History of Merchant Services

The issuing of non-cash for purchasing goods dates back as far as 1914.

Western Union issued a metal plate or “card” to their employees in lieu of a paycheck. This card was only good for purchases within the company owned stores. While not very favorable by today’s standards it was still the first “card.” However the system was “closed”. Meaning no one other than the company participated.

The current bankcard system is considered an “open” system as many members can participate. The earliest form of a credit card was “Charg-It”, a system of credit developed by John Biggins in 1946, which allowed customers to charge purchases at their local retail stores. The merchant then deposited the charges at Biggins’ bank, and the bank reimbursed the merchant for the sale and collected payment from the customer.

In 1950 Diners Club introduced the first Travel and Entertainment card and in essence was the real first credit card. The designation Travel and Entertainment (a.k.a. T&E) was due to the intended cardholder’s use. Because it was designed to relieve a business man from having to take cash on the road and use for his travel and entertainment expenses. Diners Club is also considered the first acquirer, since they were the first to charge merchants a discount rate. A discount rate is a percentage taken from each sale accepted as a fee to the issuer and acquirer.

Later in 1951, the “Charg-it” system helped introduce the first “bank” credit card, which was circulated by Franklin National Bank in Long Island, NY. Once an application was submitted for credit worthiness a card was issued. Merchants copied information from the card onto a sales slip and called for an approval for each transaction over a specified limit (floor limit). The bank would then credit the merchants account for the sale minus a discount rate to cover the cost for providing the “loan”.

American Express entered the industry in 1958 and issued its first card. Marketed for travel and entertainment use too, it along with Diner’s became known as T & E Cards. Also in 1958, Bank of America issued its first credit card, called the BankAmericard. The BankAmericard was issued and accepted only in California at the time.

By 1959, other merchant account financial institutions had begun credit programs. Simultaneously, card issuers were offering the added services of revolving credit. This gave the cardholder the choice to either pay off their balance or maintain a balance and pay a finance charge.

The idea of the bankcard association began in 1960, when Bank of America started to license other banks to issue their BankAmericard and process BankAmericard transactions. This was primarily done to gain market share outside of California. Now, for the first time there were a group of banks issuing and acquiring the same credit card. These participating banks then exchanged credit card transaction information with one another, this was the beginning of what is now called “interchange.” Even though other banks were now involved.

In order to compete with BankAmericard’s card licensing program, 14 banks met in Buffalo, NY, and formed Interbank Card Association (ICA) in 1966, a new association with the ability to exchange information on credit card transactions. Unlike other card organizations, a single entity did not dominate ICA and its members. Member committees were established to run the association. They established rules for authorization, clearing and settlement. They also handled marketing, security and legal aspects of running the organization.

The following year, four California banks (known as the Western U.S. States Bankcard Association) opened their memberships to other financial institutions in the United States. It was its own association with its own product name (brand) for its credit card – it was called MasterCharge. WSBA had previously purchased the right to use this name from First National Bank of Louisville (currently known as National City Bank of Kentucky). WSBA then licensed Interbank Card Association to use the MasterCharge name and logo in 1968.

Subsequent to being licensed to use the MasterCharge name and logo, ICA changed its name to MasterCharge. That same year, MasterCharge began what is now a huge global network by forming an association with Banco Nacional in Mexico. Later that year, they formed an alliance in Europe with Eurocard. The first Japanese members also joined that year.

In 1970, Bank of America with its BankAmericard product, formed its own association. The association consisted of all the banks that were licensed to issue the BankAmericard. These banks now became member banks of this new association, called National BankAmericard, Inc. or NBI.

A pivotal point in the credit card processing industry began in 1970 when Worthern Bank & Trust Co. of Little Rock, AR, sued NBI. Worthern Bank was a member bank of the NBI association and was not able to also become a member of MasterCharge in order to offer that product to merchants and consumers that wanted it. That was due to the NBI rule for members to exclusively offer NBI’s BankAmericard. Worthern Bank claimed that NBI’s exclusive membership conditions placed Worthern Bank at competitive disadvantage. Worthern lost the first case and the initial appeal. However when Worthern Bank threatened NBI that it would take the case to the Supreme Court, NBI (in response to the U.S. Department of Justices’ opinion and recommendation) changed its rules. Later on, NBI allowed its members to also be members of MasterCharge, and MasterCharge followed and adopted a similar policy. This policy would become known as “duality” and forever changed the industry going forward.

Also during the early 1970’s the paper-based systems became cumbersome. Losses and tremendous overhead were two major problems. The need for automation pushed both associations to find a better way to handle transactions. So both National BankAmericard and MasterCharge introduced electronic payment systems in two stages.

In 1973 the authorization system was re-vamped. Authorization is the process of assuring there is adequate credit available on the card and capturing that “authorized” amount to reduce the available credit. Previously this was based on a floor limit and a phone call was placed to a call center for any amount over the floor limit. National BankAmericard, Inc. (NBI) introduced their electronic on-line authorization system called Base I. MasterCharge introduced INAS for “on-line” authorizations the same year.

Then in 1974 NBI introduced Base II for on-line electronic clearing and settlement and MasterCharge introduced INET. Also in 1974, Bank of America’s international licensees chartered an international6 company, IBANCO, to administer BankAmericard, Inc. outside the U.S. By the late 1970’s ICA/MasterCharge too had members from as far as Africa and Australia. In 1976 the first bank becomes a dual member of both Associations, the result of the duality agreement six years earlier.

Also in 1976, National BankAmericard, Inc. changed its name to Visa USA. The IBANCO association also changed its name, and became Visa International. Then in 1977, MasterCharge changed its name to MasterCard International.