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9 DECEMBER 2018
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Wednesday, 19 September 2018 14:42
Visa at 60 – but Diners came first
"Fresno drop" leads to first widespread card fraud

Visa is celebrating its 60th birthday today, but it is worth remembering that this was not the start of the payment card story. In the 1920s, department stores and oil companies started offering metal charge plates and “courtesy cards” that customers could use to charge purchases, according to “Paying with Plastic,” by David S. Evans and Richard Schmalensee. These cards were accepted only by the merchants that issued them, similar to modern-day store cards.

Then one day,  Frank McNamara, a New York businessman was embarrassed to find he had forgotten his wallet and couldn’t pay for dinner. Instead he gave his business card to the restaurant, as surety for his debt.

He begun to think how useful it would be if all restaurants accepted a promisory note and he launched a cardboard Diners Card.

As the first major multipurpose charge card issuer, Diners Club gained widespread acceptance among merchants and paved the way for other issuers. Over three quarters of US.consumers now report carrying a credit card.

By its first anniversary, Diners Club had attracted 42,000 members and a few competitors. By 1953, it became the first internationally accepted charge card, according to the company.

Competition

But it wasn’t until 1958 that major companies joined the competition. These included American Express, which issued some of the first plastic cards; Bank of America; and Carte Blanche, owned by Hilton Hotels.

Among the flurry of credit cards launched in 1958, Bank of America’s was the most innovative. The Diners Club and other cards were only accepted at restaurants and travel and entertainment outlets. But the new “BankAmericard” was accepted by several different types of merchants, although it was limited to California at first. It also allowed some customers to revolve balances, a novelty at the time, according to Evans and Schmalensee.

Bank of America introduced the card with an unforgettable — and incredibly expensive — publicity stunt: It mailed 60,000 already-activated BankAmericard credit cards to its customers in Fresno, California.

First major card fraud
Known in the industry as the “Fresno drop,” this mass mailing resulted in widespread fraud and delinquencies that cost the bank millions. Despite the losses, the issuer offered the same card to the rest of its California customers the following year. In 1961, the card generated its first operating profit, according to Evans and Schmalensee.
In 1966, BankAmericard began licensing its cards to banks in other states to scale its business. This allowed out-of-state banks to issue cards that were accepted by merchants that took BankAmericard. In the same year, a separate group of California banks started the Interbank Card Association, working together to manage issuer-merchant transactions.
In time, these organizations evolved into two nationwide networks. They now effectively act as middlemen between issuers and merchants, ensuring transactions are legitimate before they get through and working with the merchant banks to complete transactions:
•    BankAmericard eventually became Visa, which then spun off from Bank of America. (The bank has since revived the BankAmericard name for its credit cards.)
•    ICA gained more member banks and changed its name to MasterCharge, which later became MasterCard.


So happy birthday Visa, but well done to Diners for staying the course. Now part of Discover, its founder thought the company would peter out at 250,000 members and then disappear. Not so fast Mr McNamarra.


 
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