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February is a good time to learn about and reflect on our history, specifically, the history of the GSA SmartPay card. As a charge card manager for the Federal Government, you’re already aware of the GSA SmartPay Program, its purpose, and the benefits your Agency receives. But, do you know how the charge cards became such a popular form of payment? As an inquisitive employee, I decided to do a little research. A credit card is an automatic way of offering credit to a consumer using an identifying number that speeds shopping transactions. Universal credit cards became an acceptable form of payment in the 1950s. What was it like to make purchases before credit cards? For a customer to pay using credit, the cashier would need to record their identity, billing address, and terms of repayment - a tedious process that requires time and effort. Both, personally and professionally, credit cards streamline this process. |
 Photo from Sothebys.com |
A Bit of Background:
According to Encyclopedia Britannica, "the use of credit cards originated in the United States during the 1920s, when individual firms, such as oil companies and hotel chains, began issuing them to customers." Companies used these cards to build customer loyalty and improve their customer service, but the concept of a universal card was still not yet developed.
Banks began issuing credit cards in 1946 started by John Biggins of the Flatbush National Bank of Brooklyn in New York. Biggins invented a program called "Charge-It". This program allowed customers to use a card at a local merchant. The merchant then deposited a sales receipt to the bank and the bank billed the customer.
In 1950, Frank NcNamara founded the Diners Club card in the United States intended to pay restaurant bills at participating businesses. Rumors say that the story began in 1949 when McNamara had forgotten his wallet at an important business dinner. To help avoid any future mishaps, McNamara and his partner, Ralph Schneider, wanted to design an alternative to cash. The following year, they returned to the same restaurant and paid the bill with a small, cardboard card. Customers could now eat at any participating Diners Club restaurant without carrying cash.
What’s the difference between a charge card and a credit card?
It’s confusing at times because the terms "charge cards" and "credit cards" are occasionally used interchangeably, but these cards have distinct features. A charge card is a card that requires payment in full every month. There is no revolving debt and no interest. If the bill is not paid on time, late fees and other penalties may ensue, depending on the card agreement. Credit cards have a credit limit and permit users to carry a balance (revolving debt) at an agreed to interest rate. That is why the GSA SmartPay cards are considered charge cards instead of credit cards.
Before 1958, all cards were considered “charge cards”. In 1958, the concept of a credit card as we understand it today was introduced. Customers could now maintain a revolving balance and were not required to pay off their bill each month.
Today’s Major Players:
American Express’ purple paper charge card entered the industry in 1958 followed by a plastic card in 1959. The Diners Club and American Express cards functioned in what is known as a closed-loop system. Unlike the current Visa and MasterCard open-loop systems which have several distinct players (for example, the issuing bank, merchant bank, card association, merchant, and the cardholder); the closed loop system only includes the cardholder, the merchant, and the issuer of the card. The issuer both authorizes and handles all aspects of the transaction.
In 1966, Bank of America started the BankAmericard (later know as Visa) to banks nationwide and a group of credit issuing banks joined together to form a national credit card system, InterBank Card Association or ICA (later known as MasterCard).
Discover Card revealed its new brand during Super Bowl XX (1986) as the Chicago Bears defeated the New England Patriots. Discover Card Services created its unique brand by issuing cards through the Discover Bank along with other partnering banks.
The Technology Behind the Card:
The first charge cards contained raised letters and required extensive customer service and time from merchants to process. The magnetic strip wasn’t developed until later and is still used today. The magnetic strip was designed by Jerome Svigals and Forrest Parry from IBM who discovered an innovative way of using existing technology. The magnetic strip was currently being used as a storage method for audio recording technology. The photo shown on the blog represents the earliest trial card, before plastic cards were developed. IBM’s strategy behind the magnetic strip was to develop the technology for free, in hopes that it would be largely adopted. Thus, the more transactions conducted, the more demand for computers to process them.
Where are we headed?:
GSA SmartPay works toward identifying, developing, testing and offering new innovative products and services through the GSA SmartPay 2 Master Contract that meet the evolving agency needs. Alternative forms of payment such as online services, keyfobs, chips, smartphones, and others are on the rise. 63 years from now, where will we be? Will physical, plastic cards be obsolete?
Sources include:
http://inventors.about.com/od/cstartinventions/a/credit_cards.htm
http://www.sothebys.com/en/auctions/ecatalogue/2012/books-manuscripts-n08919/lot.34.lotnum.html
http://www.bankrate.com/finance/credit-cards/is-a-charge-card-same-as-a-credit-card.aspx
http://www.creditcards.com/credit-card-news/credit-cards-history-1264.php
Photo from http://www.sothebys.com/en/auctions/ecatalogue/2012/books-manuscripts-n08919/lot.34.lotnum.html
