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Credit card
In 1950, a single dinner at a New York restaurant sparked a financial revolution that would eventually replace cash as the dominant medium of exchange for billions of people. Ralph Schneider and Frank McNamara, founders of Diners Club, created the first general-purpose charge card to solve a simple problem: they had forgotten their wallet at a restaurant and needed a way to pay without cash. This small act of forgetfulness led to the consolidation of multiple merchant-specific cards into one universal tool, allowing customers to pay different merchants using the same card. Before this innovation, charge coins and cards were made of celluloid, copper, aluminum, or steel, often shaped like coins with holes for key rings. These early charge coins were given to customers who had charge accounts in hotels or department stores, and they required a clerk to retrieve the plate from the store's files to process a purchase. The Charga-Plate, developed in 1928, was an early predecessor that used an imprinter to press an inked ribbon against a charge slip, creating an impression of the embossed information. This system sped up back-office bookkeeping and reduced manual copying errors, but it was limited to specific merchants. The Air Travel Card, introduced in 1934 by American Airlines and the Air Transport Association, simplified the process further by creating a numbering scheme that identified both the issuer and the customer account. By 1941, about half of the airlines' revenues came through the Air Travel Card agreement, and by 1948, it became the first internationally valid charge card within all members of the International Air Transport Association. The concept of revolving credit, where consumers could build a continuing balance of debt subject to interest, was not successfully established until 1958 when Bank of America launched the BankAmericard in Fresno, California. This card succeeded where others failed by breaking the chicken-and-egg cycle in which consumers did not want to use a card that few merchants would accept and merchants did not want to accept a card that few consumers used. Bank of America chose Fresno because 45% of its residents used the bank, and by sending a card to 60,000 Fresno residents at once, the bank was able to convince merchants to accept the card. It was eventually licensed to other banks around the United States and then around the world, and in 1976, all BankAmericard licensees united themselves under the common brand Visa. In 1966, the ancestor of MasterCard was born when a group of banks established Master Charge to compete with BankAmericard, and it received a significant boost when Citibank merged its own Everything Card, launched in 1967, into Master Charge in 1969. Early credit cards in the U.S. were mass-produced and mass mailed unsolicited to bank customers who were thought to be low risk. According to LIFE, cards were mailed off to unemployable people, drunks, narcotics addicts, and to compulsive debtors, which Betty Furness, President Johnson's Special Assistant, compared to giving sugar to diabetics. These mass mailings were known as drops in banking terminology, and were outlawed in 1970 due to the financial chaos they caused. However, by the time the law came into effect, approximately 100 million credit cards had been dropped into the U.S. population. After 1970, only credit card applications could be sent unsolicited in mass mailings. This system was computerized in 1973 under the leadership of Dee Hock, the first CEO of Visa, allowing reduced transaction time. However, until always-connected payment terminals became ubiquitous at the beginning of the 21st century, many merchants accepted all charges, especially those below a threshold value or from known and trusted customers, without verifying them by phone. Books with lists of stolen card numbers were distributed to merchants who were expected in any case to check cards against the list before accepting them, as well as verifying the signature on the charge slip against that on the card. Merchants who failed to take the time to follow the proper verification procedures were liable for fraudulent charges, but because the procedures were cumbersome, merchants often skipped some or all of them and assumed the risk for smaller transactions. The early credit card industry in the United States was characterized by regional monopolies. Several landmark anti-trust court cases, including the 1978 Supreme Court case Marquette National Bank of Minneapolis v. First of Omaha Service Corp., led to substantial reforms that made the credit card industry more competitive. A 2024 study estimated that these competitive reforms resulted in substantial welfare gains, in particular for the poor.
When was the first general-purpose charge card created?
Ralph Schneider and Frank McNamara created the first general-purpose charge card in 1950. This innovation solved the problem of paying without cash after they forgot their wallet at a New York restaurant. The card was called Diners Club and allowed customers to pay different merchants using the same card.
When did Bank of America launch the first revolving credit card?
Bank of America launched the BankAmericard in 1958 in Fresno, California. This card introduced the concept of revolving credit where consumers could build a continuing balance of debt subject to interest. The card succeeded by breaking the cycle where consumers did not want to use a card that few merchants would accept.
When did the Visa brand officially form from BankAmericard licensees?
All BankAmericard licensees united under the common brand Visa in 1976. Before this unification, the card was licensed to other banks around the United States and then around the world. The system was computerized in 1973 under the leadership of Dee Hock, the first CEO of Visa.
When were mass mailings of unsolicited credit cards outlawed in the United States?
Mass mailings of unsolicited credit cards were outlawed in 1970 due to the financial chaos they caused. By the time the law came into effect, approximately 100 million credit cards had been dropped into the U.S. population. After 1970, only credit card applications could be sent unsolicited in mass mailings.
When did the first credit card launch outside the United States?
Barclaycard in the United Kingdom launched the first credit card outside the United States in 1966. Many cultures remained cash-oriented or developed alternative forms of cashless payments after this launch. France, for instance, was much quicker to develop and adopt chip-based credit cards due to strict regulations regarding bank overdrafts.
When did a Japanese law enabling credit card cash back come into force?
A Japanese law enabling credit card cash back came into force in 2010. A legal loophole in this system was quickly exploited by online shops dedicated to providing cash back as a form of easy loan with exorbitant rates. On the 19th of October 2010, Hideki Fukuba became the first operator of such an online cash back service to be charged by the police.
While the United States saw rapid adoption of credit cards, the rest of the world developed at a much slower pace, often creating their own networks to suit local banking systems. In 1966, Barclaycard in the United Kingdom launched the first credit card outside the United States, but many cultures remained cash-oriented or developed alternative forms of cashless payments. France, for instance, was much quicker to develop and adopt chip-based credit cards due to strict regulations regarding bank overdrafts, and these cards are seen as major anti-fraud credit devices. In countries like Germany, France, and Switzerland, Carte bleue and Eurocard were developed, and adoption was initially much slower than in the U.S., Canada, the U.K., Australia, and New Zealand. It took until the 1990s to reach anything like the percentage market penetration levels achieved in the U.S., Canada, and U.K. In some countries, acceptance still remains low as the use of a credit card system depends on the banking system of each country. Japan remains a very cash-oriented society, with credit card adoption being limited mainly to the largest of merchants, although stored value cards such as telephone cards are used as alternative currencies, and the trend is toward RFID-based systems inside cards, cellphones, and other objects. The fragmented nature of the U.S. banking system regulation under the Glass-Steagall Act made credit cards an effective way for those who were traveling around the country to move their credit to places where they could not directly use their banking facilities. There are now countless variations on the basic concept of revolving credit for individuals, including organization-branded credit cards, corporate-user credit cards, and store cards. The design of the credit card itself has become a major selling point, and a growing field of numismatics, or more specifically exonumia, has emerged to study money-like objects. Credit card collectors seek to collect various embodiments of credit from the now familiar plastic cards to older paper merchant cards, and even metal tokens that were accepted as merchant credit cards. Early credit cards were made of celluloid plastic, then metal and fiber, then paper, and are now mostly polyvinyl chloride plastic. However, the chip part of credit cards is made from metals. The size of most credit cards is 85.60 by 53.98 millimeters with rounded corners with a radius of 3.48 millimeters, conforming to the ISO/IEC 7810 ID-1 standard, the same size as ATM cards and other payment cards. Most credit cards are made of plastic, but some are made from metal. Credit cards have a printed or embossed bank card number complying with the ISO/IEC 7812 numbering standard. The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for MasterCard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check digit. Both of these standards are maintained and further developed by ISO/IEC JTC 1/SC 17/WG 1. Credit cards have a magnetic stripe conforming to the ISO/IEC 7813. Most modern credit cards use smart card technology: they have a computer chip embedded in them as a security feature. In addition, complex smart cards, including peripherals such as a keypad, a display, or a fingerprint sensor are increasingly used for credit cards. In addition to the main credit card number, credit cards also carry issue and expiration dates, as well as extra codes such as issue numbers and security codes. Complex smart cards allow to have a variable security code, thus increasing security for online transactions. Not all credit cards have the same sets of extra codes nor do they use the same number of digits. Credit card numbers and cardholder names were originally embossed, to allow for easy transfer of such information to charge slips printed on carbon paper forms. With the decline of paper slips, some credit cards are no longer embossed and in fact the card number is no longer in the front. In addition, some cards are now vertical in design, rather than horizontal.
The Cost of Convenience
The financial mechanics of credit cards often trap consumers in a cycle of debt through high interest rates and complex fee structures that are rarely fully understood by the average user. A cash advance is a credit card transaction that withdraws cash rather than purchasing something, and the process can take place either through an ATM or over the counter at a bank or other financial agency, up to a certain limit. For a credit card, this will be the credit limit, or some percentage of it. Cash advances often incur a fee of 3% to 5% of the amount being borrowed, and when made on a credit card, the interest is often higher than other credit card transactions. The interest compounds daily starting from the day cash is borrowed. Credit-card purchases of items that are viewed as cash are sometimes deemed cash advances in accordance with the credit card network's guidelines, thereby incurring the higher interest rate and the lack of the grace period. These often include money orders, prepaid debit cards, lottery tickets, gaming chips, mobile payments, and certain taxes and fees paid to certain governments. However, should the merchant not disclose the actual nature of the transactions, these will be processed as regular credit card transactions. Many merchants have passed on the credit card processing fees to the credit card holders in spite of the credit card network's guidelines, which state the credit card holders should not have any extra fee for doing a transaction with a credit card. Under card scheme rules, a credit card holder presenting an accepted form of identification must be issued a cash advance over the counter at any bank which issues that type of credit card, even if the cardholder cannot provide his PIN. A Japanese law enabling credit card cash back came into force in 2010, but a legal loophole in this system was quickly exploited by online shops dedicated to providing cash back as a form of easy loan with exorbitant rates. At first, the online store sells a single inexpensive item of glass marble, golf tee, or eraser with an 80,000 yen wire transfer for a 100,000 yen credit card payment. A month later, when the credit card provider charges the card owner with the full fee, the online store is out of the picture with no liability. In effect, what the online cash back services provide are loans with a 300% annual interest rate. On the 19th of October 2010, Hideki Fukuba became the first operator of such an online cash back service to be charged by the police. He was charged on tax evasion of 40 million yen in unpaid taxes. Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR divided by 100 multiplied by the average daily balance, divided by 365, and then multiplied by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as a residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full. The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually, this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. If several interest rates apply to various balance segments, then payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue. A credit card's grace period is the time the cardholder has to pay the balance before interest is assessed on the outstanding balance. Grace periods may vary but usually range from 20 to 55 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a cardholder is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement. However, there are some credit cards that will only apply finance charges on the previous or old balance, excluding new transactions. The cardholder must pay a defined minimum portion of the amount owed by a due date or may choose to pay a higher amount. The credit issuer charges interest on the unpaid balance if the billed amount is not paid in full, typically at a much higher rate than most other forms of debt. This impact accounts for roughly 8% of all interest ever paid. Thus, hiding the minimum payment option for automatic and manual payments and focusing on the total debt may mitigate the unwanted consequences of default minimum payments. In addition, if the cardholder fails to make at least the minimum payment by the due date, the issuer may impose a late fee or other penalties. To help mitigate this, some financial institutions can arrange for automatic payments to be deducted from the cardholder's bank account, thus avoiding such penalties altogether, as long as the cardholder has sufficient funds. In cases where the minimum payment is less than the finance charges and fees assessed during the billing cycle, the outstanding balance will increase in what is called negative amortization. This practice tends to increase credit risk and mask the lender's portfolio quality and consequently has been banned in the U.S. since 2003. High interest and bankruptcy are significant risks, as low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy. Some credit cards often levy a rate of 20 to 30 percent after a payment is missed. In other cases, a fixed charge is levied without change to the interest rate. In some cases universal default may apply: the high default rate is applied to a card in good standing by missing a payment on an unrelated account from the same provider. This can lead to a snowball effect in which the consumer is drowned by unexpectedly high-interest rates. Further, most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit. First Premier Bank at one point offered a credit card with a 79.9% interest rate, however, they discontinued this card in February 2011 because of persistent defaults. Research shows that a substantial fraction of consumers, about 40 percent, choose a sub-optimal credit card agreement, with some incurring hundreds of dollars of avoidable interest costs.
The Hidden Economy
Behind every swiped card lies a complex web of financial relationships involving multiple parties, each with their own incentives and risks that shape the global economy. A credit card issuer, such as a bank or credit union, enters into agreements with merchants for them to accept its credit cards. Merchants often advertise in signage or other company material which cards they accept by displaying acceptance marks generally derived from logos. Alternatively, this may be communicated, for example, via a restaurant's menu or orally, or stating, We do not take credit cards. The credit card issuer issues a credit card to a customer at the time or after an account has been approved by the credit provider, which need not be the same entity as the card issuer. The cardholders can then use it to make purchases at merchants accepting that card. When a purchase is made, the cardholder agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number. Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a card-not-present transaction. Electronic verification systems allow merchants to verify in a few seconds that the card is valid and the cardholder has sufficient credit to cover the purchase, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or point-of-sale system with a communications link to the merchant's acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is called chip and PIN in the United Kingdom and Ireland, and is implemented as an EMV card. For card-not-present transactions where the card is not shown, merchants additionally verify that the customer is in physical possession of the card and is the authorized user by asking for additional information such as the security code printed on the back of the card, date of expiry, and billing address. Each month, the cardholder is sent a statement indicating the purchases made with the card, any outstanding fees, the total amount owed and the minimum payment due. In the U.S., after receiving the statement, the cardholder may dispute any charges that are thought to be incorrect, which limits cardholder liability for unauthorized use of a credit card to $50. The Fair Credit Billing Act gives details of the U.S. regulations. Many banks now also offer the option of electronic statements, either in lieu of or in addition to physical statements, which can be viewed at any time by the cardholder via the issuer's online banking website. Notification of the availability of a new statement is generally sent to the cardholder's email address. If the card issuer has chosen to allow it, the cardholder may have other options for payment besides a physical check, such as an electronic transfer of funds from a checking account. Depending on the issuer, the cardholder may also be able to make multiple payments during a single statement period, possibly enabling them to utilize the credit limit on the card several times. A credit limit is the maximum amount of revolving credit that a lender makes available on a credit card or line of credit. Credit card issuers typically assess several factors when determining credit limits, with the primary considerations being the applicant's credit score, income level, and current debt obligations. The credit limit directly impacts the cardholder's purchasing power and credit utilization ratio. Most major card issuers employ tiered limit structures based on creditworthiness, with applicants with FICO scores above 740 may qualify for limits exceeding $10,000, while those with scores below 670 often receive initial limits between $300 and $1,000. Issuers generally review accounts periodically and may grant automatic credit line increases to cardholders who demonstrate responsible usage through consistent payments and maintaining utilization below 30%. Federal Reserve data from 2022 illustrates the correlation between credit scores and limits: prime borrowers with FICO scores between 680 and 739 had median limits of $7,100, compared to $1,500 for subprime borrowers with FICO scores below 620. The aggregate credit line capacity across U.S. consumer credit cards surpassed $5 trillion in 2022, with prime and super-prime borrowers accounting for approximately 80% of available credit. The flow of information and money between these parties, always through the card associations, is known as the interchange, and it consists of a few steps. Authorization is the first step, where the cardholder presents the card as payment to the merchant and the merchant submits the transaction to the acquirer. The acquirer verifies the credit card number, the transaction type and the amount with the issuer and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an approval code, which the merchant stores with the transaction. Batching follows, where authorized transactions are stored in batches, which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. Batching can be done manually or automatically. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned to the cardholder's available credit. Some transactions may be submitted in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through. Clearing and settlement is the next step, where the acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction. Funding follows, where once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totalling the funds in the batch minus either the discount rate, mid-qualified rate, or non-qualified rate which are tiers of fees the merchant pays the acquirer for processing the transactions. Chargebacks are events in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it. Credit card issuers do not have to inform cardholders when they close any credit card, including cards with balances. Cards issued by banks to cardholders in a different country are known as offshore credit cards. In the U.S., credit card issuers do not have to inform cardholders when they close any credit card, including cards with balances. The cardholder is the holder of the card used to make a purchase, and does not pay fraudulent charges on the US credit cards. The card-issuing bank is the financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. The merchant is the individual or business accepting credit card payments for products or services sold to the cardholder. The acquiring bank is the financial institution accepting payment for the products or services on behalf of the merchant. An independent sales organization is a reseller to merchants of the services of the acquiring bank. A merchant account could refer to the acquiring bank or the independent sales organization, but generally is the organization with whom the merchant deals. A card association is an association of card-issuing banks such as Discover, Visa, MasterCard, American Express that set transaction terms for merchants, card-issuing banks, and acquiring banks. A transaction network is the system that implements the mechanics of electronic transactions, which may be operated by an independent company, and one company may operate multiple networks. An affinity partner is an institution that lends their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers. Insurance providers are insurers underwriting various insurance protections offered as credit card perks, for example, Car Rental Insurance, Purchase Security, Hotel Burglary Insurance, and Travel Medical Protection.
The Security Arms Race
As credit card fraud evolved into a sophisticated white-collar crime, the industry responded with a series of technological upgrades that have yet to fully eliminate the threat. Credit card security relies on the physical security of the plastic card as well as the privacy of the credit card number. Therefore, whenever a person other than the card owner has access to the card or its number, security is potentially compromised. Once, merchants would often accept credit card numbers without additional verification for mail order purchases. It is now common practice to only ship to confirmed addresses as a security measure to minimize fraudulent purchases. Some merchants will accept a credit card number for in-store purchases, whereupon access to the number allows easy fraud, but many require the card itself to be present and require a signature for magnetic stripe cards. A lost or stolen card can be cancelled, and if this is done quickly, will greatly limit the fraud that can take place in this way. European banks can require a cardholder's security PIN be entered for in-person purchases with the card. The Payment Card Industry Data Security Standard, or PCI DSS, is the security standard issued by the Payment Card Industry Security Standards Council. This data security standard is used by acquiring banks to impose cardholder data security measures upon their merchants. The goal of the credit card companies is not to eliminate fraud, but to reduce it to manageable levels. This implies that fraud prevention measures will be used only if their cost is lower than the potential gains from fraud reduction, whereas high-cost low-return measures will not be used, as would be expected from organizations whose goal is profit maximization. Internet fraud may be committed by claiming a chargeback which is not justified, known as friendly fraud, or carried out by the use of credit card information which can be stolen in many ways, the simplest being copying information from retailers, either online or offline. Despite efforts to improve security for remote purchases using credit cards, security breaches are usually the result of poor practice by merchants. For example, a website that safely uses TLS to encrypt card data from a client may then email the data, unencrypted, from the webserver to the merchant, or the merchant may store unencrypted details in a way that allows them to be accessed over the Internet or by a rogue employee. Unencrypted card details are always a security risk. Even encrypted data may be cracked. Controlled payment numbers, also known as virtual credit cards or disposable credit cards, are another option for protecting against credit card fraud where the presentation of a physical card is not required, as in telephone and online purchasing. These are one-time use numbers that function as a payment card and are linked to the user's real account, but do not reveal details, and cannot be used for subsequent unauthorized transactions. They can be valid for a relatively short time, and limited to the actual amount of the purchase or a limit set by the user. Their use can be limited to one merchant. If the number given to the merchant is compromised, it will be rejected if an attempt is made to use it a second time. A similar system of controls can be used on physical cards. Banks can adjust many controls on individual cards as needed; for example, a card can be subjected to temporal, numerical, and geographical usage restrictions. From a security perspective, this means that a customer can have a chip and PIN card secured for the real world, and limited for use in the home country. Should the card details be compromised, the thief will be prevented from using them overseas in non-chip and pin EMV countries. Similarly, the real card can be restricted from use online so that stolen details will be declined if this is tried. Then when card users shop online they can use virtual account numbers. In both circumstances, an alert system can be built in notifying a user that a fraudulent attempt has been made which breaches their parameters, and can provide data on this in real-time. Additionally, the physical card includes security features to prevent counterfeiting. For example, most modern credit cards have a watermark that will fluoresce under ultraviolet light. Most major credit cards have a hologram. A Visa card has a letter V superimposed over the regular Visa logo and a MasterCard has the letters MC across the front of the card. Older Visa cards have a bald eagle or dove across the front while older MasterCard cards have two circles with continents on it. In the aforementioned cases, the security features are only visible under ultraviolet light and are invisible in normal light. In the United States, the Department of Justice, Secret Service, Federal Bureau of Investigation, Immigration and Customs Enforcement, and Postal Inspection Service are responsible for prosecuting criminals who engage in credit card fraud. However, they do not have the resources to pursue all criminals, and in general they only prosecute cases exceeding $5,000. Three improvements to card security have been introduced to the more common credit card networks, but none has proven to help reduce credit card fraud so far. First, the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are intended to make forgery more difficult. The majority of smart card based credit cards comply with the EMV standard. Second, an additional 3 or 4 digit card security code, or card verification value, is now present on the back of most cards, for use in card not present transactions. Code 10 calls are made when merchants are suspicious about accepting a credit card. The operator then asks the merchant a series of yes-or-no questions to ascertain whether the merchant is suspicious of the card or the cardholder. The merchant may be asked to retain the card if safely possible. The merchant may receive a reward for returning a confiscated card to the issuing bank, especially if an arrest is made. Stakeholders at all levels in electronic payment have recognized the need to develop consistent global standards for security that account for and integrate both current and emerging security technologies. They have begun to address these needs through organizations such as PCI DSS and the Secure POS Vendor Alliance. In relative numbers the values lost in bank card fraud are minor, calculated in 2006 at 7 cents per 100 dollars' worth of transactions. In 2004, in the U.K., the cost of fraud was over £500 million. When a card is stolen, or an unauthorized duplicate made, most card issuers will refund some or all of the charges that the customer has received for things they did not buy. These refunds will, in some cases, be at the expense of the merchant, especially in mail order cases where the merchant cannot claim sight of the card. In several countries, merchants will lose money if no ID card was asked for, therefore merchants usually require ID cards in these countries. Credit card companies generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays his credit card bill. Most banking services have their own credit card services that handle fraud cases and monitor for any possible attempt at fraud. Employees that are specialized in doing fraud monitoring and investigation are often placed in Risk Management, Fraud and Authorization, or Cards and Unsecured Business. Fraud monitoring emphasizes minimizing fraud losses while making an attempt to track down those responsible and contain the situation. Credit card fraud is a major white-collar crime that has been around for many decades, even with the advent of the chip-based card that was put in practice in some countries to prevent cases such as these. Even with the implementation of such measures, credit card fraud continues to be a problem.
The Merchant's Dilemma
While consumers often focus on interest rates and rewards, the true economic engine of the credit card industry is the complex web of fees paid by merchants, which ultimately inflates prices for all consumers. Merchants that accept credit cards must pay interchange fees and discount fees on all credit card transactions. In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount. The result is that merchants are induced to charge all customers, including those who do not use credit cards, higher prices to cover the fees on credit card transactions. The inducement can be strong because the merchant's fee is a percentage of the sale price, which has a disproportionate effect on the profitability of businesses that have predominantly credit card transactions unless compensated for by raising prices generally. In the United States in 2008 credit card companies collected a total of $48 billion in interchange fees, or an average of $427 per family, with an average fee rate of about 2% per transaction. Credit card rewards result in a total transfer of $1,282 from the average cash payer to the average card payer per year. For each purchase, the bank charges the merchant a service commission, and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee, known as the interchange rate. Costs to merchants include a commission of around 0.5 to 4 percent of the value of each transaction paid for by credit card. The merchant may also pay a variable charge, called a merchant discount rate, for each transaction. In some instances of very low-value transactions, use of credit cards will significantly reduce the profit margin or cause the merchant to lose money on the transaction. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. In some cases, merchants may charge users a credit card supplement, or surcharge, either a fixed amount or a percentage, for payment by credit card. This practice was prohibited by most credit card contracts in the United States until 2013 when a major settlement between merchants and credit card companies allowed merchants to levy surcharges. Most retailers have not started using credit card surcharges, however, for fear of losing customers. Merchants in the United States have been fighting what they consider to be unfairly high fees charged by credit card companies in a series of lawsuits that started in 2005. Merchants charged that the two main credit card processing companies, MasterCard and Visa, used their monopoly power to levy excessive fees in a class-action lawsuit involving the National Retail Federation and major retailers such as Wal-Mart. In December 2013, a federal judge approved a $5.7 billion settlement in the case that offered payouts to merchants who had paid credit card fees, the largest antitrust settlement in U.S. history. Some large retailers, such as Wal-Mart and Amazon, chose to not participate in this settlement, however, and have continued their legal fight against the credit card companies. In April 2015 the EU imposed a cap on the interchange fee to 0.3% on consumer credit cards, and 0.2% on debit cards. Merchants must also lease or purchase processing equipment, although some processors provide this equipment free of charge. Merchants must also satisfy data security compliance standards which are highly technical and complicated. In many cases, there is a delay of several days before funds are deposited into a merchant's bank account. Because credit card fee structures are very complicated, smaller merchants are at a disadvantage to analyze and predict fees. Finally, merchants assume the risk of chargebacks by consumers. For a typical credit card issuer, interchange fee revenues may represent about a quarter of total revenues. These fees are typically from 1 to 6 percent of each sale but will vary not only from merchant to merchant, as large merchants can negotiate lower rates, but also from card to card, with business cards and rewards cards generally costing the merchants more to process. The interchange fee that applies to a particular transaction is also affected by many other variables including the type of merchant, the merchant's total card sales volume, the merchant's average transaction amount, whether the cards were physically present, how the information required for the transaction was received, the specific type of card, when the transaction was settled, and the authorized and settled transaction amounts. In some cases, merchants add a surcharge to the credit cards to cover the interchange fee, encouraging their customers to instead use cash, debit cards, or even cheques. The 2022-proposed change in Interchange fees, by encouraging use of multiple card networks was criticized as likely to reduce fraud detection. Credit card issuers generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays his credit card bill. Most banking services have their own credit card services that handle fraud cases and monitor for any possible attempt at fraud. Employees that are specialized in doing fraud monitoring and investigation are often placed in Risk Management, Fraud and Authorization, or Cards and Unsecured Business. Fraud monitoring emphasizes minimizing fraud losses while making an attempt to track down those responsible and contain the situation. Credit card fraud is a major white-collar crime that has been around for many decades, even with the advent of the chip-based card that was put in practice in some countries to prevent cases such as these. Even with the implementation of such measures, credit card fraud continues to be a problem. The cost of running the credit card portfolio, including everything from paying the executives who run the company to printing the plastics, to mailing the statements, to running the computers that keep track of every cardholder's balance, to taking the many phone calls which cardholders place to their issuer, to protecting the customers from fraud rings, is a significant portion of expenses. Depending on the issuer, marketing programs are also a significant portion of expenses. There is a cost to the issuer for these programs, and interest expenses are another major component. Banks generally borrow the money they then lend to their customers. As they receive very low-interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates. If the card issuer charges 15% on money lent to users, and it costs 5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns 10% on the loan. This 10% difference is the net interest spread, and the 5% is the interest expense. Charge-offs are when a cardholder becomes severely delinquent on a debt, often at the point of six months without payment, the creditor may declare the debt to be a charge-off. It will then be listed as such on the debtor's credit bureau reports. Equifax, for instance, lists R9 in the status column to denote a charge-off. A charge-off is considered to be written off as uncollectible. To banks, bad debts and fraud are part of the cost of doing business. However, the debt is still legally valid, and the creditor can attempt to collect the full amount for the time periods permitted under law. This includes contacts from internal collections staff, or more likely, an outside collection agency. If the amount is sufficiently large, there is the possibility of a lawsuit or arbitration. In relative numbers the values lost in bank card fraud are minor, calculated in 2006 at 7 cents per 100 dollars' worth of transactions. In 2004, in the U.K., the cost of fraud was over £500 million. When a card is stolen, or an unauthorized duplicate made, most card issuers will refund some or all of the charges that the customer has received for things they did not buy. These refunds will, in some cases, be at the expense of the merchant, especially in mail order cases where the merchant cannot claim sight of the card. In several countries, merchants will lose money if no ID card was asked for, therefore merchants usually require ID cards in these countries. Credit card companies generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays his credit card bill. Most banking services have their own credit card services that handle fraud cases and monitor for any possible attempt at fraud. Employees that are specialized in doing fraud monitoring and investigation are often placed in Risk Management, Fraud and Authorization, or Cards and Unsecured Business. Fraud monitoring emphasizes minimizing fraud losses while making an attempt to track down those responsible and contain the situation. Credit card fraud is a major white-collar crime that has been around for many decades, even with the advent of the chip-based card that was put in practice in some countries to prevent cases such as these. Even with the implementation of such measures, credit card fraud continues to be a problem.
The Psychology of Spending
The psychological impact of credit cards on consumer behavior has been studied extensively, revealing that the abstract nature of digital payments leads to increased spending and reduced self-regulation. The main benefit to the cardholder is convenience. Compared to debit cards and checks, a credit card allows small short-term loans to be quickly made to a cardholder who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card. One financial benefit is that no interest is charged when the balance is paid in full within the grace period. In the United States, most credit cards offer a grace period, such as 21, 23, or 25 days, on purchase transactions. Different countries offer different levels of protection. In the U.K., for example, the bank is jointly liable with the merchant for purchases of defective products over £100. Many credit cards offer benefits to cardholders. Some benefits apply to products purchased with the card, like extended product warranties, reimbursement for decreases in price immediately after purchase, known as price protection, and reimbursement for theft or damage on recently purchased products, known as purchase protection. Other benefits include various types of travel insurance, such as rental car insurance, travel accident insurance, baggage delay insurance, and trip delay or cancellation insurance. Credit cards may also offer a loyalty program, where each purchase is rewarded based on the price of the purchase. Typically, rewards are either in the form of cashback or points. Points are often redeemable for gift cards, products, or travel expenses like airline tickets. Some credit cards allow the transfer of accrued points to hotel and airline loyalty programs. Research has examined whether competition among card networks may potentially make payment rewards too generous, causing higher prices among merchants, thus actually impacting social welfare and its distribution, a situation potentially warranting public policy interventions. Some countries, such as the United States, the United Kingdom, and France, limit the amount for which a consumer can be held liable in the event of fraudulent transactions with a lost or stolen credit card. A credit card register is a transaction register used to ensure the increasing balance owed from using a credit card is enough below the credit limit to deal with authorization holds and payments not yet received by the bank and to easily look up past transactions for reconciliation and budgeting. The register is a personal record of banking transactions used for credit card purchases as they affect funds in the bank account or the available credit. In addition to checking numbers and so forth the code column indicates the credit card. The balance column shows available funds after purchases. When the credit card payment is made the balance already reflects the funds were spent. In a credit card's entry, the deposit column shows the available credit and the payment column shows the total owed, their sum being equal to the credit limit. Each check is written, debit card transaction, cash withdrawal, and credit card charge are entered manually into the paper register daily or several times per week. Credit card register also refers to one transaction record for each credit card. In this case, the booklets readily enable the location of a card's current available credit when ten or more cards are in use. Several studies have shown that consumers are likely to spend more money when they pay by credit card. Researchers suggest that when people pay using credit cards, they do not experience the abstract pain of payment. Furthermore, researchers have found that using credit cards can increase consumption of unhealthy food, compared to using cash. High interest and bankruptcy are significant risks, as low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy. Some credit cards often levy a rate of 20 to 30 percent after a payment is missed. In other cases, a fixed charge is levied without change to the interest rate. In some cases universal default may apply: the high default rate is applied to a card in good standing by missing a payment on an unrelated account from the same provider. This can lead to a snowball effect in which the consumer is drowned by unexpectedly high-interest rates. Further, most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit. First Premier Bank at one point offered a credit card with a 79.9% interest rate, however, they discontinued this card in February 2011 because of persistent defaults. Research shows that a substantial fraction of consumers, about 40 percent, choose a sub-optimal credit card agreement, with some incurring hundreds of dollars of avoidable interest costs. Unnecessary risk is another concern, as credit card ownership brings additional risks with it, such as an increased risk of fraud, or taking on unnecessary liability. Weakens self regulation is a key finding, as several studies have shown that consumers are likely to spend more money when they pay by credit card. Researchers suggest that when people pay using credit cards, they do not experience the abstract pain of payment. Furthermore, researchers have found that using credit cards can increase consumption of unhealthy food, compared to using cash. Inflated pricing for all consumers is a societal detriment, as merchants that accept credit cards must pay interchange fees and discount fees on all credit card transactions. In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount. The result is that merchants are induced to charge all customers, including those who do not use credit cards, higher prices to cover the fees on credit card transactions. The inducement can be strong because the merchant's fee is a percentage of the sale price, which has a disproportionate effect on the profitability of businesses that have predominantly credit card transactions unless compensated for by raising prices generally. In the United States in 2008 credit card companies collected a total of $48 billion in interchange fees, or an average of $427 per family, with an average fee rate of about 2% per transaction. Credit card rewards result in a total transfer of $1,282 from the average cash payer to the average card payer per year. Benefits to merchants include reduced resistance compared to paying cash, and the transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment. Cards are even more secure than cash because they reduce theft opportunities by reducing the amount of cash on the premises. Finally, credit cards reduce the back office expense of processing checks/cash and transporting them to the bank. Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk. Extra turnover is generated by the fact that the customer can purchase goods and services immediately without being inhibited by the amount of cash in his pocket or the immediate state of his bank balance. Much of merchants' marketing is based on this immediacy. For each purchase, the bank charges the merchant a service commission, and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee, known as the interchange rate. Costs to merchants include a commission of around 0.5 to 4 percent of the value of each transaction paid for by credit card. The merchant may also pay a variable charge, called a merchant discount rate, for each transaction. In some instances of very low-value transactions, use of credit cards will significantly reduce the profit margin or cause the merchant to lose money on the transaction. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. In some cases, merchants may charge users a credit card supplement, or surcharge, either a fixed amount or a percentage, for payment by credit card. This practice was prohibited by most credit card contracts in the United States until 2013 when a major settlement between merchants and credit card companies allowed merchants to levy surcharges. Most retailers have not started using credit card surcharges, however, for fear of losing customers. Merchants in the United States have been fighting what they consider to be unfairly high fees charged by credit card companies in a series of lawsuits that started in 2005. Merchants charged that the two main credit card processing companies, MasterCard and Visa, used their monopoly power to levy excessive fees in a class-action lawsuit involving the National Retail Federation and major retailers such as Wal-Mart. In December 2013, a federal judge approved a $5.7 billion settlement in the case that offered payouts to merchants who had paid credit card fees, the largest antitrust settlement in U.S. history. Some large retailers, such as Wal-Mart and Amazon, chose to not participate in this settlement, however, and have continued their legal fight against the credit card companies. In April 2015 the EU imposed a cap on the interchange fee to 0.3% on consumer credit cards, and 0.2% on debit cards. Merchants must also lease or purchase processing equipment, although some processors provide this equipment free of charge. Merchants must also satisfy data security compliance standards which are highly technical and complicated. In many cases, there is a delay of several days before funds are deposited into a merchant's bank account. Because credit card fee structures are very complicated, smaller merchants are at a disadvantage to analyze and predict fees. Finally, merchants assume the risk of chargebacks by consumers.
The Future of Plastic
As the physical credit card evolves into digital forms, the industry faces new challenges and opportunities in the realm of prepaid cards, digital cards, and specialized business solutions. Secured credit cards are a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down $1,000, they will be given credit in the range of $500 to $1,000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account. Credit card issuers offer this because they have noticed that delinquencies were notably reduced when the customer perceives something to lose if the balance is not repaid. The cardholder of a secured credit card must still make regular payments, as with a regular credit card, but should they default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows the cardholder to start building or rebuilding a positive credit history. Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually, the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency, which is 150 to 180 days. This means that an account that is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance that is much higher than the actual credit limit on the card. In these cases, the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but is left with additional debt. Most of these conditions are usually described in a cardholder agreement which the cardholder signs when opening an account. Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card that might not otherwise be available. They are often offered as a means of rebuilding one's credit. Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards. For people in certain situations, for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt, secured cards are almost always more expensive than unsecured credit cards. Sometimes a credit card will be secured by the equity in the borrower's home. Prepaid cards are sometimes called prepaid credit card, but they are a debit card, since no credit is offered by the card issuer: the cardholder spends money which has been stored via a prior deposit by the cardholder or someone else. However, it carries a credit-card brand, such as Discover, Visa, MasterCard, American Express, or JCB, and can be used in similar ways just as though it were a credit card. Unlike debit cards, prepaid credit cards generally do not require a PIN. An exception are prepaid credit cards with an EMV chip, which require a PIN if the payment is processed via Chip and PIN technology. As of 2018, most debit cards in the U.S. were prepaid cards, 71.7%. After purchasing the card, the cardholder loads the account with any amount of money, up to the predetermined card limit and then uses the card to make purchases the same way as a typical credit card. The main advantage over secured credit cards is that the cardholder is not required to supply the money required to open an account. With prepaid credit cards, purchasers are not charged any interest but are often charged a purchasing fee plus monthly fees after an arbitrary time period, together with many other fees. The Financial Consumer Agency of Canada describes them as an expensive way to spend your own money. The agency publishes a booklet entitled Pre-paid Cards which explains the advantages and disadvantages of this type of prepaid card. Prepaid cards are sometimes marketed to teenagers for shopping online without having their parents complete the transaction. Teenagers can only use funds that are available on the card which helps promote financial management to reduce the risk of debt problems later in life. Prepaid cards can be used globally. The prepaid card is convenient for payees in countries in which international wire transfers and bank checks are time-consuming, complicated and costly. A digital card is a digital cloud-hosted virtual representation of any kind of identification card or payment card, such as a credit card. Business credit cards are specialized credit cards issued in the name of a registered business, and typically they can only be used for business purposes. Their use has grown in recent decades. In 1998, for instance, 37% of small businesses reported using a business credit card; by 2009, this number had grown to 64%. Business credit cards offer a number of features specific to businesses. They frequently offer special rewards in areas such as shipping, office supplies, travel, and business technology. Most issuers use the applicant's personal credit score when evaluating these applications. In addition, income from a variety of sources may be used to qualify, which means these cards may be available to new businesses. In addition, some issuers of this card do not report account activity to the owner's personal credit, or only do so if the account is delinquent. In these cases, the activity of the business is separated from the owner's personal credit activity. Business credit cards are offered by American Express, Discover, and almost all major issuers of Visa and MasterCard cards. Some local banks and credit unions also offer business credit cards. Charge cards are a type of credit card, but they require the balance to be repaid in full each month, or at the end of each statement cycle. In contrast, credit cards allow consumers to build a continuing balance of debt, subject to interest being charged at a specific rate. A credit card also differs from a charge card in that a credit card typically involves a third-party entity that pays the seller, and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date. A credit card also differs from a debit card, which can be used like currency by the owner of the card. There were 7.753 billion credit cards in the world. In 2020, there were 1.09 billion credit cards in circulation in the United States, and 72.5% of adults, 187.3 million, in the country had at least one credit card. The future of credit cards lies in the integration of these various forms, from secured cards for rebuilding credit to digital cards for the modern economy, and the continued evolution of security measures to protect against fraud. The industry continues to face challenges in balancing the needs of consumers, merchants, and issuers, while adapting to new technologies and regulatory environments. The credit card has come a long way from the metal plates of the 1920s to the digital wallets of today, and its impact on the global economy is undeniable.