A history of credit card processing

With remote payment terminals and online shopping being the norm today, it would seem that payment via credit card has always been an easy option, right? It’s actually tough to remember when merchants used a machine to take card imprints. While those days are long gone (at least in most areas), it’s important to understand where the industry came from to appreciate what merchant account services can offer today. The school year has come to an end but it is not too late for a quick pop quiz on the history of credit card processing.

The use of non-cash for purchase goes back further than you might think. Perhaps the first instance is traced back to 1914 when Western Union offered a metal card to employees in lieu of a paycheck. While only good for purchases at select stores, it was indeed the first method of “using plastic” (or metal).

Credit card processing for the public.

Things rapidly expanded to a more open system in 1946. Back then, it was called “Charg-It”. This allowed customers to charge purchases at local retail stores. Retailers then deposited charges at a bank and the institution then reimbursed the merchant. However, the first real credit card didn’t appear until the 1950s when Diners Club unveiled the world’s first Travel and Entertainment card. The card even boasted 20,000 Diners Club holders by 1951. Later, American Express is credited with the first card made of plastic in 1959 and things really took off from there. According to CreditCards.com:

“The Diners Club and American Express cards ‘functioned in what is known as a ‘closed-loop’ system, made up of the consumer, the merchant and the issuer of the card….In 1959, the option of maintaining a revolving balance was introduced. This meant cardholders no longer had to pay off their full bills at the end of each cycle. While this carried the risk of accumulating finance charges, it gave customers greater flexibility in managing their money.”

The manner in which cards were processed grew with the industry. Things picked up steam with the creation of bank conglomerations that would honor the same card. All this time, it is important to note, the entire credit card processing system was entirely paper-based. All of this changed in the 1970s.

Introduction of electronic payment systems.

Paper-based systems simply cost too much. Between overhead and lost transactions, the leading players now began to invest in an electronic authorization process. During the early 1970s, this took place via a phone inquiry to a call center to ensure available funds. The big change appeared around 1975 when National BankAmericard, Inc. (NBI) introduced and upgraded the electronic authorization system.

Instead of the typical manual imprint, Visa introduced a highly cumbersome electronic data capturing Point-of-Sale (POS) system in 1979. This was also the year when all major credit cards introduced the magnetic information stripe. In subsequent years, there were many streamlined POS advancements – but it wasn’t until 1994 when a company called Lipman Electronics Engineering, Ltd. created the face of modern credit card processing. It was during that year the company unveiled the first wireless terminal – changing the face of payments and processing forever.

It’s been a long road for both credit cards and the way in which they’re processed. From the first charge cards to manual imprint machines –and now wireless credit card processing – the industry continues to evolve and grow. In order to really understand how to make the most of POS technologies – and all that your merchant services provider has to offer – it’s important to take a step back and study a little history.

Class dismissed!