4 April 2015 - ORIGINAL CREDIT CARDS


ORIGINAL CREDIT CARDS

G'day folks,

Ever wondered about the first credit card? How many do you own? Better still, how much do you owe?

Charging for products and services has become a way of life. No longer do people bring cash when they buy a sweater or a large appliance, they charge it. Some people do it for the convenience of not carrying cash; others "put it on plastic" so they can purchase an item they cannot yet afford. The credit card that allows them to do this is a twentieth century invention. 

At the beginning of the twentieth century, people had to pay cash for almost all products and services. Although the early part of the century saw an increase in individual store credit accounts, a credit card that could be used at more than one merchant was not invented until 1950. It all started when Frank X. McNamara and two of his friends went out to supper. 



The Famous Supper

In 1949, Frank X McNamara, head of the Hamilton Credit Corporation, went out to eat with Alfred Bloomingdale, McNamara's long-time friend and grandson of the founder of the Bloomingdale's store, and Ralph Sneider, McNamara's attorney. The three men were eating at Major's Cabin Grill, a famous New York restaurant located next to the Empire State Building, to discuss a problem customer of the Hamilton Credit Corporation. 

The problem was that one of McNamara's customers had borrowed some money but was unable to pay it back. This particular customer had gotten into trouble, when he had lent a number of his charge cards (available from individual department stores and gas stations) to his poor neighbours who needed items in an emergency. For this service, the man required his neighbours to pay him back the cost of the original purchase plus some extra money. 

Unfortunately for the man, many of his neighbours were unable to pay him back within a short period of time and he was then forced to borrow money from the Hamilton Credit Corporation. 

At the end of the meal with his two friends, McNamara reached into his pocket for his wallet so that he could pay for the meal (in cash). He was shocked to discover that he had forgotten his wallet. To his embarrassment, he then had to call his wife and have her bring him some money. McNamara vowed never to let this happen again. 

Merging the two concepts from that dinner, the lending of credit cards and not having cash on hand to pay for the meal, McNamara came up with a new idea - a credit card that could be used at multiple locations. What was particularly novel about this concept was that there would be a middleman between companies and their customers. 



The Middleman

Though the concept of credit has existed longer even than money, charge accounts became popular in the early twentieth century. With the invention and growing popularity of automobiles and airplanes, people now had the option to travel to a variety of stores for their shopping needs. In an effort to capture customer loyalty, various department stores and gas stations began to offer charge accounts for their customers which could be accessed by a card. 

Unfortunately, people needed to bring dozens of these cards with them if they were to do a day of shopping. McNamara had the idea of needing only one credit card. 

McNamara discussed the idea with Bloomingdale and Sneider and the three pooled some money and started a new company in 1950 which they called the Diners Club. The Diners Club was going to be a middleman. Instead of individual companies offering credit to their own customers (whom they would bill later), the Diners Club was going to offer credit to individuals for many companies (then bill the customers and pay the companies). 

Previously, stores would make money with their credit cards by keeping customers loyal to their particular store, thus maintaining a high level of sales. However, the Diners Club needed a different way to make money since they weren't actually selling anything. To make a profit without charging interest (interest bearing credit cards came much later), the companies who accepted the Diners Club credit card were charged 7 percent for each transaction while the subscribers to the credit card were charged a $3 annual fee (begun in 1951). 

McNamara's new credit company focused on salesmen. Since salesmen often need to dine (hence the new company's name) at multiple restaurants to entertain their clients, the Diners Club needed both to convince a large number of restaurants to accept the new card and to get salesmen to subscribe. 

The first Diners Club credit cards were given out in 1950 to 200 people (most were friends and acquaintances of McNamara) and accepted by 14 restaurants in New York. The cards were not made of plastic; instead, the first Diners Club credit cards were made of a paper stock with the accepting locations printed on the back. 

In the beginning, progress was difficult. Merchants didn't want to pay the Diners Club's fee and didn't want competition for their own store cards; while customers didn't want to sign up unless there were a large number of merchants that accepted the card. 

However, the concept of the card grew and by the end of 1950, 20,000 people were using the Diners Club credit card. 



The Future

Though the Diners Club continued to grow and by the second year was making a profit ($60,000), McNamara thought the concept was just a fad. In 1952, he sold his shares in the company for more than $200,000 to his two partners. 

The Diners Club credit card continued to grow more popular and didn't receive competition until 1958. In that year, both American Express and the Bank Americard (later called VISA) arrived. 

The concept of a universal credit card had taken root and quickly spread across the world.


Clancy's comment: The first time I ever saw a plastic card was in Washington DC at 2am in the morning at a whopping supermarket in 1973. Now, they are an accepted part of life. I guess the secret is to use them, not abuse them. 

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