Thursday, May 28, 2009

Frank McNamara and John Biggins

Because the credit card companies are currently being unfairly demonized in the media, by the President, and by Congress, I thought today we could celebrate the modern credit card as the wealth-creating and life-promoting innovation that it truly is. (For a great debate on the current issue, see here.)

Throughout the history of business, customers and merchants have depended on credit accounts to facilitate transactions. Prior to modern credit accounts, merchants would have to look up records of payments and assess credit risks on an per transaction basis with their customers. The development of the credit card facilitated an automatized means of offering a set amount of credit to the bearer of the card. Although individual stores and oil companies had issued their own company credit account cards for major clients in the early twentieth century, the first modern credit card was the Diners Club card.

Invented by Frank McNamara, who, when he was out to dinner with friends realized he had forgotten his wallet, realized how convenient it would be to have a credit account at his favorite dining spots, the Diners Club was recognized at multiple locations. Originally a cardboard wallet-sized card, the Diners Club was a charge card that required a full payment upon receipt of the monthly bill. Soon, banks entered the market and offered revolving credit lines to compete with the existing cards.

At about the same time that McNamara was developing the Diners Club, John Biggins, a banker in Brooklyn, started to offer a bank card that could be used with local merchants. The bill for the items purchased with the card would be forwarded to the bank, which would then pay the merchant and collect payment from the bank customer on agreed-upon terms.

By the 1960s, American Express, Bank of America (BankAmericard later known as Visa), and the Interbank Card Association (later MasterCard) had entered the business and the modern, general purpose credit card had taken off. Heavy Congressional regulations would follow in the 1970s, but as modern processing systems and computerized communications took off, more Americans turned to the use of credit cards and the use of personal checks and cash declined. In 1995, there were 49.5 billion checks paid in the United States and 15.6 billion credit card transactions. By 2003, that ratio had changed to 36.6 billion checks and 19 billion credit card transactions. Credit and debt cards have expanded from 33% of non-cash payments in 2000 to more than 43% in 2003, and likely even more today.

Now, as banks offer debit cards as a means of competing with credit cards, offering better rates to merchants and more limitations on spending (for those customers without impulse control), the genius of a little piece of plastic to facilitate transactions has revolutionized the customer-merchant relationship. Further, credit card companies now vigorously compete for business by offering cash back, bonus points, airline miles, and other perks for the customers.

By facilitating a quick, easy transaction model and by providing credit to those who merit it, the modern credit card, along with McNamara and Biggins, stand as giant heroes of capitalism.

Sources:
About.com article
Wikipedia entry on McNamare and Diners Club
Brief history of credit cards

3 comments:

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