History of the Use of Credit Cards - Essay Example

?Payment Cards Introduction The use of credit cards has increased in the last decades remarkably. The first credit card was a voucher which was introduced in the United Kingdom in the 1880. Card boards were introduced to use as payment cards in the early 1900s followed by the introduction of metal cards. Plastic cards were introduced in the second half of the twentieth century and could have stored value to allow the customers to make payments. The first credit cards were limited to specific locations but that changed as cards could be used anywhere in the world. Credit cards also changed from single purpose to multi-purposes in which they can be used for even hundreds of services as long as the limit allows. Use of credit cards is very convenient and secure which is the main selling point of the cards. Individuals as well as businesses prefer the use of credit cards for this purpose. However, there are a number of risks associated with these cards. Fraud and security risks have increased especially with the introduction of internet. At the same time, the use of credit cards has been associated with controversies. Most credit cards allow people to borrow money they do not have and with the debt ceiling limits, they are thought to contribute to high debt. Addressing the challenges associated with the credit card use can make them very sustainable, convenient and safe Use of plastic cards for payments is one of the best innovations in the payment industry, having many benefits appreciated by individuals but also has some risks History First Generation Unlike what most people would expect, the use of cards goes back to the 19th century. The first credit card was produced in 1880 in the United Kingdom. Customers would be issued with the voucher which they could use to shop from certain shops. After shopping, a person who was responsible for collecting the money used from the clients would go to their homes to collect the money. The method was convenient and offered the clients the security they deserved. The use of these vouchers is not well documented and it is not known for how ling it was used (Longemann, 2012). A few decades later, companies in the United States started to use credit cards as way of maintaining customers. In this case, customers were issued with loyalty cards which would allow them to buy goods and pay later. The cards were limited to the stores issuing them and clients could only use the cards at those particular stores or their branches. Oil companies also issued cards to their employees every three to six months for entertainment. These cards improved business as the issuing businesses knew that the clients they provided the cards would always go back to those stores. At the same time, clients were happy that they could be allowed to make purchases only to pay later. It was convenient for the customers as they did not have to carry money around all the time they were to make purchases. In addition, they could make purchases even when they did not have money at hand (Sienkiewicz, 2001). About a decade later, Western union started to offer metallic cards to their clients. The cards gave the customers with the cards certain preferences over customers who did not have those cards (The U.K Cards Association, n.d). These cards can be termed as the first generation cards but had a lot of limitations. Second generation The next generation cards were much better compared to the first ones. This generation of cards was started by a banker at Flatbush National Bank of Brooklyn, New York, John Biggins. Biggins realized there were many people using the ban and needed something unique to retain the customers. He invented credit scripts which would be used by the consumers to make small purchases at selected merchants. Customers would present the script to the merchant who would copy the information on the script on the payment slip which would later be deposited to the bank. The customers and the merchants had to be members of the Flatbush bank for transfer of money between accounts to be completed easily. If the amount of purchase to be made was higher than what the client had in the account, they were required to call the ban for approval. This strategy was region specific as the bank had to establish its customers be it consumers or merchants. The idea was appreciated by many banks which started their own scripts in their respective jurisdictions (Kaptan, 2002). Although the John Biggins idea was appreciated by many people across United States, it was limited to specific regions. Consumers from one region would find it challenging to make purchases in other regions other than their home town. The national and international Credit card use is accredited to Frank McNamara. In 1949, McNamara forgot money in another of his jackets and was terribly embarrassed when the bill was brought to him as he was unable to pay. He thought of a way to make it easy for people to make payments even when they did not have money. McNamara later went back to the same restaurant with a friend and made the payment using the dinner’s card he had made successfully. That dinner in 1950 is said to be the first supper in the credit card industry (Ritchie, 2006). The card became a credit card in the following year 1951 in which card holders would be allowed to make payments and repay later. Since there were no swipe machines at that time, the merchants would copy the information on the consumers’ card and take the details to the bank. The bank would make payment to the merchant and deduct a flat fee charged on the loan (Mandell, 1990). Dinner’s card was appreciated by the people and restaurants. By the end of 1950, there were 27 restaurants accepting the cards and more than 20,000 people had the cards (Woolsey and Gerson, 2009). The introduction of the Dinners card encouraged many banks to appreciate the value of credit cards. American Express, which was formed in 1850 and was dealing with telegraph ventured into credit cards. The company introduced a traveler’s cheque which would allow people to use the cheque to make payments for expenses and entertainment. People using the American Express traveler’s cheque were required to pay the money they spent when travelling once they got back. That was limiting as many people preferred to use the money and pay at a later date. The banks were cautious that some people may be unable to pay back the money they were lent using the cards. As such, banks started credit card screening process in which the bank officials would determine the amount limit of each person. Banks were also concerned that most people spent much more than their loan limit. This has been the case throughout the credit card use. Currently, people using credit cards spent an average of 112% of the credit card limit (Evans & Schmalensee 2005). Bank of America introduced universal card in 1959 and was embraced well by the merchants. The card was launched in California and was only used in that state for sometime. The Bank of America went ahead to form agreements with banks across United States to allow clients to use the BankAmericard. The BankAmericard changed the name to Visa in 1976. Other banks in California realized the potential of the credit card industry. Four banks from California came together to form an association which issued credit cards. The card was renamed MasterCard in 1979 (Evans & Schmalensee 2005). The number of people using credit cards increased with time. By 1970, more than 16% of the population in United States had credit cards. The number has increased with more than 80% f the households in the United States having at last one credit card (Sienkiewicz, 2001). Smart Cards This second generation of cards were limiting to some extent. Clients could only use them at specific merchants for only one purpose. The limitations led to the development of the smart cards. Smart credit cards detail was patented in 1974 and its commercialization was not until the 1980s. Smart cards have silicon chips with small microprocessors. Smart cards are much safer because they cannot be tampered with and cannot be reproduced. At the same time, they create a must presence and authentication by the owner. The use of smart cards has been embraced well. By 2000, there were more than one and half billion smart cards shipped. The number of smart cards has been growing consistently over the years because of their wide usage. These cards can be used by banks and individual companies for many purposes (Resch, 2004). Features Credit cards are based on the principle of paying now paying later. In this case, clients are availed a short term loan which they have to pay back within a specified period. In most cases, clients are required to pay the interests accrued every month. If interest is not paid within the agreed period, penalties are charged on the principle and interest. Once the interests are paid, the money borrowed can be forwarded to the following month. In this case, a client can take months or even years to pay the loan amount they used initially. Different credit card providers have varying terms and conditions on the repayment period. The amount of loan a person can be given depends on how much they earn per month and credit reputation. Those with good credit reputation can be availed any amount of credit card loan as long as they are capable of paying back. On the other hand, those who have previously borrowed but do not pay well may not even be availed credit (Houghton, 2009). The card payment process is as described in the image below. Benefits of Credit Cards Credit cards are of great benefit to the individuals and businesses as well. For the individual, they have money they can spend even if they do not have cash at hand. Even if they have some money somewhere the clients do not have to carry it but use the credit card. This prevents the client from being robbed as it would be the case when they are carrying money. Clients are also safeguarded against losses in some countries through insurance in the case the card is lost or obtained by unauthorized person. People who like accounting how they spent their money can access credit card statements every month or whenever they wish to get one. They can track all things they bought with the credit card and also know when their credit is due. In some cases, the credit card balance on the card can earn interest in the case of some banks and credit card companies (Swart, 2004). Bank of America encourages clients to save on the card and use them occasionally which can win a client an award including groceries and gas. Some credit cards issued by Bank of America have additional features such as trip cancellation and delays, luggage insurance and emergency assistance (Bank of America, 2013). The use of credit card is beneficial to businesses as well. The first way a business can benefit with credit cards is getting short term loans from time to time. Some businesses operate in many countries in which officials have to travel from place to place every now and then. Giving such people hard cash may put them at risk or robbery or losing the money. Such organizations prefer to give the frequent travelers credit cards for use. The company management appreciates that they can track all the expenses made and account for each. At the same time, the business operations do not have to stop because there is no money available at the company. Some businesses may even get large loans from the credit card issuers that can be used for expansion or purchasing costly items. However, such extensions are available for the businesses with very good credit reputations (Kiisel, 2013). Businesses also benefit in that the business does not have a lot of money at their offices which may attract robbers. Risks Credit cards are also associated with a number of risks. One of the greatest disadvantages of credit cards is that people get into debt. The perception that a person can do anything with their credit card is a self inflicted injury. In fact, most people tend to overspend whenever they are using credit card. As stated above, people overspend by about 112% when using credit cards compared to when they are using hard cash (Evans & Schmalensee 2005). According to Swart (2004), most people do not have discipline when shopping with credit card. In fact, there are people who can shop with credit cards to the point of going beyond the threshold limit. Nevertheless, people are getting into debts they cannot afford to pay easily. Most of the credit card clients prefer to pay the interest in most cases and do not really focus on the principle amount. As time passes, the debt continues to increase and by the time the clients get to know the amount they own the bank or the credit card companies, they become shocked. Sienkiewicz, (2001) confirms that there are a percentage of people who get to this situation. He confirms that about 14% of American households are in debt of an average of 12,000 dollars as a result of credit card spending. This could lead to serious consequences to the individuals in this situation especially if they happen to lose job or get into financial crisis. Getting into debt with credit cards is quite easy. The interest rates charged on the use of credit cards are quite high. The lowest interest is about 12% and the highest about 16%. People have always wondered why credit card loans are charged such kind of interest rates. In addition to that, interests may be compounded especially when an individual is unable to pay the debt within the specified time. Assuming that a person late several times a year, the interest rates accrued could be very high and they have to be paid. The introduction of internet has also increased risks of using credit cards. Internet is one of the most common avenues of credit card transactions. Franchise stores and many other stores have online shops nowadays where clients can shop online and have the goods delivered to their house within a specified period of time. While this is a great advantage in that it provides a lot of convenience, the avenue presents a lot of challenges especially cyber crime. Hackers and cyber criminals have mastered ways of obtaining credit card details from the clients and transferring money at times from the client’s credit cards. This has been a great challenge to banks and credit card providers as hackers are able to hack into even very high secure websites. Credit card details are obtained from the client and used to make payments for things they did not order or transferred to other payment systems. Millions of people have become prey to the credit card fraud. There are cases where cyber criminals obtain details of the clients and use them to open bank accounts and other accounts Christina Couch (2012) confirms that there are as many as nine million theft identity cases in the United States alone every year. It is interesting that whenever there are new features introduced to curb credit card fraud and theft identity, hackers work until they are able to crack the details of some clients. There are extremely clever people who do not even known how to hack into systems but can con clients through ingenious ways. It is no wonder there are always cases of theft identity and credit card fraud through out credit card history. VISA confirms that there are many ways criminals use to scam clients through credit cards. It could be phrihising websites, scam marketing and phone scams. Most of these methods seem very legitimate and the clients and businesses are compelled to use their credit card to make purchases for goods or services. By the time the clients know that they have been scammed, the transactions cannot be reversed (VISA, 2013). The cases of identity theft and credit card fraud are very apparent in the world over. The Federal Bureau of Investigations brought to the limelight the case of a couple that was suspected to be involved in identity theft and credit card fraud. The couple Flenaugh and Silas was caught with about one hundred credit cards. Some of the cards had their names while some did not have any names. Investigations into the cards indicated that the cards were fraudulent. It was found out that the cards had details of other people, who probably did not know their details were being, used somewhere else by another person. Silas admitted that he was responsible for losses amounting between 200,000 and 400,000 dollars using those credit cards (Federal Bureau of Investigations, 2013). While Flenaugh and Silas were caught by the long arm of the law, there are many other people doing the same thing around the world and have never been caught. The use of credit cards has been associated with economic slow downs around the world. The recent economic recession in 2008 was as a result of high loan debts and credit card loans have a big contribution to that. In the United States credit card loans were at 850 billion dollars in 2008. This was the third largest amount after mortgages and student loans. What is tricky about credit cards is the fact that they do not have collaterals in most cases. In this case, banks may go on losses whenever clients are unable to make payments unlike mortgages and other loans where the banks take the assets quoted by the client. Looking at the 2008, the crisis was caused by banks across the world. The banks were in crisis as the money they owed was much more than what they were making. One of the contributors to such case scenarios is the loans the banks are unable to recover. As stated above, credit card loans are not well recovered when clients are unable to pay (Elvi, 2013). Controversies There have been a number of controversies that credit card companies have been involved in. in 2010, a lawsuit was filed against the credit card giants claiming that the credit card companies prevent merchants from informing clients about discounts and fair pricing. It was claimed that some of the companies do not provide complete information to the merchants who in turn misinform the clients (Hanson, 2013). Recently, there has been controversy after major credit card providers refused to accept payments through credit cards for purchasing guns. The gun businesses are legal in the United States but the providers fell that the business may put then at risk. After all, terrorism has been on the increase across the world and o has violence in schools and homes. In this case, the credit card providers feel they may be held responsible in some case scenarios. The controversy is only for the online purchases of guns as the credibility of a person cannot be well authenticated. Business owners feel that they may lose some business as most people nowadays prefer to shop online. Credit card providers are correct to some extent but the gun business owners are also legitimate. It is possible that the best solution can only be through the government (Merzer, 2013). The Future of card Payments Card payments have made things very easy for most people. The number of people having credit cards is increasing dramatically currently with over 10% increase per year. Some people have several credit cards. There are some household in the United States that have more than 10 credit cards (Sienkiewicz, 2001). In fact, use of credit card seems quite sustainable. However, the issues of fraud and identity theft should be addressed by the credit card providers. Government institutions can also assist in addressing the challenges faced. It is encouraging that these institutions are working towards better use of credit card. Conclusion The use of credit cards has been on the increase in the last few decades. They are secure and convenient to use. Credit cards have evolved a lot in the last one century they have been operational and changes are expected in the coming decades. However, there are some challenges that come with the use of these cards especially in the current times of the internet. Addressing the challenges would be important in enhancing the credit card business and passing down the benefits to the users. This may be a big challenge as fraudsters have also been evolving over the years. Conversely, cooperation among the parties involved can really help in addressing the current challenges and foreseeing possible challenges in the future and addressing them before their time. The current studies and research in computing can provide the solutions needed in the credit card industry to make it better and sustainable. References Bank of America, 2013. Advantages of Credit cards. [online] Bank of America. Available at: [accessed 14 December 2013]. Couch, C., 2012. Risks of 'swipe and go' credit cards. [online] MSN Money. Available at: [accessed 14 December 2013]. Evans, D and & Schmalensee, R., 2005. 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[online] Available at: http://www.creditcards.com/credit-card-news/credit-cards-history-1264.php [Accessed 14 December 2013]. Read More