The History of Credit

Article by FNB and VISA

To know where you are going, it is important to know where you have been. With the increasing use and acceptance of plastic money in the form of debit, credit and pre-paid cards, as well as the growing global movement towards a cashless society, we investigate the history of the card and offer insights into where the industry is heading.

Credit was first used in Assyria, Babylon and Egypt 3000 years ago. The bill of exchange — the forerunner of banknotes — was established in the 14th century. Debts were settled by one-third cash and two-thirds bill of exchange. Paper money followed only in the 17th century.

Christopher Thornton, offering furniture that could be paid off on a weekly basis, placed the first advertisement for credit in 1730. From the 18th century until the early part of the 20th, tallymen sold clothes in return for small weekly payments. They were called 'tallymen' because they kept a record or tally of what people had bought on a wooden stick. One side of the stick was marked with notches to represent the amount of debt and the other side was a record of payments. In the 1920s, a shopper's plate — a 'buy now, pay later' system — was introduced in the USA. It could only be used in the shops that issued it.

The first charge cards

In 1950, the first 'plastic money' — charge cards — were issued in the USA, followed in the next year by the arrival of the first-ever credit cards issued to 200 consumers who could use them at 27 restaurants in New York. But it was only until the establishment of standards for the magnetic strip in 1970 that the credit card became part of the information age.

Since the introduction of bank cards in the early 1950s, the global acceptance and use of this form of payment system has grown exponentially. Today there is even a word for the study of money-like objects, such as credit cards, namely exonumia.

Exonumiasts collect any form of money — from the now familiar plastic cards to older paper merchant cards and even metal tokens that were accepted as early merchant credit cards. The first credit cards were made of celluloid and then metal and fibre, then paper and are now plastic.

Within the first seven years 5-million credit cards circulated in the US

Payment cards are a relatively recent development. Visa, for example, traces its history back 50 years to 1958 and within the first seven years 5-million credit cards circulated in the US.

Long before the first credit cards were issued, a visionary of the 19th century wrote that a cashless society, using credit cards for purchases, would exist at the end of the 20th century. Falling asleep in 1887, the narrator of Edward Bellamy's novel Looking Backward, published in 1888, wakes in the year 2000 to an America whose problems have been solved by getting rid of buying and selling.

Instead, 'A credit corresponding to his share of the annual product of the nation is given to every citizen on the public books at the beginning of each year, and a credit card issued him with which he procures at the public storehouses, found in every community, whatever he desires, whenever he desires it.' Bellamy's credit card is actually more similar to what we would call a debit card — one that draws from an established account.

The credit card was the successor of a variety of merchant credit schemes following the development of store-specific metal charge cards in 1928. These cards continued the system of extending credit to favoured customers and in 1938 several companies in America started to accept each other’s cards.

Early charge cards did not possess the key feature of modern credit cards: revolving credit, which allows cardholders to pay balances over time, while simultaneously charging new amounts. There are now countless variations on the basic concept of revolving credit for individuals, including organisation-branded credit cards, corporate-user credit cards and store cards.

The growth of credit cards has had an enormous impact on the global economy

The growth of credit cards has had an enormous impact on the global economy, changing buying habits by making it much easier for consumers to finance purchases.

Advances in technology have facilitated the use of credit cards. Merchants are now connected to banks electronically, so purchases are approved rapidly; online shopping on the Internet is possible with payment cards.

An alternative to credit cards is the debit card, which deducts the price of goods and services directly from customers' bank accounts. The design of the card itself has become a major selling point in recent years. Since the value of the card to the issuer is related to the customer's use of the card, there has been a rise of co-brand and affinity cards, leading to higher card use. In most cases, a percentage of the value of the card is returned to the affinity group.

The introduction of the latest in Visa chip card and contactless technology is bringing about the next evolution in plastic cards. Transactions are not only easier and more convenient, but may feature increased security as the card never leaves the holder's hand. Editor's Note: I don't know about that statement. RFID, by some accounts, may have a major security flaw enabling fraudsters to intercept the wireless transmission of the radio frequency waves. Doesn't have to leave the pocket. I've read reports that indicate the card information can, ironically, be "swiped" while it's sitting in the consumers wallet.

This cutting edge technology has an application beyond just banking and the functionality chip cards offer holds much potential for the card industry. The amount of storage space and the processing power of the chip card may allow various forms of information to be stored and utilised, such as biometric and personal contact info. These advances may likely contribute to making the concept of a cashless society a reality and also make the idea of having a single card for everything you need a realistic possibility.

While we still have some way to go before reaching Bellamy's vision of a cashless society, the rise of plastic money has put payment cards in nearly everyone's hands and it certainly looks to be a pivotal mechanism in the future of payment.

September 23, 2008 by Gill Montia

Story link: Cardholders flock to secure online payment methods

UK payment services association, Apacs, has reported a major increase in the volume of credit and debit card holders taking advantage of measures that can prevent online shopping fraud.

According to Apacs, over 25 million cards are now registered with secure online payment systems, Verified by Visa and MasterCard SecureCode. Cardholder registration in August was up 150% over the year and had increased by nearly 600% on August 2006. The process of signing up is simple and can be completed on the websites of card providers.

The schemes offer enhanced protection against the unauthorised use of a card and provide state of the art online security without the need for additional software.

Online shopping card fraud was estimated at £223.8 million in 2007, when it formed around 77% of total card-not-present fraud losses in the UK. Last year’s figure was up from 45% from 2006, when Internet fraud losses stood at £154.5 million and accounted for 73% of total card-not-present fraud losses.

Top UK Retailer Pins Hopes on Web - eMarketer

Top UK Retailer Pins Hopes on Web
SEPTEMBER 19, 2008

Karin von Abrams, Senior Analyst

On September 11, John Lewis, the leading UK store group, announced a 27% fall in pretax profits for the first half of 2008.

Earlier this year, the company said it hoped to avoid the worst effects of the impending recession thanks to its loyal customer base, the opening of several new stores and significant diversification into Internet selling.

That hope in Internet sales may be well-placed. Retail e-commerce sales in the UK are predicted to reach £44.9 billion ($80.8 billion) in 2012, up from £19.5 billion ($38 billion) in 2008, according to Verdict Research data cited in Internet Retailing.

UK Retail E-Commerce Sales, 2002-2012 (billions of £ and % of total retail sales)

eMarketer estimates that B2C e-commerce in the UK will reach £94.2 billion ($169.6 billion) in 2012, up from £59.8 billion ($116.6 billion) in 2008.

Verdict's figures are significantly lower than eMarketer's because Verdict excludes air travel and tickets from its estimates, whereas eMarketer includes them. Verdict also gathers data from UK adults only, while eMarketer estimates include online sales to UK residents ages 14 and older.

The John Lewis group, owned as a cooperative by its employees, made pretax profits of £108 million ($191 million) in the six months to July 26, 2008, said a spokesman. Sales overall rose 3.6% to reach £3.27 billion ($6.38 billion).

The company's physical stores are bearing the brunt of the economic storm.

Operating profit at the group's department stores was down 34%, and at its Waitrose supermarkets—considered pricier for consumers than other major grocery chains—operating profit fell 8%. Price cuts and promotions, designed to appeal to worried shoppers, accounted for much of this loss.

But the group's Internet ventures continued their recent robust performance, strengthening hopes that online shopping will help John Lewis come through the current downturn in good shape. During the first half of 2008, online sales rose a healthy 30%.

Irish businesses are now selling up to €12m in goods and services online every day, an e-commerce strategist has claimed.

Ennis-based e-commerce strategy company Magico.ie said that while traditional retailers are facing a downturn, online retailing is on track to break new records.

Paul McGurran, director of e-commerce at Magico.ie, said that despite the current economic climate, “online retailing” is still very much in growth mode compared to traditional high-street retail activity.

“Although traditional high-street retail activity is suffering a downturn, internet sales in Ireland are likely to smash all previous records this year as more and more drop the high street for the information super-highway.

“For example, according to Realex Payments, peak online sales in Ireland reached €12.7m on 4 December 2007 last year, declining to €7.3m in subsequent days during the Christmas period. In 2008, average daily web sales in Ireland are now exceeding €12m per day’.

McGurran pointed to recent research in the UK showing that internet sales will continue to grow and the web channel will claim more than half of the retail market pie by 2026.

“This increase in online retail activity is being stimulated by numerous factors, including greater broadband penetration across Ireland and time-poor and price-conscious consumers.

“Furthermore, the rising price of fuel is the main reason behind consumers’ inclination towards web shopping, with users spending an average of 1.6 hours each week buying on the internet,” McGurran added.

Magico.ie was established in 1999 and currently employs 13 people at its headquarters in Ennis, Co Clare. Its current client base includes Fujipix.ie, The Bag Shop, Smyths Toys, Irish Auctioneers & Valuers Institute, Evergreen Healthfood, Munster Rugby Supporters Club, Freshways Sandwiches, Sisk Builders and Fitzpatrick Design Hotels.

The Magico.ie team consists of industry experts who have worked on large Irish and overseas ICT projects with partners such as IBM, Microsoft, Tesco.com, Ireland Online, Bank of Ireland Asset Management and many more.

Retailers wishing to develop an ecommerce Strategy are being invited to attend an e-commerce Seminar from 7-9pm at The Morgan Hotel, Templebar, Dublin on 15 October 2008. For more information go to www.magico.ie

By John Kennedy

Commercial Payments International reports on the growth of Corporate Cards in Mexico:

Until recently corporate cards in Mexico were limited mainly to senior executives of very large companies. Several changes in this market have occurred recently indication that the Mexican corporate card market is poised for rapid growth:

• Increasing numbers of mid-sized corporates and SMEs have begun to use some type of corporate payment cards
• Petrol stations only recently began to accept cards for payment
• The increased desire for visibility into corporate spend
• The introduction of prepaid cards which have been successful as salary cards in a market with a large unbanked population.

Currently only four banks and American Express issue corporate cards in Mexico. In early 2008 Citibank, one of the leading global issuers of corporate cards, announced its plans to introduce new corporate card services in Mexico which will improve procurement process efficiency. Through its subsidiary Banamex, Citi already has over 150 corporate clients and have experienced a CAGR of 102% since 1999 indicating the significant opportunity in the market.

Hollie Shaw , Canwest News Service

TORONTO - As worldwide markets plunge, Wal-Mart Canada is vowing to carry its low-cost credo into the financial sector.  The biggest mass merchant in Canada has applied for a banking license, joining the ranks of retailers such as Canadian Tire, Sears and Loblaw.

Two years after luring a former American Express Canada executive to head up its financial services department and expand into non-bank financial products, the retailer posted mandatory public notice on Saturday of its official bank application to the Office of the Superintendent of Financial Institutions.

'A license would allow us get into banking products and the obvious one would be a credit card, but if you look at other retailers the breadth of (potential) products is huge,' Wal-Mart spokesman Kevin Groh said.  "Services common to some other retailers (include) savings accounts, loans, mortgages, RSPs, GICs . . . but at this point it would be premature for us to speculate" the breadth of its offering, he said.

One thing seems certain - the price competition that Wal-Mart Canada has brought to the retail sector in the past decade, from Pampers to groceries, will likely be carried into the banking segment.  "Our approach in everything we have done to date is to be a price leader and eliminate costs that would pass on to customers," Groh said. 

Keith Howlett, retailing analyst at Desjardins Securities, said getting
into financial services is a valuable income stream for retailers.

"It is pretty lucrative for Loblaw and at Canadian Tire it was a big growth driver for them," he said. Credit cards are also a valuable source of information about its consumers, letting them see where and how they spend their money.

"I think Wal-Mart could have a huge opportunity there, and quite a different offering from ING or President's Choice Financial or Canadian Tire and something quite different from the banks. The traffic in their stores is enormous and is skewed to those least likely to get the value-added from banks," he said, noting that banks mostly try to court customers with high income or high savings.

"Wal-Mart could design a business model that goes against the grain." One such business, he suggested, would be to offer a lower-fee option on payday loans and services provided by companies such as Money Mart. "It's a huge, fast-growing business, it covers a huge number of people," but no banks or retailers are tapping into it.

Close to two years ago, Wal-Mart Canada signaled its interest in the banking business when it hired Trudy Fahie, former vice-president of financial services for American Express Canada, to take on the same role - a newly created position - at Wal-Mart Canada. Wal-Mart currently has ATMs and offers extended warranties, wire transfers and emergency bill payments through Western Union.

It's a different story in the United States, where the retailer has met with resistance to efforts to get into banking. Its applications for bank charters in Oklahoma and California were turned down and it ended up withdrawing an application in Utah.

Despite the fact that over 90% of Americans that own contactless payments cards like using them, three quarters of the population are not even aware of the technology's existence, according to a survey commissioned by the Smart Card Alliance.

Javelin Strategy and Research surveyed 500 contactless card users, finding that 92% think the technology is fast and easy to use. Respondents also use their cards regularly - with over 22% making payments with their contactless cards more than six times per month.

Contactless card users are also keen on mobile payments. The research found 43% are likely to use a handset as a mobile wallet, compared to just 19% of people who don't use contactless cards.

Nearly half - 47% - of contactless card owners would even switch carriers in order to make mobile payments.

The technology is rapidly gaining in popularity, with nine percent of the US population now possessing a contactless card. Last year the number of open network contactless cards in circulation reached 35 million, nearly double the 19 million in 2006.

Merchants are also adopting the technology, with an estimated 75,000, including taxi firms and transport operators as well as retailers, now accepting the cards.

"Contactless payment acceptance at merchants is taking off much faster than PIN debit did," says John Suchanec, SVP, payment research and innovations, Bank of America. "Contactless acceptance is already growing at a rate that it took seven years to achieve with PIN debit. Mobile will accelerate the curve."

But Javelin also questioned 1500 people representative of the US online population (not necessarily contactless card users) and found awareness of the technology is still poor.

Only a quarter of those surveyed are familiar with contactless, although this is up from 15% in 2006.

• Use secure ATM machines, inside a bank lobby or inside a store. Offenders can install the scanners quickly, but likely won't go inside a place of business to do it.
• Cover the keyboard with your free hand when you punch in your PIN. This obstructs the view of any hidden cameras that may be present.
• Skimming devices may protrude from the face of the ATM. If something looks suspicious or if the keyboard jiggles or the card slot is not quite level, leave and use another ATM and contact the bank to report it.
• If the machine keeps your card, call the bank immediately.
• Don't accept help from anyone hanging around the ATM. They may be there to try to observe your PIN number.

OTTAWA, Sept. 16 /CNW Telbec/ - The Canadian Payments Association (CPA) has published new requirements for pre-authorized debits (PADs) to ensure appropriate information is disclosed to consumers and other parties using this option to pay for goods or services. As a result, all businesses using PADs to collect payments from their customers will need to make some changes to the forms or processes through which they obtain customers' authorization.

A PAD is a payment based on an agreement between a business and its customer through which the business obtains the customer's authorization to debit his or her bank account in accordance with specified terms. Requirements for these items to be processed through the clearing system are set out in the CPA's Rule H1 - Pre-authorized Debits. Recurring charges to credit cards are outside the scope of this framework.

On average, more than 2.3 million PADs were processed through the Canadian clearing system each business day during 2007.Mandatory Information Elements for Pre-authorized Debit Agreements

A key change in the new version of Rule H1 is the definition of mandatory elements to be included in the Payor's PAD Agreement - that is, the form or process through which the business or "payee" obtains the customer's authorization to debit his or her bank account. Among the mandatory elements are:

- information on how to cancel a PAD,
- the payee's contact information, and

- a standard statement with regard to the consumer's rights of recourse in the event of a debit that does not follow the terms of the agreement or is not authorized.

All payees using PADs must update their forms or electronic processes to reflect these new requirements by February 28, 2010. Each payee must submit a copy of its proposed forms and/or electronic processes to its financial institution to confirm that they meet the new requirements. Payor's PAD Agreements in effect before that date are grandfathered to avoid potential disruption to both consumers and payees. As part of the transition, CPA's member financial institutions will be updating their contractual arrangements with corporate clients on whose behalf they enter PADs into the clearing system to incorporate their clients' new obligations as PAD payees.

More Flexible Framework for Electronic PAD Agreements

The new framework also provides more flexibility to establish Payor's PAD Agreements through electronic means such as over the telephone or the internet. Payees who wish to initiate PAD Agreements electronically must submit their proposed electronic forms or processes to their financial

institution for review, including the proposed process to confirm the identity of the payor in the electronic environment. In addition, for all electronic Payor's PAD Agreements, the payee must send a written confirmation of all details to the payor in advance of the first PAD; the standard period is 15 days before the first PAD, which may be reduced by mutual agreement, but may not be waived

More information on the new requirements, including a copy of Rule H1, is available on the CPA's web site at www.cdnpay.ca.

The Canadian Payments Association (CPA), created by an Act of Parliament in 1980, operates Canada's national clearing and settlement systems; facilitates their interaction with other systems involved in the clearing and settlement of payments; and facilitates the development of new payment methods and technologies. It promotes the efficiency, safety and soundness of the clearing and settlement systems, taking into account the interests of users.Its current membership comprises virtually all of Canada's bank and non-bank deposit-taking financial institutions. In 2007, the CPA's systems cleared and settled transactions averaging $203 billion each business day.

For further information: Roger Dowdall, Vice-President, Communications and Education, Canadian Payments Association, (613) 238-4173, ext 3240

• For the fourth consecutive year, nearly 9 out of 10 (87%) online adults who have conducted an online transaction in the past year have experienced problems doing so;
• 41% of online adults who experience problems transacting would switch to a competitor or abandon a transaction entirely if they experienced an online transaction problem;
• Four in five online adults who experience problems (84%) share their experiences with others — both online and offline