Next discussed re recent industry-altering litigation involving Visa and MasterCard, and significant aftereffects of the litigation. The article concludes by noting the main challenges facing the industry today. The Formation of the Credit Card Industry Although merchant credit may be as old as civilization, the present-day credit card industry in the United States originated in the nineteenth century. In the early 1800s, merchants and financial intermediaries provided credit for agricultural and durable goods, and by the early 1900s, major U. S. hotels and department stores issued paper identification cards to their most valued customers.
When a customer presented such a card to a clerk at the issuing establishment, the customer’s creditworthiness and status were instantly established. The cards enabled merchants to cement the loyalty of their top customers, and the cardholders benefited by being able to obtain goods and services using preestablished lines of credit. Generally these cards were useful only at one location or within a limited geographic area—an area where local merchants accepted competitors’ cards as proof of a customer’s creditworthiness. * All the authors are in the Division of Insurance and Research at the Federal Deposit Insurance Corporation.
Douglas Akers is a research assistant, Jay Golter a financial analyst, Brian Lamm a senior financial analyst, and Martha Solt a senior economist. 1 The term “credit card industry” as used in this article refers to the four major payment card networks: Visa, MasterCard, American Express, and Discover. In addition, Diners Club is a very small participant. ------------ Overview of Recent Developments Diners Club established the first generalpurpose charge card,2 enabling its cardholders to purchase goods and services from many different erchants in what soon became a nationwide network. The Diners Club card was meant for highend customers and was designed to be used for entertainment and travel expenses. Diners Club charged merchants who accepted the card 7 percent of each transaction. Merchants found that accepting Diners Club cards brought more customers who spent more freely. The Diners Club program proved successful, and in the following decade it spawned many imitators. In the late 1950s, Bank of America, located on the West Coast, began the first general purpose credit card (as opposed to charge card) program.
At that time, banking laws placed severe geographic restrictions on individual banks. Virtually no banks were able to operate across state lines, and additional restrictions existed within many states. Yet for a credit card program to be able to compete with Diners Club, a national presence would be important. To increase the number of consumers carrying the card and to reach retailers outside of Bank of America’s area of operation, therefore, other banks were given the opportunity to license Bank of America’s credit card. At first Bank of America operated this network internally.