In 1949, a businessman named Frank McNamara was
dining at a fancy New York City restaurant when he realized that he forgot his wallet at
home. Luckily, his wife was able to come to his rescue and stop by to pay the tab. Frank
was so embarrassed about this whole situation that he resolved to never face something like that
again. Together with his business partner, Ralph Schneider, Frank started working on something
called the Diner's Club card, which was a cardboard credit card that could be used to pay at
a bunch of different restaurants across New York City. By February of 1950, Frank returned back
to that New York City restaurant that left him so embarrassed and used his newly invented Diner's
Club card to make the first ever credit card payment. According to the Diner's Club website,
this event was hailed as the "First Supper," which paved the way for credit cards for decades
to come, and many consider this to be the first ever general purpose credit card. Now, Frank's
embarrassing story of forgetting his wallet and not being able to pay his bill is an interesting
one, but you may be thinking, "If Frank had a credit card, how would that have helped him in
that situation? Wouldn't the card just have been in the same wallet as his cash? It's not like the
card's existence in his wallet would have helped him." Well, the reality is, people like a good
story a lot more than hearing about the boring details behind what goes into creating a credit
card and the financial system behind it. After all, stories are a big part of brand marketing and
a powerful way to create a sense of identity and connect with an audience. Knowing this, Frank's
restaurant story was invented and glamorized by Maddie Simmons, Executive Vice President in
charge of sales and marketing at Diner's Club, to publicize and increase the adoption of
their credit card. The more accurate story is that Frank was a regular at this particular
restaurant. I'm talking eat lunch there every day and everyone knows your name type of regular.
And as a regular, he was already able to set up a tab and pay his bill on a monthly basis,
similar to how a credit card works. In fact, restaurants and stores had already had cards for
many years at this point that allowed customers to pay their bills at the end of the month. However,
this was accomplished by each business issuing their own cards to their customers, so people
would need to carry many different cards around for all the places at which they wanted to pay
with credit. It's easy to argue that this concept is what eventually became the Diner's Club card,
which was just a single card that could be used at many different restaurants and shops around
the city. Really, it was almost inevitable for Frank's favorite restaurant to be the first place
to accept this credit card, but now his story has made credit card history. The Diner's Club card
would continue to gain popularity over the years as more and more businesses began to accept the
payment method. After all, who doesn't appreciate the convenience of carrying a single card around
instead of a bunch of cash? But the Diner's Club card faced one major challenge during its infancy,
getting businesses to agree to accept the card in the first place. You see, when a merchant
would accept payment from a Diner's Club card, they had to give a percentage of the purchase
amount to Diner's Club as a fee for this service. But the even bigger issue was that if a customer
ultimately wasn't able to pay their credit card bill at the end of the month, it was the merchant
that took the loss on the purchase. So merchants took on a certain level of risk whenever they let
people pay with credit. For years, no one was able to successfully change this process until Bank of
America launched the Bank of America card in 1958. With this credit card, businesses could accept
payment from the customer and Bank of America would reliably send over money from that purchase
every single time. It was then Bank of America themselves that took on the risk of customers not
paying their credit card balance, which also ended up being advantageous to the bank as banks are
experts at managing risk and could also benefit off of charging customers fees and interest.
The success of the Bank of America card would continue for decades to come as it was eventually
licensed to other banks around the world and later rebranded under the name Visa. Yes, that Visa,
who's now one of the largest companies in the world by market cap and is valued at over twice
that of Bank of America. It was around the time Bank of America card was first launched in 1958
that another competitor had also entered the credit card market and that came from an express
mail delivery company that you may have heard of called American Express. American Express has a
long and crazy history of its own so that'll have to be its own video. Make sure you're subscribed
with notifications on so you know when that video gets released. One thing that is worth noting here
about American Express is that they were the first to use magnetic tape technology on their credit
cards in the year 1970. You see, at this point in time, credit card transactions involved a physical
process where a merchant would essentially use a mini printing press type of machine to press
the raised numbers on the card onto a piece of paper that would be sent to a processing center
and manually entered into a computer. So if you have or have ever seen a credit card with raised
letters and numbers, that's actually what those were originally for. Now as you can imagine, that
process of imprinting the credit card number onto a receipt and sending it off to a processing
center was slow and prone to error so in 1969, an engineer at IBM thought to add a strip of
magnetic tape to the credit card to digitally store and process credit card information. For
everyone that isn't familiar with magnetic tape, it was a technology involving a special coating
on a plastic tape that was used for storing audio, video, and computer data. You may have seen
these on a VHS tape or a mixtape. Anyways, as the story goes, the IBM engineer was trying to
attach the magnetic tape to the credit card but couldn't figure out how to get the tape to stick
to the plastic. A solution came when he took the card home and complained about the problem to his
wife who was ironing at the time and suggested that he try to iron it onto the card. As it would
turn out, this worked perfectly and the process was quickly adopted by all card companies. In
1966, Bank of America's Bank of America card, which as a reminder is the brand that later became
Visa, had grown beyond their California roots and expanded nationally across the US. That same year,
a group of California banks responded to Bank of America's success by forming a partnership known
as the Interbank Card Association or ITC to create what was and still is the country's second major
credit card, now known as MasterCard. With Visa and MasterCard soon dominating the credit card
market and American Express not far behind, it seemed unlikely that another competitor could rise
up in the space. But in the late 1980s, Sears, which at the time was the largest retailer in
the US, was looking to expand into the financial services industry. To do so, they created a new
credit card called Discover. Besides being backed by one of the largest companies in the nation,
the Discover card carried no annual fee, which was uncommon at the time, and offered a higher
credit limit than competitors. More importantly, Discover also introduced a feature that we all
know and love to this day. "The Discover card, a credit card that pays you money back on every
purchase." That's right, in 1986, Discover introduced the concept of giving cardholders cash
back on their purchases, which of course is a practice that is still done today. With everything
going for it, Discover quickly grew in popularity and is now one of the largest credit card issuers
in the world. The world's first credit card was created from a story of one man's embarrassment
and inconvenience, but it paved the way for revolution in the way we spend and do business.
From humble beginnings, credit cards have become a ubiquitous part of our life, enabling us to buy
goods and services from anywhere in the world and fooling economic growth across the globe. The
story of credit cards is a story of innovation, risk-taking, competition, and perseverance. It's a
story that inspires us to think big, take chances, and never give up on our dreams. So the next
time you swipe your card, remember the incredible history behind this little piece of plastic and
the impact that it has had on our world. Thank you for watching. If you enjoyed this video, why
don't you leave a comment below about what you'd like to learn about next. And if you're new to
this channel, subscribe for more Five Minute Finance.
