks: Provide cards to individuals and ensure cardholder’s creditworthiness
Acquiring Banks: Facilitate payments for merchants by integrating them into the network
Historical Context and Trust
Prior to the 1950s: Merchants and customers relied on personal trust or personal credit
1950: Diners Club founded by Frank X. McNamara
Implemented a membership card for deferred payments at participating merchants
Growth and Innovation
1950s Onward: Banks like Bank of America started offering credit on behalf of cardholders
Technological Advances: Introduction of plastic cards, magnetic strips, and POS terminals
Network Communication: Standardized processes and rules for card transactions
MasterCard Origins (1966): Consolidation of bank systems to form a cohesive network
Card Types and Usage
Credit Cards: Payment from a line of credit, settled later
Debit Cards: Direct deduction from a current account
Prepaid Cards: Funds paid in advance, stringent rules to avoid overdraft
Innovation in Prepaid Cards: Real-time transaction alerts and advanced processing technologies
Fee Structures
Interchange Fees: Charged to merchants, paid to issuing banks (up to 2.7%)
Network Fees: Collected by card networks (~0.05% per transaction)
Future of Card Payments
Continued value proposition of card payments
Increasing consumer choice and flexibility
Growing interest and investment in fintech and payment technologies
Competitive tension between established players and new fintech companies fosters innovation
The role of networks like MasterCard adapting to modern requirements and challenges
Conclusion
The credit card industry has evolved from limited local systems to global networks providing convenience, trust, and security for both consumers and merchants
Continued innovation and adaptation are key to the future success of card payments