How Credit Cards Were Invented

Summary

The video script narrates the birth of the credit card, starting with Frank McNamara's embarrassing moment at a restaurant, which led to the creation of the Diner's Club card in 1950. It discusses the evolution of credit cards, including the challenges faced by early issuers and the innovations that followed, such as Bank of America's card that later became Visa, MasterCard's formation, and American Express's introduction of magnetic tape technology. The script also highlights Discover's entry with cashback rewards, emphasizing the transformative impact of credit cards on global spending and economic growth.

Takeaways

• 😅 The origin story of the Diner's Club card was a marketing invention by Maddie Simmons to glamorize the brand.
• 🍽️ Diner's Club card was the first general-purpose credit card, simplifying the need to carry multiple cards for different businesses.
• 💡 The real story behind Frank McNamara was that he was a regular at the restaurant and already had a tab setup, similar to a credit card.
• 🛍️ Merchants initially took on the risk with credit cards, which was a hurdle for the widespread acceptance of Diner's Club.
• 🏦 Bank of America changed the game in 1958 by taking on the risk of customer non-payment and ensuring merchants received their money.
• 🌐 The Bank of America card later became Visa, one of the largest companies in the world by market cap.
• 📦 American Express entered the credit card market and was the first to use magnetic tape technology on cards in 1970.
• 🧲 The innovation of magnetic tape on cards streamlined the transaction process, reducing errors and increasing efficiency.
• 🔄 In 1966, the Interbank Card Association was formed, creating MasterCard, which competed with Visa for market share.
• 🛒 Sears introduced Discover in the late 1980s, offering no annual fee and cash back, a feature now common among credit cards.
• 🌟 Credit cards have evolved from a tale of embarrassment to a global economic driver, shaping the way we conduct business and transactions.

Q & A

What was the incident that inspired Frank McNamara to create the Diner's Club card?

Frank McNamara was dining at a New York City restaurant and realized he had forgotten his wallet at home. His wife came to pay the bill, and this embarrassing situation motivated him to create the Diner's Club card to avoid such incidents in the future.

Who was Frank McNamara's business partner in creating the Diner's Club card?

Frank McNamara's business partner was Ralph Schneider, and together they started working on the Diner's Club card.

What was the first event that the Diner's Club website refers to as the 'First Supper'?

The 'First Supper' refers to the moment when Frank McNamara returned to the New York City restaurant where he had forgotten his wallet and used his newly invented Diner's Club card to make the first-ever credit card payment.

How did the story of Frank McNamara forgetting his wallet become a part of credit card history?

The story was invented and glamorized by Maddie Simmons, Executive Vice President of sales and marketing at Diner's Club, to publicize and increase the adoption of their credit card.

What was the actual situation of Frank McNamara at the restaurant before the Diner's Club card was introduced?

Frank McNamara was a regular at the restaurant and was already able to set up a tab and pay his bill on a monthly basis, similar to how a credit card works.

What was the main challenge for the Diner's Club card during its early days?

The main challenge was getting businesses to agree to accept the card in the first place, as they had to give a percentage of the purchase amount to Diner's Club as a fee and take on the risk if a customer couldn't pay their credit card bill.

How did Bank of America change the credit card system for merchants?

Bank of America launched a credit card in 1958 where they took on the risk of customers not paying their credit card balance, and businesses could reliably receive money from every purchase without having to worry about the customer's ability to pay.

What significant change did American Express bring to the credit card industry in 1970?

American Express was the first to use magnetic tape technology on their credit cards, which allowed for digital storage and processing of credit card information, making transactions faster and less prone to error.

What was the Interbank Card Association, and what is it known as today?

The Interbank Card Association, or ITC, was a partnership formed by a group of California banks in response to Bank of America's success. It is known today as MasterCard.

What unique feature did Discover introduce to the credit card market in 1986?

Discover introduced the concept of cash back on purchases, giving cardholders money back on every purchase, a feature that is still popular today.

How has the credit card industry evolved from its inception to its current state?

The credit card industry has evolved from a single card used at a few restaurants to a global system that enables transactions anywhere, with innovations in technology, risk management, and consumer benefits such as cash back and rewards.

Outlines

00:00

💳 The Birth of the Credit Card

In 1949, Frank McNamara's embarrassing experience of forgetting his wallet at a New York City restaurant led to the creation of the Diner's Club card, a cardboard credit card usable across various restaurants. Despite the popular story, the reality was that McNamara was a regular at the restaurant and had a tab, which was similar to a credit card system. The Diner's Club card simplified the process by offering a single card for multiple establishments. The story of its origin was glamorized by Maddie Simmons for marketing purposes. The card faced challenges, such as convincing businesses to accept it due to the fees and risks involved. It was Bank of America's card in 1958 that changed the merchant acceptance process by taking on the customer payment risk, which later became known as Visa.

05:02

🛒 Evolution of Credit Card Technology and Market Expansion

The evolution of credit card technology began with the introduction of magnetic tape by an IBM engineer in 1969, which was a significant improvement over the manual imprinting process. This innovation was accidentally discovered when the engineer's wife suggested ironing the tape onto the card. In 1966, the Bank of America card expanded nationally, prompting the formation of the Interbank Card Association, which later became MasterCard. American Express entered the market with a magnetic tape-enabled card in 1970. Sears introduced the Discover card in the late 1980s, offering no annual fee and cash back on purchases, which became a popular feature. The credit card industry's history is marked by innovation, competition, and the transformation of consumer spending and global economic growth.

Keywords

💡Diner's Club card

The Diner's Club card is considered one of the first general-purpose credit cards, introduced by Frank McNamara and Ralph Schneider in 1950. It was initially a cardboard card that could be used at various restaurants across New York City. In the video's narrative, it symbolizes the beginning of a revolution in consumer payment methods, allowing for credit purchases and setting a precedent for modern credit cards.

💡Credit card

A credit card is a payment card issued by financial institutions that allows cardholders to borrow funds and pay for goods and services. In the context of the video, the invention of the credit card changed the way people spend money, offering convenience and the ability to pay later, which is exemplified by the story of Frank McNamara and the Diner's Club card.

💡Bank of America card

The Bank of America card, launched in 1958, was a significant development in the credit card industry. It introduced a system where the bank took on the risk of customers not paying their balances, which was a game-changer for merchants and consumers alike. The card later evolved into the Visa brand, one of the largest credit card networks globally.

💡Visa

Visa is a global payments technology company that operates one of the world's largest retail electronic payment networks. It originated from the Bank of America card and is mentioned in the video as an example of how the credit card industry has grown and evolved, becoming a dominant player in the market.

💡American Express

American Express is a financial services corporation known for its charge card, credit card, and traveler's cheque businesses. The video mentions American Express as one of the early entrants into the credit card market, highlighting its innovation in using magnetic tape technology on credit cards in 1970.

💡Magnetic tape

Magnetic tape is a technology used for storing audio, video, and computer data. In the video, it is discussed as a significant innovation in the credit card industry, allowing for the digital storage and processing of credit card information, which made transactions more efficient and less prone to error.

💡Interbank Card Association (ITC)

The Interbank Card Association, or ITC, was a partnership formed by a group of California banks in response to the success of Bank of America's card. It was created to develop a competing credit card, which later became known as MasterCard. The ITC represents the competitive nature of the credit card industry and the drive for innovation.

💡MasterCard

MasterCard is a global credit card company that operates as a franchise, providing a variety of financial products and services. The video discusses MasterCard's origin as a response to the Bank of America card and its role as one of the major credit card networks, highlighting the competitive landscape of the industry.

💡Discover card

The Discover card, introduced by Sears in the late 1980s, was a new entrant in the credit card market. It was notable for offering no annual fee and higher credit limits than competitors. The video emphasizes Discover's introduction of cash back rewards, a feature that has become a staple in the credit card industry.

💡Cash back

Cash back refers to a feature offered by some credit cards where a percentage of the money spent is returned to the cardholder. The Discover card pioneered this concept in 1986, as mentioned in the video, making it a significant innovation in consumer credit and a popular feature among cardholders.

💡Innovation

Innovation in the context of the video refers to the process of introducing new ideas, methods, or products. The history of credit cards is filled with innovative moments, such as the creation of the Diner's Club card, the adoption of magnetic tape technology, and the introduction of cash back rewards, all of which have shaped the modern financial landscape.

Highlights

In 1949, Frank McNamara's embarrassing experience of forgetting his wallet at a New York City restaurant led to the creation of the Diner's Club card.

The Diner's Club card was a cardboard credit card usable at various restaurants in New York City.

The 'First Supper' marked the first-ever credit card payment using the Diner's Club card in February 1950.

The story of Frank forgetting his wallet was a marketing strategy by Maddie Simmons to promote the Diner's Club card.

Frank was a regular at the restaurant and already had a monthly payment arrangement, similar to a credit card.

The Diner's Club card simplified the payment process by allowing credit at multiple establishments with a single card.

Merchants initially faced challenges in accepting the Diner's Club card due to fees and risk of customer non-payment.

Bank of America revolutionized the credit card industry in 1958 by assuming the risk of customer non-payment.

The Bank of America card later became known as Visa, one of the world's largest companies by market cap.

American Express entered the credit card market with the first use of magnetic tape technology on credit cards in 1970.

The adoption of magnetic tape on credit cards streamlined the transaction process and reduced errors.

In 1966, the Interbank Card Association was formed to create MasterCard, the second major credit card in the US.

Sears introduced the Discover card in the late 1980s, offering no annual fee and cash back on purchases.

Discover's cash back feature revolutionized credit card rewards and is still popular today.

Credit cards have become an integral part of global economic growth and daily transactions.

The history of credit cards is a narrative of innovation, competition, and the transformation of consumer spending habits.

The story of credit cards inspires perseverance, risk-taking, and the pursuit of big ideas.

Transcripts

In 1949, a businessman named Frank McNamara was  dining at a fancy New York City restaurant when  

he realized that he forgot his wallet at  home. Luckily, his wife was able to come  

to his rescue and stop by to pay the tab. Frank  was so embarrassed about this whole situation  

that he resolved to never face something like that  again. Together with his business partner, Ralph  

Schneider, Frank started working on something  called the Diner's Club card, which was a  

cardboard credit card that could be used to pay at  a bunch of different restaurants across New York City.

By February of 1950, Frank returned back  to that New York City restaurant that left him so  

embarrassed and used his newly invented Diner's  Club card to make the first ever credit card  

payment. According to the Diner's Club website,  this event was hailed as the "First Supper,"  

which paved the way for credit cards for decades  to come, and many consider this to be the first  

ever general purpose credit card. Now, Frank's  embarrassing story of forgetting his wallet and  

not being able to pay his bill is an interesting  one, but you may be thinking, "If Frank had a  

credit card, how would that have helped him in  that situation? Wouldn't the card just have been  

in the same wallet as his cash? It's not like the  card's existence in his wallet would have helped  

him." Well, the reality is, people like a good  story a lot more than hearing about the boring  

details behind what goes into creating a credit  card and the financial system behind it. After  

all, stories are a big part of brand marketing and  a powerful way to create a sense of identity and  

connect with an audience. Knowing this, Frank's  restaurant story was invented and glamorized  

by Maddie Simmons, Executive Vice President in  charge of sales and marketing at Diner's Club,  

to publicize and increase the adoption of  their credit card. The more accurate story  

is that Frank was a regular at this particular  restaurant. I'm talking eat lunch there every  

day and everyone knows your name type of regular.  And as a regular, he was already able to set up  

a tab and pay his bill on a monthly basis,  similar to how a credit card works. In fact,  

restaurants and stores had already had cards for  many years at this point that allowed customers to  

pay their bills at the end of the month. However,  this was accomplished by each business issuing  

their own cards to their customers, so people  would need to carry many different cards around  

for all the places at which they wanted to pay  with credit. It's easy to argue that this concept  

is what eventually became the Diner's Club card,  which was just a single card that could be used  

at many different restaurants and shops around  the city. Really, it was almost inevitable for  

Frank's favorite restaurant to be the first place  to accept this credit card, but now his story has  

made credit card history. The Diner's Club card  would continue to gain popularity over the years  

as more and more businesses began to accept the  payment method. After all, who doesn't appreciate  

the convenience of carrying a single card around  instead of a bunch of cash? But the Diner's Club  

card faced one major challenge during its infancy,  getting businesses to agree to accept the card  

in the first place. You see, when a merchant  would accept payment from a Diner's Club card,  

they had to give a percentage of the purchase  amount to Diner's Club as a fee for this service.  

But the even bigger issue was that if a customer  ultimately wasn't able to pay their credit card  

bill at the end of the month, it was the merchant  that took the loss on the purchase. So merchants  

took on a certain level of risk whenever they let  people pay with credit. For years, no one was able  

to successfully change this process until Bank of  America launched the Bank of America card in 1958.  

With this credit card, businesses could accept  payment from the customer and Bank of America  

would reliably send over money from that purchase  every single time. It was then Bank of America  

themselves that took on the risk of customers not  paying their credit card balance, which also ended  

up being advantageous to the bank as banks are  experts at managing risk and could also benefit  

off of charging customers fees and interest.  The success of the Bank of America card would  

continue for decades to come as it was eventually  licensed to other banks around the world and later  

rebranded under the name Visa. Yes, that Visa,  who's now one of the largest companies in the  

world by market cap and is valued at over twice  that of Bank of America. It was around the time  

Bank of America card was first launched in 1958  that another competitor had also entered the  

credit card market and that came from an express  mail delivery company that you may have heard of  

called American Express. American Express has a  long and crazy history of its own so that'll have  

to be its own video. Make sure you're subscribed  with notifications on so you know when that video  

gets released. One thing that is worth noting here  about American Express is that they were the first  

to use magnetic tape technology on their credit  cards in the year 1970. You see, at this point in  

time, credit card transactions involved a physical  process where a merchant would essentially use a  

mini printing press type of machine to press  the raised numbers on the card onto a piece of  

paper that would be sent to a processing center  and manually entered into a computer. So if you  

have or have ever seen a credit card with raised  letters and numbers, that's actually what those  

were originally for. Now as you can imagine, that  process of imprinting the credit card number onto  

a receipt and sending it off to a processing  center was slow and prone to error so in 1969,  

an engineer at IBM thought to add a strip of  magnetic tape to the credit card to digitally  

store and process credit card information. For  everyone that isn't familiar with magnetic tape,  

it was a technology involving a special coating  on a plastic tape that was used for storing audio,  

video, and computer data. You may have seen  these on a VHS tape or a mixtape. Anyways,  

as the story goes, the IBM engineer was trying to  attach the magnetic tape to the credit card but  

couldn't figure out how to get the tape to stick  to the plastic. A solution came when he took the  

card home and complained about the problem to his  wife who was ironing at the time and suggested  

that he try to iron it onto the card. As it would  turn out, this worked perfectly and the process  

was quickly adopted by all card companies. In  1966, Bank of America's Bank of America card,  

which as a reminder is the brand that later became  Visa, had grown beyond their California roots and  

expanded nationally across the US. That same year,  a group of California banks responded to Bank of  

America's success by forming a partnership known  as the Interbank Card Association or ITC to create  

what was and still is the country's second major  credit card, now known as MasterCard. With Visa  

and MasterCard soon dominating the credit card  market and American Express not far behind, it  

seemed unlikely that another competitor could rise  up in the space. But in the late 1980s, Sears,  

which at the time was the largest retailer in  the US, was looking to expand into the financial  

services industry. To do so, they created a new  credit card called Discover. Besides being backed  

by one of the largest companies in the nation,  the Discover card carried no annual fee, which  

was uncommon at the time, and offered a higher  credit limit than competitors. More importantly,  

Discover also introduced a feature that we all  know and love to this day. "The Discover card, a  

credit card that pays you money back on every  purchase." That's right, in 1986, Discover  

introduced the concept of giving cardholders cash  back on their purchases, which of course is a  

practice that is still done today. With everything  going for it, Discover quickly grew in popularity  

and is now one of the largest credit card issuers  in the world. The world's first credit card was  

created from a story of one man's embarrassment  and inconvenience, but it paved the way for  

revolution in the way we spend and do business.  From humble beginnings, credit cards have become  

a ubiquitous part of our life, enabling us to buy  goods and services from anywhere in the world and  

fooling economic growth across the globe. The  story of credit cards is a story of innovation,  

risk-taking, competition, and perseverance. It's a  story that inspires us to think big, take chances,  

and never give up on our dreams. So the next  time you swipe your card, remember the incredible  

history behind this little piece of plastic and  the impact that it has had on our world. Thank  

you for watching. If you enjoyed this video, why  don't you leave a comment below about what you'd  

like to learn about next. And if you're new to  this channel, subscribe for more Five Minute Finance.