Lessons learnt from the plastic age of card payments

Innovative technology, card payment security and consumers' growing familiarity with new payment methods are driving the sweeping changes we're experiencing in how we make and take payments.

Paying by card has now become consumers' payment reflex, loosening cash's three century grip as the preferred payment option. Over 60% of BOIPA customers reflected how they had seen a decrease of cash usage over the past 12 months and Central Bank statistics notes that we paid by card over two billion times in 2023. In many ways, this should be the golden age for the physical debit and credit card.

Yet, the physical card is becoming more out of sight, as digital wallets gain prominence, along with payment apps. Over 40% of contactless payments last year were made through a digital wallet.

The accelerated adoption of cash-alternative options over a comparatively short period of time has been seamless despite the remarkable sea-change in how we make transactions.

This wasn't the case when institutions introduced cards to consumers in the middle of the last century. Looking back to the plastic age of cards lends some clues as to what lessons the banking and financial industry learnt as we embrace expedited waves of payment innovation.

Charge cards: credit and debit cards in disguise

The first utterance of card payments predates the invention of the car and the arrival of electricity in the utopian novel, Looking Backwards first mentioning credit cards in 1887. Fiction would evolve into fact just over four decades later, with the arrival of charge cards.

Charge Cards were offered by large scale merchants to their regular or trusted customers. This replaced signatures with stamps and improved back-office operations, becoming the first real iteration of the credit card.

The issue with charge cards was that they could only be used in the issuing store. But, the journey towards a revolving credit card reality moved further with the launch of Air Cards in the 1930s.

Air Cards offered passengers a ticket against their credit to receive a fifteen percent discount with participating airlines. All American airlines would sign up to Air Cards in the 40’s, with almost half their revenue coming from the scheme, as well as making flying more accessible to customers through a structured instalments programme.

Diners Club created a more generalised charge card concept in the early 50’s, offering a general purpose card for participating restaurants, allowing for the card’s bill to be settled with each scheduled statement.

Banks move the dress rehearsal to the main stage

Smaller, regional banks would try to launch their own credit card scheme but failed to reach a critical mass to make it viable. Both consumer and business apprehension to adopt credit card schemes also limited progress.

Bank of America, with a strong market presence in California would be the first to make the breakthrough in the late 50s, harnessing its market share to encourage enough consumer and business interest in adopting card payments by posting BankAmericards to 60,000 customers at once.

However, this initial breakthrough came with mistakes and a reputational cost.

Early day card issues

Drops

The bank would replicate this approach nationally, mass-mailing credit cards to customers across the country. This approach was known as “drops”.

Without properly screening potential customers, credit cards were offered to financially vulnerable individuals, as well as minors and people suffering from addictions. Betty Furness, consumer advocate and special advisor to President Johnson at this time, compared it to someone “giving sugar to a diabetic.”

It’s estimated 100 million credit cards were “dropped” over a four year period.

Processing pains

The initial credit card payment process contrasts starkly to the frictionless card transactions experienced today.? The process involved the merchant calling the bank, who then called the credit card company, whose employee manually looked up the customer’s name and credit balance.?A protracted process that did little to encourage initial credit card uptake.

Fraud and liability

Paul O’Neil, columnist for Life Magazine , was one of the first journalists to comprehensively shine a light on these issues, as well as the impact of card fraud on unsuspecting bank customers.

Criminals learnt quickly how to exploit credit cards with relative ease given the limited security features and checks at this time and cardholders were inadequately protected from fraud.

O’Neil takes the case of middle-class couple Daniel and Gloria Orlick, whose excitement from receiving a credit card from their local bank turned to anguish with its unnoticed disappearance.

“Statement, meanwhile, followed statement — the last of them for $1,636.02…? The Orlicks stubbornly went on refusing to pay, and First National City, having failed to squeeze the crook’s total expenditures out of them, now calculates that his spending amounted to no more than $963.98 at the time Orlick reported the loss of his card.”

Improvements

Changes in the 1970s would shore up confidence and best practice in the card industry.

Drops were banned with the Unsolicited Credit Card Act and mass credit card mailing became limited to being for only credit card applications, acting as a postal “opt-in” system.

The computerisation of the credit card system made transactions more straightforward and quicker, along with the invention of a magnetic stripe for credit and debit cards by IBM in 1969 and bank associations pressed for means of achieving “instant communication and instant credit verification.”

By the middle of the decade, consumer trust in cards improved but scepticism remained from almost two decades of false starts and industry issues. The introduction of chargebacks through the Fair Credit Billing Act in 1974 (for credit cards) and the Electronic Fund Transfer Act in 1978 (for debit cards) reassured consumers by limiting their liability in the case of fraud and created a process to dispute a purchase.

Four decades of consolidation and growth

Credit and debit cards would find their feet in the subsequent decades. Consumer awareness and continued security developments, like chip and pin, made it a more secure payment option, along with contactless transactions.

A best practice approach has been maintained and continually improved upon with an eye on future payment developments. Cross-industry co-operation ensures procedures are followed to protect consumers and merchants, with PSD2 – a comprehensive framework with the goal of making payments within the EU more efficient and secure – and PSR offering a tangible example of this commitment.

As the convergence of technologies, connectivity and data enables the next wave of payments, lessons have been learnt from the rocky start endured in the last century. The storied legacy of physical cards may be entering a new chapter in the digital era but, now more than ever, they still hold popularity with customers, “holding as a tangible symbol of trust in the modern world .”