While credit cards may be a modern-day invention, consumer credit itself is an age-old tradition.
What started with farmers borrowing money for seeds and other things until the next harvest has now turned into a consumer-credit revolution. In 2018, there were 1.1B credit cards in circulation in the United States alone. This number is expected to increase to 1.3B by 2023.
This boom in credit card usage is partially attributable to the technological advancements that have made noncash payments convenient. Over the past six decades, various tech innovations such as the EMV chip, near-field communication (NFC) technology, and application program interfaces (APIs) have made credit cards and digital payments the go-to mode of payments for people.
Among the earliest innovations in noncash payments were card-not-present transactions. These were transactions that occurred over the phone or through mail orders. A customer placed the order and offered their payment details verbally. The merchant simply trusted the customer to make good on their promise of payment.
Some of the earliest cards that were issued by banks were check guarantee cards, which were plastic cards issued by banks as a guarantee of the creditworthiness of a depositor. Customers could present this card to a retailer, along with a check they wished to make a purchase with. The retailer then made the customer sign on the check and verified the signature against that on the check guarantee card. Banks could not then refuse transactions verified against these guarantee cards.
These check guarantee cards gradually evolved into the present-day payments cards and eventually into digital payments systems.
In this article, we take a look at seven innovations that led to the evolution of digital payments and the companies that led the various aspects of card issuance.
Charge cards guaranteed payment at a later date
Charge cards first appeared in the United States in the early 1900s. A charge card was a paper or cardboard card on which the customer’s details were printed in ink. They were usually issued by department stores.
Even before department stores issued charge cards, small shopkeepers would informally extend credit to their customers based on personal relationships with them. But as cities and businesses grew, it became difficult for those shopkeepers to keep track of the creditworthiness of every person that visited their shop. That challenge gave rise to the charge cards, which worked similarly. Customers with good credit standing were issued charge cards, which allowed them to buy goods and settle all payments at the end of the month. But, originally, charge cards could be used at only the establishment that issued the card.
The first charge card that could be used at multiple establishments was issued by Diners Club International. Diners Club’s general-purpose charge card could be used to pay at 27 participating restaurants and was initially used by “200 of the founder’s friends and acquaintances.”
The idea for Diners Club card came to be in 1950, when American businessman Frank McNamara forgot to bring his wallet when dining at a restaurant in New York City. While his wife paid the bill then, he thought of creating a card that could guarantee payment to the merchant in order to avoid a similar situation again.
Originally, charge cards could be used at only the establishment that issued the card.
Initially, any transaction on a charge card needed to be authorized manually by a banker. Whenever a customer made a purchase, a banker was required to write a charge slip and then call up the merchant to authorize the transaction.
To make this process of authorizing transactions easier, companies moved on to a plastic card, with customer information embossed on them. The embossing helped merchants easily record the transactions made on these cards by using a manual imprinter. Merchants placed these embossed plastic cards in the imprinter, which created three copies of the charge slip — one each for the buyer, the banker, and the seller.
This process of payment using a manual imprinter, however, was time-consuming and often left fraudulent transactions undetected. To check if a charge card was valid for payments, merchants had to consult a booklet issued by Mastercard and by Visa that listed all the canceled credit card numbers. Many merchants simply skipped this important but time-consuming, step.
Magnetic stripes put customers in charge of their banking hours
The next evolution in card payments was the magnetic stripe.
The magnetic stripe, or magstripe, was a strip of iron particles on the back of a payment card, the magnetism of which could be modified to embed information.
The magnetic stripe was first added to the back of a plastic card by IBM. The magstripe contained three magnetic tracks, each of which stored different bits of information, such as a customer’s name, the credit card number, and the card’s expiration date. When this magstripe was swiped through a card reader, the reader decoded the information embedded within the stripe. To authorize the transaction, the reader sent a message to the bank, which in turn sent a message to the card-issuing network, which then either authorized or denied the payment. All of this happened within a few seconds.
The speed at which the electronic card reader could read customer’s information was a step forward from the manual imprinter. It saved the merchant time and effort spent manually creating charge slips and reduced fraud because the process of authorizing transactions was now automated.
The first ATM was established in New York in 1969 at the Chemical Branch bank.
The magstripe card also allowed customers to be able to have a secure and convenient way to withdraw their money as and when required, especially outside of banking hours. The rising popularity of all-night convenience stores, and customer’s expectations to be able to access their money over the weekends, meant banks needed a way to provide these services, without hiring new staff.
Banks solved this problem with the invention of the automated teller machine (ATM). The first ATM was established in New York in 1969 at the Chemical Branch bank. The magstripe cards, which let users identify themselves in a secure and quick manner, made ATM usage easy and efficient.
The magnetic stripe cards were so popular that by 2003, a majority of customers ditched cash in favor of these magnetic stripe cards, according to Thales Group.
American Express was one of the first major card issuers to adopt the magnetic stripe in 1970, in a joint project with American Airlines and the Chicago O’Hare Airport. In one of the first projects where the magstripe was widely used, AmEx issued 250,000 magstripe cards to its customers in Chicago. Customers could use these cards to purchase tickets at kiosks installed at the American Airlines counters at Chicago’s O’Hare International Airport.
Bank of America’s BankAmericard was the first magnetic stripe card that also offered the revolving credit feature. BankAmericard was created in 1958 as an attempt by the then California-based bank to make more of its customers use credit cards. To that end, Bank of America mailed unsolicited BankAmericards to over 60,000 of its customers in Fresno, California. The BankAmericard gained immense popularity among consumers and began to be accepted at 61,000 merchants across 42 states by 1966.
In response to BankAmericard, a group of banks on the East Coast formed Interbank Card Association and developed a card called Master Charge. BankAmericard and Master Charge later transformed into two of the world’s largest card issuers, Visa and Mastercard, respectively.
As credit cards gained popularity, especially among US households in the 1960s and 1970s, credit card fraud became an issue for card issuers and banks.
Fraudsters started using skimmers installed in card-reading machines to steal sensitive payment information stored on magstripe cards to create counterfeit cards.
Card issuers found an answer to this problem in the EMV chip cards.
EMV chips standardized security measures for global card issuers
EMV stands for Europay, Mastercard and Visa, the three card issuers that came up with security standards to make card payments more secure. Prior to global EMV standards, every card issuer had its own security standards.
Every card compliant with EMV standards comes with a chip, in addition to the magstripe. The chip contains a microcircuit, which stores the card and customer information in an encrypted form. The chip generates a unique transaction code for each payment that is initiated on the card. This dynamic nature of the information on the card, instead of the static information that was stored on a magstripe, makes it difficult to replicate a chip credit card.
The chip card enables faster payments than a magnetic-stripe card, because the chip has more processing prowess than a magnetic-stripe card. These cards also usually require a customer to enter a unique personal identification number (PIN) to authorize the transaction on the card reader.
Prior to global EMV standards, every card issuer had their own security standards.
While the chip card was launched in Europe in the mid-’90s, card issuers in the United States didn’t start transitioning to this technology until 2012. Customers were now making payments by inserting or “dipping” their chip card into a machine reader instead of swiping it through the card reader.
The EMV global compliance standard for secure card payments has now transitioned from being managed by only three card issuers to a consortium of card issuers, including American Express, UnionPay, JCB, and Discover. It is now known as EMVCo. It partners with many financial institutions, including banks, vendors, and processors, to ensure “worldwide interoperability and acceptance of secure payment transactions”.
Along with innovation in how cards stored payment information, card issuers were also focusing on ways to create a seamless experience in recording that information.
As more cards moved on to the magstripe, card readers also went from manual imprinting of card information to point-of-sale systems that digitally transmitted card data.
Point-of-sale systems sped up payment processing for card issuers
Visa was the card issuer to created the first PoS system in 1979. This was the predecessor of the credit card processing machines we know today. This machine was bulky and captured data electronically.
These digital machines replaced the manual imprinters, capturing the information on a customer’s credit/debit card digitally. It sped up the transaction process significantly and made card payments more convenient for customers. Some PoS systems also had the ability to integrate with other business processes, such as tracking inventory and employee schedules.
Verifone, touted as the world’s largest maker of payments terminals, created the ZON payments terminals in 1982. These terminals offered faster processing speed and were widely considered to be the standard that is still followed by modern-day PoS systems.
The bulky PoS systems of earlier days operated on an on-site server and were wired into a computer system that was usually placed at a retailer’s front desk. These were called on-site PoS systems. Today, cloud-based PoS systems allow any device with an internet connection to be turned into a PoS terminal.
Digital PoS systems sped up the transaction process significantly and made card payments more convenient for customers.
This flexibility in movement allows retailers to accept payments from anywhere in their store and has enabled new ways of conducting business, such as setting up a pop-up shop. According to Lightspeed, a cloud-based PoS maker, 80% of small businesses that used mobile PoS systems reported an increase in their sales. The global market for cloud-based PoS systems is expected to be worth $3.7B in 2023, up from $1.3B in 2018.
One company that is pioneering the cloud-based PoS systems is Square Inc, a San Fransisco-based company that launched its square-shaped card readers in 2009.
Virtual and cloud-based PoS systems are also transforming the way businesses conduct their payments. TouchBistro allows restaurant owners to track the performance of their servers while enabling customers to search menu items and split bills. These virtual PoS systems also allow merchants to track a customer’s loyalty-cards programs.
Payment gateways made online payments possible
Payment gateways are companies that act as a bridge between a merchant selling a product or service and a customer buying it. Payment gateways came into the picture after the advent of the internet and are a key component in the proliferation of e-commerce.
Once businesses went online in the mid-’90s, payments also needed to transition online. Payment gateways ensured that payment information was transmitted securely from the website that a customer was making a purchase on to the credit card network or the card issuer.
The first credit card processing gateway was Authorize.Net Corp., founded in 1966 by Jeff Knowles, also known as the “father of the payment gateway.” Authorize.Net allowed merchants to accept online payments without downloading any additional software, unlike other internet payment services, such as CyberCash, which required merchants to download the software on their servers. Merchants could either use an API that Knowles had created, or they could use a virtual terminal, which they could access via a standard secure internet connection. Authorize.Net was later acquired by Visa and today is one of the “world’s most popular payment gateways“.
Another company that was a major player in e-commerce payments was PayPal. The California-based company, which was initially focused on mobile payments, shifted its attention to online payments as it developed a strong base of smaller merchants or individuals who began using its payments gateway to accept online payments from customers on eBay.
Payment gateways came into the picture after the advent of the internet and are a key component in the proliferation of e-commerce.
eBay tried to bring merchants onto its own payment gateway, Billpoint, to compete with PayPal. However, merchants preferred PayPal, partly because it was easier to use. From being an upstart payments company in the early 2000s, PayPal turned into a major competitor in payments for eBay. To quell this threat, eBay eventually acquired PayPal in 2002 in a $1.5B deal. At the time of the acquisition, nearly 70% of all auctions on eBay accepted their payments through PayPal.
eBay eventually spun off PayPal in 2015. Today, PayPal has 377M active accounts and has transformed from being an online payments gateway to a payment-services company that offers peer-to-peer payments and digital money transfers, as well as a PayPal debit card.
Braintree was another payment-gateway company, which also offered other merchant services, such as storing credit card information, enabling mobile and international transactions. This made it a one-stop shop for many merchant needs. Considered one of the best companies for “merchant account services and payment processing,” Braintree today boasts customers such as Uber and Airbnb. The company eventually became a part of PayPal in 2013, when the latter acquired Braintree for $800M.
Near-field communication was responsible for contactless payments
The next innovation that revolutionized card payments was near-field communication (NFC), which enabled contactless payments.
NFC technology allows two devices that have an NFC chip to communicate when kept within up to two centimeters of each other. The NFC Forum was formed in 2004 to promote the use of this technology and comprised Nokia, Sony, and Philips. It has now come to have members ranging from electronics makers and telecom companies to banks and card issuers.
The origins of NFC technology lie in the radio-frequency identification technology that uses radio frequency to communicate between two devices. Nokia pioneered the NFC movement by creating the first NFC-enabled mobile phone in 2006.
Today, all digital wallets, such as Apple Pay, Google Pay, and Samsung Pay, use NFC technology to make payments. The wallets allow customers to store their card information, as well as loyalty-card information. Digital wallets remove the need for a customer to bring out their physical wallet or card at the time of payment. A customer can simply place a mobile device with a digital wallet near the payment reader to enable a transaction.
All digital wallets, such as Apple Pay, Google Pay, and Samsung Pay, use NFC technology to make payments.
There is an increased layer of security with NFC technology because a payment cannot be authorized unless the mobile device that contains a customer’s card information is near the card reader. In addition, most devices require a customer to authorize the transaction on their mobile device using either a passcode or biometric information, such as fingerprint or Face ID.
Apart from digital wallets, credit or debit cards equipped with NFC technology also offer customers the convenience of paying at PoS terminals by tapping the card onto the card reader instead of dipping or swiping it. The popularity of contactless payments can be seen from the fact that it is expected to be used by 58% consumers across the world by 2022, according to a report by CGI Global Payments.
APIs enabled more secure third-party payments
Another technological innovation that is enabling quicker online and in-person payments is application programming interface (API), software that allows two computer applications to communicate with each other.
In the case of payments, APIs enable a payment method, say a debit/credit card, to send information to a URL.
APIs enable more secure online payments. One way that they do this is by creating virtual cards, which allow a customer to make online transactions without revealing their credit or debit card number. Customers can use these virtual cards to make one-time payments, after which the details of the virtual card are destroyed. Alternatively, customers can use a virtual card to make recurring payments to the same merchant, as in the case of subscription accounts. Users can set monthly spending limits on these cards.
Escrow APIs allow a customer to make a payment with an escrow account when transacting on certain marketplaces. This way, a customer is charged when they make an online transaction, and the money is held in an escrow account. However, the money is credited to the merchant’s account only when the customer receives the product/service that they ordered.
According to a 2017 report by CGI Global, API-based payments are expected to be the leading mode of retail payments by 2022, with 69% of survey respondents preferring these over other modes of payments, such as mobile technology and biometric technology.
APIs enable virtual cards, which allow a customer to make online transactions without revealing their credit or debit card number.
One company that is leading the API-based payments is Square Inc. Square’s payment APIs allow any computer to turn into a virtual PoS terminal. Square’s API acts as the third-party entity that allows a merchant to create a customized payments interface for their website, as well as use prebuilt web forms for accepting payments.
Privacy also offers a card-issuing API that allows companies to issue cards for varied use-case scenarios, such as for employees of advertising agencies, with a preset spending limit; for financial services companies, which can further issue these cards to their customers; and to SaaS companies, which can use these virtual cards for their borrowing needs. Privacy’s easy onboarding process and quick integrations allows businesses to issue cards for their specific needs within hours. The company also offers simple and transparent pricing options to make the process of card-issuing easier.
Fiserv Inc. in 2019 introduced APIs that smoothed out the process of paying bills through banks. The APIs make the bill payment process more efficient by automating tasks such as establishing the connection between a biller and a payee and logging payment entries. The API provides capabilities such as sending reminders for bill payments to a customer and sending out alerts when a customer’s bill payment is debited from their account.
Technology continues to make payments more efficient
By 2025, 67% of global transactions are estimated to be done digitally, up from their 57% estimate prior to the COVID-19 pandemic, according to Bain & Co. Even as other sectors saw a downturn in consumer demand, owing to global lockdowns, an increase in online shopping and payments boosted demand in the payments industry.
This boom in digital payments will also be accompanied by faster technological advancements. The magstripe ruled card payments for nearly five decades and was replaced by tap-and-pay in only 10 years.
While the continued use of APIs and NFC tech is expected to bring more transparency and efficiency to online payments, artificial intelligence (AI)-powered voice assistants with voice-recognition features are expected to enable payments. AI-powered biometric cameras, such as Amazon’s Deeplens, are also being used to check out grocery items and pay through the AmazonGo app at the online retailing giant’s cashier-less grocery stores in the United States.
Blockchain, on the other hand, is helping to reduce risk by tokenization of transactions, as well as leveraging data to monitor payments clearances and reduce fraud.
With fast-moving technologies such as AI and blockchain making their way into payments, the future set of innovations are expected to yield faster changes to how people make payments.