Sunday, September 25, 2011

First Credit Card Launched

Credit card has become a way of life to charge for products and services today. People could charge a product or a service without bring cash in their hands. They do not need to carry cash to buy things for convenience. Some of them could purchase an item that they can’t afford currently. It is a twentieth century invention to have launched credit card.

People should pay cash for almost all products and services at the beginning of the twentieth century. In 1950, a credit card that could be used at more than one merchant was invented since there were individual store credit accounts increased at the early of last century. Frank X. McNamara and two of his friends started it.

A Famous Supper in New York

One day in 1949, the head of the Hamilton Credit Corporation, Frank X McNamara who went out to eat with Alfred Bloomingdale, McNamara's long-time friend and grandson of the founder of the Bloomingdale's store, and Ralph Sneider, McNamara's attorney. The three men were eating at Major's Cabin Grill, a famous New York restaurant located next to the Empire State Building, to discuss a problem of the Hamilton Credit Corporation from customers. 

One of McNamara's customers had borrowed some money but was unable to pay it back at the present. This particular customer had gotten into trouble, when he had lent a number of his charge cards (available from individual department stores and gas stations) to his poor neighbors who needed items in an emergency. For this service, the man required his neighbors to pay him back the cost of the original purchase plus some extra money. Unfortunately for the man, many of his neighbors were unable to pay him back within a short period of time and he was then forced to borrow money from the Hamilton Credit Corporation because he had no money to spend on a meal. 

Until one day McNamara reached into his pocket for his wallet so that he could pay for the meal (in cash) at the end of the meal with his two friends. He was shocked to discover that he had forgotten his wallet. To his embarrassment, he then had to call his wife and have her bring him some money. McNamara vowed it would never happen in the future. 

McNamara came up with a new idea - a credit card that could be used at multiple locations when merging the two concepts from that dinner, the lending of credit cards and not having cash on hand to pay for the meal. There should be a middleman between companies and their customers to support the concept.

The Middleman

Charge accounts became popular in the early twentieth century though the concept of credit has existed longer even than money. With the invention and growing popularity of automobiles and airplanes, people now had the option to travel to a variety of stores for their shopping needs. Various department stores and gas stations began to offer charge accounts for their customers which could be accessed by a card in an effort to capture customer loyalty. 

However, people needed to bring dozens of these cards with them if they were to do a day of shopping. McNamara had the idea of having only one credit card provided.
In 1950, a new company called the Diners Club started after McNamara discussed the idea with Bloomingdale and Sneider and the three pooled some money. The Diners Club was going to be a middleman. Instead of individual companies offering credit to their own customers (whom they would bill later), then by billing the customers and paying the companies, the Diners Club was going to offer credit to individuals for many companies.

At the beginning, stores would make money with their credit cards by keeping customers loyal to their particular store, thus maintaining a high level of sales. However, the Diners Club needed a different way to make money since they weren't actually selling anything. 

Since interest bearing credit cards came much later, there was nearly no profit from the credit card. In 1951, the companies who accepted the Diners Club credit card were charged 7 percent for each transaction while the subscribers to the credit card were charged a $3 annual fee, which made a good profit to Diners Club credit card.
Since salesmen often need to dine (hence the new company's name) at multiple restaurants to entertain their clients, the Diners Club needed both to convince a large number of restaurants to accept the new card and to get salesmen to subscribe. So salesmen focused a main group to McNamara's new credit company.

In 1950, only 200 people (most were friends and acquaintances of McNamara) were give a Diners Club credit card in New York where just 14 restaurants accepted the card. The cad were make of a paper stock with the accepting locations printed on the back, which was not the same as a plastic one as today.

At first, progress was difficult. Merchants didn't want to pay the Diners Club's fee and didn't want competition for their own store cards. Since there were a small number of merchants that accepted the card, the customers didn’t want to sign up as well. Anyways by the end of 1950, 20,000 people were using the Diners Club credit card as the growth of the concept of the card.

The Future

McNamara thought the concept was just a fad. In 1952, he sold his shares in the company for more than $200,000 to his two partners though the Diners Club continued to grow and by the second year was making a profit ($60,000).
In 1958, both American Express and the Bank Americard (later called VISA) launched, which became competitions to Diners Club credit card. After that the concept of a universal credit card had taken root and became popular around everywhere.

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