The Birth of the Credit Card Industry

As a merchant, you likely have a love/hate relationship with credit cards. Most merchants do. You love the fact that your client can pay you so easily. You love that your client can make a large purchase with you because they have credit and can pay off the charge over time. You love the convenience that a credit card provides for both you and your customers. However, when you receive your monthly merchant statement and find that the convenience of accepting the card cost you anywhere from $600 to $3000 or more as a merchant, you hate credit cards.

Credit and debit cards are the foundation of the American economy. At the end of 2017, the average American had at least three credit cards in their wallet. To prove how much consumers rely on the concept of buying today and paying later, the average balance of a MasterCard or Visa cardholder is $6,354. That does not include “store cards” like Target, Macy’s and JC Penney. Most people have at least two of those retail store cards with an average balance of $1,841, according to Experian. In fact, American’s love buying today and paying later so much that total U.S. credit card debt topped $1 trillion last year, according to the Federal Reserve.

It makes you wonder how the world operated before credit cards were invented considering how essential they are to doing business today. From paying for groceries to paying utility bills, credit cards make the world of commerce go round. Have you ever wondered when the first credit card was issued or how we got to a world with over a trillion dollars of debt being carried on credit cards? We did too. Here is what we found:

The modern credit card was first launched in 1950 by Diners Club International. While Diners Club may have invented the concept and still be around today, they are a tiny fish in a huge ocean that is dominated by four big players, Visa, MasterCard, American Express and Discover, the latter of which owns Diners Club today. The crazy idea was hatched at Majors Cabin Grill restaurant in New York City in 1949 when Diners Club co-founder Frank McNamara was dining with clients and realized he had left his wallet in another suit. Legend has it that McNamara first thought of a multipurpose charge card as a way to avoid future embarrassment. He discussed this idea of accepting a “credit card” with the restaurant’s owner. One year later, McNamara used his cardboard charge card and his signature to pay for lunch at the exact same restaurant. Various versions of this story differ about whether it was a lunch or dinner at which McNamara forgot his wallet, and whether the meal was considered a loan or McNamara waited for his wife to bring him his wallet. Some journalists later credited McNamara’s friend, Alfred Bloomingdale with the idea for Diners Club who was present at the meal.

There is no doubt that it was McNamara and his attorney, Ralph Schneider who launched Diners Club International on February 8, 1950, with $1.5 million in initial capital. The original concept of Diners Club was to be a “club of diners” that would allow patrons to settle their bill at the end of each month through a credit account. Yet, the restaurant operator would be paid much sooner. When it launched, Diners Club listed 27 participating restaurants, and 200 of the founder’s’ friends and acquaintances as cardholders.  By the end of the first year, Diners Club had 20,000 members and more than doubled that by the end of 1951.

At the time, the Diners Club was charging participating restaurants a whopping 7% and billed cardholders an annual fee of $5. This should make you feel better about taking credit cards today. The highest credit card processing rates doled out today by American Express run about 3.5% or roughly half of what the original credit card accepting merchants paid back in the day.

While the idea obviously took off, it really is considered a “failure to launch” brand. McNamara sold his shares for $200,000 and moved on. In 1981 Citigroup purchased the brand and later sold it to Discover in 2008. Diners Club’s monopoly was short-lived, as American Express came along and today dominates the charge card sector, providing millions of customers with cards that require the monthly balance to be paid in full. Towards the end of the 60’s, Diners Club also faced competition from banks that issued revolving charge cards which later became known as Visa and MasterCharge (later MasterCard).

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