Most people think that credit card processing is a rather recent invention but it actually dates back to the early 1800s. While plastic wasn't used then, merchants and financial intermediaries did extend credit on durable goods. In the early 1900s the larger hotels and department stores began to issue paper cards to their most valued customers.
In 1949, Diners Club launched the first general merchandise charge card. It was primarily used for travel and entertainment expenses for a more well-to-do customer. Diners quickly expanded their network across the nation and charged merchants a hefty 7% fee per transaction.
In the 1950s Bank of America launched the first general credit card. At the time, banking regulations limited the geographic reach of individual banks, so Bank of America found it difficult to compete with Diners nationwide access. To overcome this limitation, Bank of America licensed their card to other banks. Initially they were successful but soon became overwhelmed with the administrative task of processing all of the paper slips from member banks. In effort to address the growing needs, Bank of America decided to spin off the organization and it eventually became known as Visa.
In light of Bank of America's success with their card, a competing network of banks launched a second network known today as MasterCard in 1966. American Express was launched in 1958 and Sears, Roebuck, and Co. launched the Discover Card in 1986.
Issuing credit cards has turned into big business. These financial institutions that issue cards to consumers make money through outstanding balance fees, annual fees, and late payment fees. On the front end, when consumers make purchases with their cards, financial institutions make roughly 2.00% (the actual amount depends on the size of the sale).
The fees that banks charge when credit cards are used for purchases are known as Interchange. The industry has come under fire during the past few years because interchange fees have risen 117% in the past five years. Interchange prices are fixed regardless of volume, which has irked many larger retailers.
Credit cards are now an integral part of our lives with roughly 80% of all families having some type of credit card.