FIS Modern Banking Platform
Advance your bank with a modern core platform.
The evolution of credit cards
July 09, 2019
When considering how to process credit card payments, it’s easy to think it happens in the blink of an eye. A transaction made with a wave of a smartphone is almost like magic. But the fact is that payment processing technology has come a long way from the original credit cards, especially with the introduction of smartphones.
If you want to know how to process credit card payments, it’s worth taking a look back at the evolution of credit cards and payment technology of yesteryear, from cardboard to plastic, zip-zaps to EMV.
How credit cards got started
While closed loop charge cards began with retail, oil and travel companies in the early 1900s, it wasn’t until the 1950s when what we know as the modern day credit card was born.
It all began in 1949, when Frank McNamara, a prominent executive, forgot his wallet while dining in a Manhattan restaurant. The embarrassment of not being able to pay prompted McNamara to return a year later and pay for his meal with a small cardboard “charge” card, the precursor to the Diners Club Card, which became the world’s first multipurpose charge card.
While the Diners Club Card was cardboard, American Express introduced the first plastic credit card in 1959. Credit cards truly entered the mainstream with widespread acceptance in the 1960s when Bank of America (eventually Visa) introduced the general-purpose credit card by licensing their brand to banks, which allowed consumers to make installment payments on their purchases.
Evolution in payment technology
Affectionately called a zip-zap machine or knuckle-buster, the manual imprinter was one of the first credit card processing “technology” used by merchants. The imprinter allowed a merchant to capture the information on a customer’s credit card, and provided three copies using carbon paper—one each for the customer, the bank, and the merchant. (The nickname “knuckle-buster” came from the fact that employees often developed skinned knuckles from the repetitive motion of using the machine.)
When manual card imprinters were commonplace, card authorization and approval weren’t part of completing a credit card transaction. Instead, Mastercard and Visa issued a booklet listing all the credit card numbers that were cancelled, stolen, or were past due, for merchants to cross-reference before verifying purchases. It was a time-consuming process, and often inefficient since the booklet went out of date quickly. Many small businesses just skipped this part of the process altogether, which left them vulnerable to fraudulent charges.
As more consumers began to use credit cards and transaction amounts grew larger, telephone authorization was introduced as a way to determine a customer’s credit line and facilitate a transaction. Merchants continued to use the manual imprinter to capture cardholder data, but could also call a phone number listed on the back of the card to verify funds availability. This process generally took a good amount of time and was not always followed by all merchants.
Shortly after an engineer at IBM developed magnetic stripe technology in 1969, the card brands began incorporating it into credit cards to hold customer data used to facilitate transactions. Ten years later, Visa introduced the first point of sale terminals, which began replacing manual imprinters. POS terminals allowed a business to electronically capture and send credit card information, greatly speeding up the transaction approval process, and contributing to the growth in credit card usage.
As computer technology rapidly advanced, the POS terminal became more and more advanced, as well. POS systems were not only able to process transactions faster and more securely, but also had the ability to integrate with other business systems such as accounting, inventory tracking, and employee scheduling. Some systems allowed merchants to capture customer data and offer loyalty programs, further promoting credit card usage.
While the magnetic stripe was among the first efforts to secure credit cards, the introduction of of EMV took the effort several more steps forward. The chip cards we have all become more familiar with in recent years, use an embedded computer chip to protect transaction data. EMV chip cards require different hardware to process than magnetic stripe cards, since they are “dipped” rather than swiped in the terminal. EMV chip card acceptance in the US has been on the rise since the fraud chargeback liability shift that took place in October 2015. In the UK, chip and pin was implemented in 2006 and marked the largest change in the way Europeans pay.
Other payment technology advancements have taken credit card transactions to a whole new level— making it possible for a business to accept secure payments in-store or remotely using a physical card or mobile device, online on an eCommerce site, and even on a mobile app.
In 1994, the first online sale was facilitated by UK-based retailer, Shop Direct. The development of Near Field Communication (NFC) technology, which allows two devices to communicate when in close proximity, has enabled contactless payments using a smartphone and a mobile wallet such as Apple Pay and Samsung Pay. Virtual payment terminal technology makes it possible to take payments on-the-go, using a mobile device or tablet.
Even as it seems like credit card processing technology and merchant services cannot get any more advanced, they undoubtedly will. In addition to more advanced efforts to secure payment transactions, contactless payments are expected to continue to evolve—from wearables such as watches and rings, to biometric fingerprints and retinal scanners. Merchants who want to know how to process credit card payments should partner with a reputable provider, because who knows where the technology will take us from here? One thing is for certain, however—it’s highly likely that plastic credit cards are likely to become as obsolete as the zip-zap machine.