The idea of credit has been around for centuries, but not the kind of credit we’re used to today. In the past, credit was only good for people in your community who knew you and trusted you to pay later. They may have kept a running tab that you would pay off periodically. Credit was essentially nothing more than an I-O-U. Today, credit cards allow people to quickly pay for goods and services all over the globe. You no longer need to have personal credibility with the merchant. You can simply swipe, insert or tap your card and settle up with your issuing bank later. If you enjoy this modern technology, you may be wondering how it all started. Let’s take a look at the origins of credit card processing as well as the future of credit cards.
When were credit cards invented? The answer depends on what exactly you mean by credit card. The idea of a credit card that would allow you to have credit anywhere, as opposed to at a single store, didn’t emerge until the mid-20th century. The Diner’s Club, Inc. introduced the very first credit card people could use at a variety of establishments in 1950. The founder, Frank McNamara, hoped that, eventually, restaurants throughout New York would accept the card — and they did. Though this card was good at various participating locations, it still wasn’t a universal card. The American Express Company followed with a similar type of card in 1958. With these early credit cards, the participating merchants would pay a percentage to the credit card company as a service charge. The fee for the Diner’s Club was 7%, which McNamara justified by assuring restaurant owners that cardholders would spend more. The cardholders would pay an annual fee to use the card along with paying off their monthly bill. The system proved to be pretty useful, and it led to an even more useful type of credit card — the bank credit card.
The bank credit card system is what we use today. The first bank-issued card was known as the Charge-It card. It was invented before the Diner’s Club card, but it had minimal impact since it was only good at several establishments near the Brooklyn bank. The bank card system really started to take off in the late ’50s.
This system came with some real advantages over the earlier credit card systems. This system did away with annual fees and lowered the service charge for merchants because banks were now able to charge interest on their cardholders’ outstanding balance. Another advantage of this system is that it wasn’t tied to a specific location. The first bank credit card that people could use almost anywhere, not just at certain establishments, was the BankAmericard, which first came out in California in 1958. In 1966, it started to become valid in other states.
Today, credit cards work electronically, so you may be wondering how credit cards worked before the internet. Early credit cards were just paper or plastic cards that functioned as a sign or form of ID that the cardholder had credit with a certain organization or bank. The first credit card processor was a simple, manual machine, called an imprinter. The cashier would fill out a form, place it in the imprinter along with the card and use the mechanism to stamp the information from the card onto the form. Merchants would mail these forms to the issuing banks to receive payment. This imprinting method didn’t include any real-time authorization from banks, which led to some problems, including fraud and overcharging. Cashiers used phone authorization as a solution in some situations, especially for large transactions. The cashier would call a number listed on the credit card to see whether the cardholder was authorized to charge a certain amount.
These early processing methods were far from ideal. Thankfully, it wouldn’t be long before electronic processing came onto the scene. In the early ’60s, an engineer named Forrest Parry came up with the magnetic stripe that is now a fixture of credit cards. An important event in the history of credit card processing occurred in 1969, when these magnetic stripes became the standard means for credit cards to store the cardholder’s account information. This technology, along with electronic payment terminals, enabled electronic credit card processing. Credit card processing technology has come a long way in the past five decades. Modern POS systems with electronic credit card processors can process credit cards more efficiently and more securely than ever before. Today, a cardholder can swipe, dip or tap their card to initiate a speedy process of authorization and authentication. If a transaction is approved, the customer goes on their way, and the payment information goes to the POS to be sent out for clearing and settlement.
One of the most recent developments in the timeline of credit cards is EMV chip technology. EMV stands for the three parties who collaborated to make this new technology the standard for credit cards — Europay, MasterCard and Visa. EMV chip cards were developed to make credit card payments more secure. Rather than a magnetic stripe that stores static information about the cardholder and their account, which can be duplicated or stolen, EMV cards contain a computer chip that generates a new code for every transaction. To read this code, merchants need an EMV card reader. If they don’t have one of these modern card readers, they could be held liable for credit card fraud that occurs at their stores. EMV chip transactions are slightly slower than transactions with older cards, but it still only takes about 15 seconds, and the cardholder doesn’t have to worry about their information being stolen.
Today, the average American has three credit cards, which they can use to pay anywhere credit cards are accepted. That includes online stores, retail shops, restaurants, gas stations and more. Merchants who don’t currently have credit card processing capabilities are very likely to lose business since some people don’t even carry cash anymore. In addition to credit card processing, merchants should also be aware of other emerging payment technologies.
In particular, the new payment method that’s rapidly gaining traction is mobile wallet pay. Mobile wallet apps are linked to a person’s bank account, just like a card is, so they can use their phone to pay. This new payment method is becoming increasingly common, which means merchants need to adopt credit card readers that are also capable of taking mobile payments to please these customers. A whopping 29% of consumers already say they would prefer to pay with their smartphone all the time.
The future of payment processing is likely to include both credit cards and mobile payments, so your business needs to be prepared to accept all of these payment types. You can accept credit cards, including EMV chip cards, along with Apple Pay and Android Pay when you partner with NRS Pay for payment processing. We make it easy and affordable for your small business to embrace these payment technologies so you can meet your customers’ needs and grow your business.