How Did That Happen?

https://api.spreaker.com/v2/episodes/51444627/download.mp3

This week I take a look at card based transactions and find out who invented the first credit card. Come along for the ride this week as I ask, card based transactions, how did that happen?

The beginning:

Money lending is one of the world’s oldest professions. In fact some of the earliest written laws pertain to the idea of lending.

The concept of credit is goods are traded but the seller does not immediately receive payment. Instead, the debt is recorded and paid at a later date.

Beginning as far back as 9,000 B.C. with cattle and camels, currency took some truly odd shapes, from cowrie shells, bronze and copper imitation cowrie shells, and gold and silver nuggets to Chinese deerskin notes and Native American stringed wampum beads.

The concept of using a valueless instrument to represent banking transactions dates back thousands of years to a time when the ancient Mesopotamians used clay tablets to conduct trade with other civilizations.

Early Modern Uses:

The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. 

Bellamy used the term credit card eleven times in this novel, although this referred to a card for spending a citizen’s dividend from the government, rather than borrowing, making it more similar to a debit card.

Early Charge Cards:

Charge coins are probably the earliest modern predecessor of credit cards. These came to prominence in the 1860’s. 

They would usually have some sort of words on their usually linking to whatever store or account they were connected to and usually only usable at one company or location.

Charge coins were usually given to customers who had charge accounts in hotels or department stores. Which explains why department store credit is a thing.

The people would come into the store and when they were about to buy something they would present the coin and the cashier would check the number against a ledger to make sure the account was up to date. These accounts were usually settled at the end of every month.

Beginning in the late 19th century charge cards came in various shapes and sizes, made of celluloid (an early type of plastic), copper, aluminum, steel, and other types of whitish metals.

Paper slips entered the mainstream as well serving the same purpose.

In 1914 Western Union launched “metal money”.

Gas companies  were next. They began offering credit cards that you could use to gas and maintain your car at their stations.

1936 American Airlines and the Air Transport Assoc. created the idea of credit for airplanes. They used a dog tag like product that was popular at the time. 

They made it so the customer could sign a receipt for the flight in lieu of payment at the time and then pay it off later. doing this also took 15% off the price of the flight. 5 years later these dog tag credit cards accounted for half of their revenue.

In 1946 John C. Biggins of Flatbush Brooklyn, NY created the idea of a universal credit card. He called it a charge it card. 

The idea being that when the customer used the card the business would charge the bank who would then get the money from the customer. 

When it started they only worked at businesses close to the bank itself.

Bank of America was first out of the gate in 1958, mailing unsolicited credit cards to select California markets. In 1966, BankAmericard went national to become the nation’s first licensed general-purpose credit card. 

By 1970 Bank of America has passed on ownership to a group of issuer banks that manage Visa. It went international in 1974 and issued its first debit card in 1975.

Credit card, front. NU*84.17.10.

Some of the original banks that went in on this agreement still have the original stock from their merger to create Visa.

The Marquette Decision

Have you ever wondered why some if not all your credit statements come from Sioux Falls South Dakota?

It’s because in the late 90s Sioux Falls was falling on hard times. There was a recession in America.

The banks in South Dakota weren’t issuing very many loans. In order to get banks to issue loans South Dakota eliminated its cap on interest rates which was known as usury law.

And if you are wondering what a usury law is…

It is the illegal action or practice of lending money at unreasonably high rates of interest.

New York’s Usury laws didn’t allow companies to collect more than 12% interest. This lead the leaders of Citibank to look for a new place for their endeavors. 

Walter Wriston who was chairman of Citibank at the time is quoted as saying “we made a study of the 5 states that had either no usury law or very high amounts. One of them was South Dakota.”

In 1981 Citibank moved its credit card headquarters from New York City to Sioux Falls, SD.

There was a supreme court ruling known as the Marquette decision that said a state could export its interest rate to other states. 

Marquette National Bank of Minneapolis V. First of Omaha Service Corp. 

In other words wherever the credit decision is made, that is where the interest rate could be charged. For example if you make a loan from South Dakota and their interest rate limit is 20% then you could charge that rate to someone in Florida.

For the first time in history, there were no legal restrictions on the interests rates banks could charge across the country.

This is called the True Lender Doctrine.

From there all the big banks wanted to get involved. Some people said it was wrong because it allowed institutions to charge higher interests rates to less than qualified individuals.

In 1996 there was another landmark Supreme Court decision that effected credit cards. This time it was late fees. The case is Smiley V. Citibank. This took the cap off of what could be charged for late fees.

Credit Scores

The credit score is determined by a FICO score. The company that determine these scores is called Fair Isaac. They get their information from the normal credit reporting agencies like Experian and Transunion.

 

Technology

The Charga-Plate, developed in 1928, was an early predecessor of the credit card and was used in the U.S. from the 1930s to the late 1950s

1960’s 

IBM engineer Forrest Parry invents the magnetic stripe used on credit card and identification badges.He had the idea of gluing short pieces of magnetic tape to each plastic card, but the glue warped the tape, making it unusable. When he returned home, Parry’s wife Dorothea was using a flat iron to iron clothes. When he explained his inability to get the tape to “stick” to the plastic in a way that would work, she suggested that he use the iron to melt the stripe onto the card. He tried it and it worked. This guy also created Bar codes.

Americans spent $6.7 Trillion in credit card transactions in 2019. 

Work Cited

https://en.wikipedia.org/wiki/Credit_card#History

https://www.creditcards.com/statistics/history-of-credit-cards/

https://www.creditcards.com/statistics/history-of-credit-cards/

https://www.forbes.com/advisor/credit-cards/history-of-credit-cards/

https://www.bankrate.com/finance/credit-cards/the-evolution-of-credit-cards/

https://www.britannica.com/topic/credit-card

https://www.federalregister.gov/documents/2020/07/22/2020-14114/federal-interest-rate-authority

https://dlj.law.duke.edu/article/the-true-lender-doctrine-hannon-vol67-iss6/ https://www.youtube.com/watch?v=vR-uvPPdI_M

https://en.wikipedia.org/wiki/Forrest_Parry