A FICTIONAL EXTRACT FROM A FUTURE BOOK: The Death of Credit Cards
Studies in Change: Except from “A financial history of the world” by Martin J Cropper, HBR Publishing NY 2035
From Chapter 9. Payments…..
9.3.2 The Death of Credit Cards.
"...finally came together in such an unexpected way to end the dominance and the use of all credit cards and debit cards overnight on the 3rd June 2012."
Are you old enough to remember credit cards?
Chances are, if you were born sometime in the last half of the 21st Century, you will remember the experience of lugging round in various pockets, bags or pouches a thing called a wallet. And this wallet would typically be bursting at the seems, sometimes literally, with small retangular multicoloured, multi-logoed pieces of plastic. It seems odd now looking back that this cumbersome state was just something that we accepted, on a par with carrying a phone (remember them) or wearing shoes (some things don’t change at least). In fact if you are perhaps a little older still you remember a world before even carrying a phone was the norm and when you had a wallet filled with a cheque book, bank notes and coins, then something changed, gradually first in the US in the earlly 1950’s and then across Europe and the rest of the world during the 1970’s.
Early Systems of Credit
As we have already described, during the 1920’s, the use of credit was regularly practiced in both the hotel, as well as the oil industries who commonly extended credit to their fondest customers. This practice then allowed patrons to pay for purchases or services later. Initially, credit was offered directly from merchants to their consumers who, in turn, also directly repaid their debts back to the original merchant.
Mimicking the success of hotels and oil companies, stores eventually began offering credit to attract new customers and as a way of boosting existing customer loyalty. As a new credit concept began to grow in popularity with consumers, merchants formed groups based on agreements to do business with consumers by accepting credit purchases on cards from other stores within their group. This alliance allowed customers the luxury of shopping at a wider number of stores while using the same agreement they enjoyed with the original merchant.
Early Charge Cards
John Briggins later created the charge card when he introduced the “Charge-It” program in the mid-1940s, which permitted merchants to directly deposit sales slips at their bank and, in turn, the bank would then bill that merchant’s credit customers.
The story really began however in 1949 when a man named Frank McNamara had a business dinner in New York's Major's Cabin Grill. When the bill arrived, Frank realized he'd forgotten his wallet. McNamara and his partner, Ralph Schneider, returned to Major's Cabin Grill in February of 1950 and paid the bill with a small, cardboard card. Coined the Diners Club Card and used mainly for travel and entertainment purposes, it claims the title of the first credit card in widespread use.
Plastic debuts
By 1951, there were 20,000 Diners Club cardholders. A decade later, the card was replaced with plastic. Diners Club Card purchases were made on credit, but it was technically a charge card, meaning the bill had to be paid in full at the end of each month.
According to its archivist, American Express formed in 1850. It specialized in deliveries as a competitor to the U.S. Postal Service, money orders (1882) and traveler's checks, which the company invented in 1891. The company discussed creating a travel charge card as early as 1946, but it was the launch of the rival Diners Club card that put things in motion.
In 1958 the company emerged into the credit card industry with its own pruduct, a purple charge card for travel and entertainment expenses. In 1959, American Express introduced the first card made of plastic (previous cards were made of cardboard or celluloid).
American Express soon introduced local currency credit cards in other countries. About 1 million cards were being used at about 85,000 establishements within the first five years, both in and out of the U.S. In the 1990s, the company expanded into an all-purpose card.
Closed-loop system
The Diners Club and American Express cards functioned in what is known as a 'closed-loop' system, made up of the consumer, the merchant and the issuer of the card. In this structure, the issuer both authorized and handled all aspects of the transaction and settled directly with both the consumer and the merchant.
In 1959, the option of maintaining a revolving balance was introduced, according to MasterCard. This meant cardholders no longer had to pay off their full bills at the end of each cycle. While this carried the risk of accumulating finance charges, it gave customers greater flexibility in managing their money.
Bank card associations
The general-purpose credit card was born in 1966, when the Bank of America established the BankAmerica Service Corporation that franchised the BankAmericard brand (later to be known as Visa) to banks nationwide.
In 1966, a national credit card system was formed when a group of credit-issuing banks joined together and created the InterBank Card Association, according to MasterCard. The ICA is now known as MasterCard Worldwide, though it was temporarily known as MasterCharge. This organization competes directly with a similar Visa program.
The new bank card associations were different from their predecessors in that an 'open-loop' system was now created, requiring interbank cooperation and funds transfers, Visa and MasterCard still maintain "open-loop" systems, whereas American Express, Diners Club and Discover Card remain "closed-loop."
Visa and MasterCard's organizations both issued credit cards through member banks and set and maintain the rules for processing. They were both run by board members who are mostly high-level executives from their member banking organizations.
As the bank card industry grew, banks interested in issuing cards became members of either the Visa association or MasterCard association. Their members shared card program costs, making the bank card program available to even small financial institutions. Later, changes to the association bylaws allowed banks to belong to both associations and issue both types of cards to their customers.
Credit card processing evolves
As credit card processing became more complicated, outside service companies began to sell processing services to Visa and MasterCard association members. This reduced the cost of programs for banks to issue cards, pay merchants and settle accounts with cardholders, thus allowing greater expansion of the payments industry.
Visa and MasterCard developed rules and standardized procedures for handling the bank card paper flow in order to reduce fraud and misuse of cards. The two associations also created international processing systems to handle the exchange of money and information and established an arbitration procedure to settle disputes between members.
Other issuers join the party
Although American Express was among the first companies to issue a charge card, it wasn't until 1987 that it issued a credit card allowing customers to pay over time rather than at the end of every month. Its original business model focused on the travel and entertainment charges made by business people, which involved significant revenue from merchants and annual membership fees from customers. While these products are still in its tool chest, the company has developed numerous no-annual fee credit cards offering low introductory rates and reward programs, similar to as traditional bank cards.
One of the last major entries into the card business was the Discover Card, originally part of the Sears Corporation. According to Discover, its first card was unveiled at the 1986 Super Bowl. Discover Card Services sought to create a new brand with its own merchant network. A 2004 antitrust court ruling against Visa and MasterCard -- initiated by the U.S. governement and the Department of Justice -- changed the exclusive relationship that Visa and MasterCard enjoyed with banks. It allows banks and other card issuers to provide customers with American Express or Discover cards, in addition to a Visa or MasterCard.
A blessing or a curse?
Some called it a blessing that people could borrow money so easily and help fuel the purchase of consumer goods and services no matter what their income. Others called it a curse and the basis of all that was wrong in America in the era of the great credit crunch- millions of people living beyond their means, drowning in debt and bankruptcy and foregoing the discipline of saving for instant gratification.
Even dogs and children could get credit card offers in the mail. If you filed for bankruptcy, no problem, there was a credit card offer for you.
No matter where you fall in the spectrum of sentiments about credit cards, there's no doubt the plastic cards had a major impact on society. The 2008 CreditCards.com "Taking Charge" survey found that 82 percent of Americans felt that credit cards were essential, with the same percentage saying credit cards provide a valuable service. Amazing to think that within three years they had all but vanished completely from the scene, certainly no one would have thought that in 2008.
Traveling or facing any kind of emergency (stranded on a highway, a quick relocation because of disaster) without a credit card as a backup you would quickly see the truth of the essential nature of cards then. Online purchases and many of the convenient payment options (utilities, bail or school lunches) we now enjoy would not have been possible without credit cards.
Consumer advocates argued then that the popularity and widespread use of credit cards made it all the more important for government to step in to protect consumers from potential abuses and unfair practices which was an interesting pre-cursor to todays debates about the ubiquity and ease of instant and pre-purchases.
Recalling the invention of the credit card unveils a perfect illustration of how rapidly strong business ideas will spread and transform how business is done worldwide. In a very short time period, the credit card had grown into a popular and convenient tool routinely used in the marketplace. Understanding their purpose and how they came into being, helps us in respecting how today’s payments options evolved.
The great iPay transformation
Of course alternative payment options had been evolving continuously through the last decade of the last century and the first decade of this. We had major initiatives by many companies dedicated to the simplification of both Virtual World and Real World payment modes, including alternative forms of payment rising to prominence, from online payment services such as the now suplanted PayPal, to credit card keyfobs to chips that could be implanted into cell phones or other devices, or even in people, however all these lacked the interoperability and standardised approaches that would finally came together in such an unexpected way to end the dominance and the use of all credit cards and debit cards overnight on the 3rd June 2012, with the now imfamous joint presentation between Brin and Cook combiniing the news of the incopration of Google as a bank and with the launch of the Cloud based Apple iPay system……
How does your company deal with massive unplanned change? Are you a change agent or a change follower?
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Posted by: Christian Louboutin Stores | 09 November 2011 at 11:42 AM