A Brief History of Credit Cards (or What Happens When You Swipe)

Summary

The video explores the history and evolution of credit cards, starting from the 1940s when affluent New Yorkers used charge cards like Diners Club. In 1958, Bank of America introduced the mass-market BankAmericard, leading to widespread credit use but also significant financial risks. The process of a credit card transaction involves multiple parties, including the consumer, issuing banks, acquiring banks, and payment networks like Visa and MasterCard. This intricate system highlights the complexities behind everyday transactions and emphasizes the importance of understanding credit card usage and its implications on personal finance.

Takeaways

• 💳 Credit cards originated from the need for wealthy individuals in New York to avoid carrying cash in the 1940s, starting with the Diners Club charge card.
• 📅 The first mass-market credit card, BankAmericard, was introduced by Bank of America in 1958, allowing everyday consumers access to credit.
• 📉 The initial implementation of credit cards faced significant losses due to consumers using credit they couldn't afford to repay.
• 🏦 Visa and MasterCard evolved as for-profit entities, serving as networks connecting issuing banks with acquiring banks and merchants.
• 🔄 In a credit card transaction, five parties are involved: the consumer, the issuing bank, the network (Visa/MasterCard), the acquiring bank, and the merchant.
• 🍽️ The transaction process involves multiple steps: the consumer swipes their card, the merchant's point-of-sale system communicates with the issuing bank through the network.
• ✅ The issuing bank assesses the transaction's validity before approving or declining it, ensuring that the consumer can cover the cost.
• 🔍 Visa and MasterCard do not have a direct relationship with consumers or merchants; they only facilitate transactions between banks.
• 🛑 Many consumers misunderstand the role of Visa and MasterCard, believing they handle customer service issues related to purchases.
• 💡 Understanding the credit card transaction ecosystem is crucial for recognizing the complexities behind what seems like a simple payment process.

Q & A

What was the original purpose of the Diners Club charge card introduced in the 1940s?

The Diners Club charge card was introduced to allow wealthy individuals in New York City to dine at high-end restaurants without carrying large amounts of cash, offering a more convenient payment method for expensive meals.

How did American Express build on the concept of the Diners Club charge card?

American Express copied the concept of the Diners Club card, creating their own charge card aimed at providing the same convenience to wealthy individuals, without offering credit, only allowing payment at the end of the month.

What innovation did Bank of America introduce in 1958 with the BankAmericard?

In 1958, Bank of America introduced the BankAmericard, a mass-market credit card that was sent to every person in Fresno, California, allowing them to make purchases on credit, a significant departure from earlier charge cards.

Why was the BankAmericard's initial rollout in Fresno both successful and problematic?

The rollout was successful because it was widely adopted by consumers and merchants, but problematic because people often used credit they couldn't afford, leading to massive losses for the bank.

What is the difference between a charge card and a credit card?

A charge card, like the original Diners Club, required full payment at the end of the month, while a credit card allows users to carry a balance and pay over time, often with interest.

How did Visa and MasterCard evolve from early credit card systems?

Visa and MasterCard evolved from early credit card systems by introducing broader networks that connected banks, merchants, and consumers, and eventually became public companies, significantly expanding the credit card industry.

What role do Visa and MasterCard play in the credit card transaction process?

Visa and MasterCard act as central clearing networks, connecting issuing banks with acquiring banks to facilitate the transaction process. They do not directly handle the money or have a relationship with consumers or merchants.

Who are the five parties involved in a credit card transaction?

The five parties in a credit card transaction are the consumer (cardholder), the issuing bank (which gives the credit), the network (Visa or MasterCard), the acquiring bank (which partners with merchants), and the merchant (the business receiving payment).

Why do people often mistakenly think Visa or MasterCard are responsible for transaction issues?

People mistakenly think Visa or MasterCard are responsible for transaction issues because they associate the network with the credit card process, but Visa and MasterCard only facilitate the communication between banks, not the product or service being provided.

How did Visa and MasterCard's business models evolve in the last decade?

In the last decade, Visa and MasterCard became publicly traded companies, and both saw significant growth, with Visa reaching a market cap of over $200 billion and MasterCard over $100 billion, solidifying their roles as key players in the financial transaction ecosystem.