Our industry often focuses on the here-and-now, but there’s a rich history of innovators and troublemakers who’ve reshaped the world of trade. Their creations turned the world of trade on its head and reshaped entire fields of industry. Here’s the story of the brave souls who started the credit revolution.
The First Credit Card Ever
It all started, apocryphally, with a business dinner at the Early Harvest Diner in 1950 that Frank McNamara couldn’t pay for. Supposedly (but probably not), Frank forgets his wallet and has to call home and ask his wife to come and pay the bill. He thinks, what if he could use a card to pay on credit for restaurant meals? And so Frank starts The Diners Club. After just a year in business, Diners Club has 42,000 members, and by its third year it becomes the first internationally accepted credit card. It didn’t take long for other credits cards to hit the market and by 1966, we had a full-fledged credit card ecosystem in the US.
Zip Zap Credit Card Machines
Before digital credit card readers, retailers used manual machines called zip-zap machines. Zip zaps were basically credit card copy machines that recorded transactions when customers made purchases. The process went like this:
- The retailer used the big, clunky zip-zap credit card machine to create a carbon copy image of your card.
- Then they sent that and the receipt to a credit card processing company in a different location than the store.
- A clerk from the processing center took that information, then entered your credit card number and the sales information into a computing system to make sure you had enough credit to make the payment.
- The clerk sent that information back to the store with the final verdict.
If that sounds cumbersome, it was.
Strip vs. chip: a tale of two countries
Understandably, retailers and customers made a fuss about speeding up the process, and IBM came to the rescue in the ‘60s with the help of an army veteran. Jerome Svigals, a straight-laced, former second lieutenant of the US Army, lead a team to create an instant credit card data transmission solution. He was a black suit and tie, black rim glasses, starched white shirt American kind of guy. His team perfected a solution that uses magnetic tape to send radio signals to banks for instantaneous processing. Voilà, immediate payments. And since American phone lines were already reliable, the whole system worked great and would lead to a boom in American credit card use.
But problems showed up when the solution was imported to Europe. Their phone lines weren’t as reliable and were prone to interruption, especially in France. It turned out that combining poor phone lines with credit card use led to rampant fraud because retailers were still selling their merchandise even when the card details weren’t getting transmitted. They held the logs of consumer payments and would then call them all in to the bank at the end of the day, just like the original system. But that meant that there was an entire day’s difference between payment and credit checking. So if a thief wanted a free French bike for the countryside, they just had to buy it with a fake card. When the stores would rectify the payments later in the day, the thief was already long gone on a fancy new bike pedaling through the French countryside eating delicious baguettes.
Enter Europe’s credit card hero: Roland Moreno. He’s a French inventor, comedian, and, in his own words, “inimitable slacker.” He patented computer chip circuit technology in 1974 to transmit information far more reliably and safely.
And beyond his technical savvy, he was also a first-rate character, describing himself as a “lazy bum” and “a total couch potato” who said he came up with the groundbreaking idea in a dream. He code-named his project, “TMR” after Woody Allen’s film, Take the Money and Run. And the first thing he wanted to do with the technology was put it in electronic signet rings so people could easily validate their identity.
Predictably, that didn’t catch on. But the credit card chip did when France’s national phone company, France Télécom, began using the technology in its phone booths. C'est la vie to the fraudsters buying iconic french bicycles and baguettes with defunct credit cards.
Back to the future
So credit card fraud packed its bags, hopped on a red-eye, and moved to the US. Credit card fraud flourished in the US, taking advantage of the less secure strip cards still in wide use. It took a while—not until 2018 were chip cards mandated—but eventually, the States caught on to new security standards. And credit card fraud drops nearly 70 percent over the first two years thanks to the implementation of this 50-year-old technology.
So, if you enjoy your newfound credit card, tip your glass to Roland Moreno, the man who invented that technology back in 1974.
Credit Cards by the numbers
- There are 362 million open credit accounts in the US (pdf).
- 40% of Americans prefer using credit cards for payments, 35 percent like debit cards, and only 11 percent prefer using cash.
- 47 percent of all credit card fraud occurs in the United States.
- Two years after US retailers started deploying chip and pin terminals, reports of counterfeit card fraud dropped by 70%.
Into the future
Of course, now that credit cards are more secure, fraud is moving online. We can’t even recount all the online data breaches that have happened in the last few years. So virtual credit cards and online payment services are gaining traction and popularity both in the consumer world and the B2B world for their security and ease of use.
They’re still not prevalent or wide-spread, but the technology is moving ahead with the hopes to make buying more secure, faster, and adaptable. For finance departments, virtual card solutions have the potential to bring a whole host of solutions for enterprises indirect and long-tail spend, security, and visibility into purchases.
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