The idea of giving credit to customers so that they can “buy now, pay later” isn’t new. As Americans headed west to cash in on the gold rush in the 1800s, merchants used credit coins and charge plates (literally metal plates) to trade with farmers along the way. This way, farmers could trade their crops to purchase goods before their crops had even been harvested. By the turn of the century, the financial services firm Western Union used the same idea by issuing metal plates to certain customers so that they could pay oil companies and department stores with credit. It wasn’t much later that a middle manager at Flatbush National Bank would further develop the idea.

The Charg-It Charge Card

In 1946, John Briggins — a Brooklyn-based banker at Flatbush National Bank (FNB) — further improved Western Union’s metal plates by introducing the Charg-It card. The Charg-It card allowed FNB-banked customers to charge purchases at stores within a two-square-block radius of FNB to the bank; purchases had to be in this radius because the stores had to physically leave slips with the bank to collect funds from sales at a later date. The card was risky to FNB because they would need to pay the merchants using their own deposits before the owner of the charge card paid the balance back to the bank at the end of the month — if the owner didn’t have the money or defrauded the bank in any way, FNB was out of luck.

Diner’s Club

While Western Union’s metal plates and FNB’s Charg-It cards were early prototypes of modern day credit cards, Diner’s Club is widely credited (pun intended 😉) as being the first charge card (for the difference between charge cards and credit cards, scroll down to the Appendix). The story of Diner’s Club’s founding goes like this: the founder, Frank McNamara, was eating at Major’s Cabin Grill in NYC when he realized he forgot his wallet at home. When it was time to pay the bill, the restaurant wanted him to go in the back to wash the dishes to pay his debt; to get out of doing that, he negotiated to sign a paper promising he’d pay the next day. Instead of carrying around a giant wad of cash everywhere he went, he wondered why he couldn’t just carry around some indicator that promised payment to all the merchants he frequented. After sharing the idea with his business partner, Ralph Schneider, they officially launched the Diner’s Club. Kickstarted with 14 restaurants and 200 card holders (all of whom were McNamara’s and Schneider’s closest friends and family), the network grew quickly. By the end of 1950 (less than one year in), they had 20,000 card holders. By the end of 1951, they had 42,000 card holders and 330 merchants in the network. And by 1953, they became the world’s first internationally accepted charge card.

Made of cardboard, the Diner’s Club card charged its members a $5 annual membership and merchants a 7% transaction fee… 🤯 yes you read that right. Compared to today’s 2.5–4% fees, 7% sounds insane. But McNamara explained:

“it saves the restaurant owners a lot of bookkeeping and the bother of collecting bad debts.”

The fees might’ve been high, but offering credit to customers increased sales enough to offset the cost. Despite the fees, the network continued to grow exponentially.

The BankAmericard

It wasn’t a revolutionary idea, but competitors didn’t spring up until the credit card business model was proven. McNamara explained in an interview:

“it’s so simple an idea that at least 25 people have told me they had the same one before me. They just never followed through.”

As Diner’s Club’s growth exploded, though, so did competition. In 1958, three formidable competitors entered the space: Hilton Hotels launched Carte Blanche (the world’s most prestigious credit card at the time), Amex launched their first card (they launched the first plastic credit card in 1959), and Bank of America launched their famous BankAmericard.

The “Fresno Drop”

To launch with a bang, Bank of America got every merchant in Fresno, California to accept their new card. In what is now dubbed the “Fresno Drop,” BofA then activated and mailed out 60,000 BankAmericards with $500 credit limits to all their customers in the area, no questions asked. Although they got a lot of publicity, they lost millions due to rampant fraud and delinquencies: similar to the Charg-It card, if a card holder didn’t have the money to pay BofA back, BofA was out of luck. Despite the initial losses, they held it out and the BankAmericard finally posted an operating profit for the company by 1961. In an effort to scale the business in 1966, they began licensing the card to banks in states outside California — eventually, these card programs merged to become Visa, the payment rail behemoth we all know and love 🫣 today.

Evolution of Credit Cards

The BankAmericard ushered in the era of modern credit cards as we know them. The 1960s introduced magnetic stripe verification to reduce fraud, the 1970s brought on heavy regulation, the 1980s introduced the first reward programs (Diner’s Club created the first rewards program called ClubRewards in 1984), and there have been countless technology iterations ever since (EMV chips, RFID for contactless payments via Apple and Google Pay, etc).

Appendix

  • Charge cards: cards that require you to pay your balance in full at the end of the month. If you don’t pay, access to your card is shut off until you do.
  • Credit cards: cards that allow you to rollover your balance at the end of the month (with interest).

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