It all started with a forgotten wallet!
Credit cards have revolutionized the way people pay online and make financial transactions. It’s a big part of cashless societies, where people use digitalized solutions for faster and more convenient payments. Actually, it’s now easier than ever to get a credit or debit card and use it to pay online anywhere, thanks to modern e-wallets and financial technologies.
Well, what’s a credit card anyway?
First, “credit” is a method of selling products or services without the buyer having cash in hand. A credit card simply is a way banks or financial institutions offer credit to a customer. The customer borrows money from the card issuer when purchasing from merchants.
Today, there are many types of payment cards in addition to credit cards, like debit cards and prepaid cards. We’ll talk about them later.
So, how all of that started? How it developed throughout the years? And what actually happens when you use a card online or offline? Let’s take a look!
1. A Brief Timeline
Here’s a brief timeline of the credit cards (and other payment cards) revolution:
1947: Flatbush Bank introduces the first charge card in the USA.
1950: Diners Club introduces the world’s first multi-purpose charge card.
1958: Bank of America creates BankAmericard, the first modern revolving credit card.
1966: Interbank creates its credit card.
1969: Interbank becomes Master Charge.
1975: Debit cards introduced.
1976: Bank of America spins off their card and joins with other banks to create Visa.
1979: Master Charge becomes Mastercard.
1999: American Express launches the first chip card (The technology is now known as EMV chip).
2015: EMV chips become standard as a more secure way to pay.
2. The History
Now, let’s talk more about the origins of the credit card, and how it evolved throughout the years.
In 1947, John Biggins, the president of the Flatbush National Bank of Brooklyn in New York, created the “Charg-It” card. The bank customers can get the card and use it at participating local stores. Then, the merchant deposits sales slips at the bank. The bank pays the merchant and then bills the customer.
Well, this idea was experimental and not widespread. So, when it became famous? This takes us back to 1949!
“In 1949, businessman Frank McNamara forgot his wallet while dining out at a New York City restaurant. It was an embarrassment he resolved never to face again. Luckily, his wife rescued him and paid the tab.”
How could he resolve the problem? In 1950, he created the Diners Club card as a way to pay restaurant bills. That way, customers can eat at restaurants that accept the Diners Club card without having any cash in hand. Diners Club would then pay the restaurant and then the customer would pay Diners Club.
In 1958, American Express entered the party and issued their first charge card.
Then, a revolution happened! Later in the same year, the Bank of America launched the first successful modern credit card that was accepted by numerous merchants. It was called “BankAmericard”. It was the first credit card to offer revolving credit, which gave people the ability to carry a balance.
With that considered the first modern credit card, many other companies wanted to make the same thing. In 1966, several regional bankcard associations joined together and formed the Interbank Card Association to compete with BankAmericard. Three years later, the name changed to “Master Charge”.
Aside from credit cards, the first debit card appeared in 1975, which works differently than a credit card, where the balance is directly deducted from the customer’s bank account when they pay at merchants.
So, we now have 2 major players in the credit card industry, BankAmericard and Master Charge. That’s in addition to other minor players, like American Express and Discovery.
In 1976, Bank of America spun off BankAmericard and joined with other banks to create Visa. In 1979, Master Charge changed its name to Mastercard. Several years later, they went public, and today, Visa has over 200 billion market cap, and Mastercard has over 100 billion market cap.
Then, credit cards and payment cards went into many improvements throughout the years. we got co-branded cards, EMV chips, the 3-D Secure feature, virtual cards, and much more. Just imagine how advanced and widespread they are!
3. How It Works?
After we talked about the history, let’s see how they actually work. When you use it to pay online or offline, what actually happens in the background?
Well, the first thing is companies like Visa and Mastercard don’t have consumers as clients. Their clients are actually the issuing banks and the acquiring banks/payment processors. They connect the issuing banks and the acquiring banks/payment processors with each other.
So, we have 5 parties involved in the payment process:
1. The customer.
2. The merchant.
3. The payment network, which provides the infrastructure (like Visa and Mastercard).
4. The issuing bank, which is the bank that issues the card for you.
5. The acquiring bank/payment processor, which connects the merchant with the payment network (Like PayFort).
Now, let’s take an example:
1. You want to purchase a smartphone online or offline. You go to the merchant and give them your card number.
2. The merchant sends the card number to the acquiring bank/payment processor. Now the acquiring bank/payment processor checks the card number, so if it starts with 4 for example, then it’s a Visa card. If it starts with 5, then it’s a Mastercard, and so on. And then it sends the transaction details to the right payment network.
3. Let’s say the payment network here is Mastercard. Mastercard checks the next 5 digits of the card which denote the identification number of the issuing bank.
4. Then, Mastercard sends the transaction details to the issuing bank and the bank makes the decision to accept the transaction or not.
5. When the transaction is accepted, the bank tells Mastercard that the transaction is approved.
6. Mastercard tells the acquiring bank/payment processor that the transaction is approved and the acquiring bank/payment processor tells the merchant that the transaction is approved.
And now you’ve successfully purchased your product. All of that happens in a matter of seconds!
4. Types and Technologies
Credit cards and payment cards in general have evolved into new shapes and types.
There are main types of payment cards. We have credit cards, debit cards, and prepaid cards.
You already know what credit cards are. Debit cards work differently than credit cards. To make a purchase, you must have a balance in your e-wallet or bank account, so when you make that purchase, the payment value will be deducted directly from your balance.
The last type is prepaid cards. They work differently too. You actually charge the card’s balance itself, and the balance isn’t connected to your account. Every time you want to use it, you have to recharge its balance.
We also have 2 forms of cards. They can be physical or virtual. Physical cards can be used online or offline, but you have to keep them in a safe place. Virtual cards can be used online only, but the card itself is stored inside your e-wallet or bank account, so this keeps it in a safer place.
Several technologies have helped payment cards to become more secure, convenient, and widespread. One of the most important ones is e-wallets. They helped the unbanked people to shop online and make financial transactions easily and securely by getting a payment card in a simple way, and without the need for a bank account. One example is CASHU, the first and the largest e-wallet in MENA!
Other technologies have helped payment cards to become more secure like the 3-D Secure feature that adds an extra layer of security, and EMV chips which enabled very secure contactless payments.
So, this is the story of credit cards and how they work. They really revolutionized the way we use money and make financial transactions. What’s next in the future? We’ll see!