A Brief History Of Credit Cards
Credit cards have nowadays insinuated themselves into all corners of our lives, and it is rare for an adult these days to not carry at least one card. As well as being used in the traditional manner to buy goods or services in person, they are also now used online, over the telephone, for writing checks, and even for withdrawing money from cash machines. People use them in all sorts of ways - as a means of borrowing, as a convenient payment method, and even for earning money through cashback or reward schemes.
Despite their ubiquity in modern life, credit cards have a fairly short history, with the first general purpose credit card being introduced less than fifty years ago. In this article we'll look at the origins of credit cards, and then at how they've developed over the years with the emphasis on the United Kingdom market.
The very first credit card was launched by Diners Club in 1951, and was limited to use in twenty seven New York restaurants. It wasn't a huge success initially, with only 200 cards being issued. The real story of credit cards began in 1958 with the introduction of two major new products. The first was the American Express charge card, which boasted over a million users within five years of it being launched.
The other innovation was the first example of what we now recognize as a credit card: the Bank Americard, a general purpose card developed by Joseph Williams while working at the Bank of America. Over time, this card was to develop into the Visa company that we know today. Eight years after the introduction of this card, fourteen U.S. banks formed an alliance to launch a rival to the Bank Americard, named Interlink, which was to evolve into the Mastercard payment processor by 1979.
The first UK general card was launched by Barclays Bank in 1967, and their Barclaycard is still one of the most popular and widespread cards forty years later. In 1972, four other UK banks joined forces to launch the Access card in competition with Barclays, and for the next decade or so this remained the status quo.
It was during the 1980s that the credit card industry began consolidating behind the two big processors that had evolved into their current form by this time, Visa and Mastercard. Banks dropped their own processing facilities, and began to issue cards that could be used at any outlet that supported these two main payment processors. It was this move that led to the great expansion in card use, as they could now be easily used almost anywhere in the world.
The next major change to the industry was the revolutionizing technology of the internet, allowing purely online cards such as Egg in the UK to offer attractive benefits to the cardholder at low cost to the issuers. Competition between lenders quickly heated up, and features such as balance transfer offers began to appear.
Balance transfer deals allowed cardholders to move their debt from card to card and avoid paying any interest on it almost indefinitely, or so it seemed. Unfortunately, this ruse of 'credit card surfing' couldn't last as it was costing the credit industry billions every year, and so a balance transfer fee was imposed which made it much less attractive to cardholders.
The last major change in the credit card industry has been the introduction of Chip and PIN technology which has cut card fraud substantially by requiring payments to be approved via entering a code number rather than relying on a signature. The technology began to be rolled out in the UK in 2004, and is now fully in use across the country.
What's next for credit cards? Only the issuers know, but with record levels of debt many people are reluctant to apply for new cards, and so we're likely to see more attractive features becoming available to new applicants as credit companies compete for the shrinking amount of business available.
Adverse Credit Boom Prompts Questions
Over the last year, there’s been a flurry of product launches, as lenders pile into this nascent market. Some of the new entrants in 2005 included the Bristol & West, Victoria Mortgages and Beacon Homeloans, while investment banks Deutsche Bank and Morgan Stanley are in the process of setting out their stalls. And the trend looks set to continue during 2006; with personal debt now topping the Ј1 trillion mark, it would seem that there’s room for the adverse market to grow and for more lenders to take advantage of the increased profit margins of this sector.
Many mortgage brokers have tales to tell about the bad old days of the adverse sector, when clients with impaired credit history had to pay through the nose to secure a mortgage. Today, this flourishing sector is now a competitive one, and with so many new entrants, there is potential for a price war. However, the old adage that increased competition is always a good thing for customers, because it brings prices down and improves services, may not apply in the adverse market.
Of major concern is the limited experience of some of these new lenders, in what is an incredibly complicated market. A recent investigation by the industry regulator, the Financial Services Authority (FSA - http://www.fsa.gov.uk ), , revealed that in many cases, mortgage firms were giving inappropriate sales advice. In 80% of the files reviewed by the FSA, there was a lack of evidence to demonstrate how the recommended adverse product met the customer’s needs and circumstances. Further, more than 40% of firms had no intention of reviewing a client’s sub-prime mortgage product, to see whether that customer could transfer onto a prime mortgage contract at market leading rates at some point in the future.
Although the FSA’s conduct of business rules do not require such a review, Alistair Good, the managing director of the south London-based brokerage, MIAS (http://www.mias-ltd.co.uk ), believes that adverse credit mortgages should only ever be recommended as a stepping-stone to high street lenders and good credit. He said: “Establishing long-term affordability is therefore key; otherwise, a vicious circle can easily occur, whereby a customer grappling with high mortgage repayments falls into arrears – which in turn, locks them into further expensive adverse deals in the future.”
Although some of the new products on offer are competitive, many target only certain types of customer. Some mainstream lenders can be said to be dipping their toes in the market, and going for clients with only small blips on their credit history – rather than heavily adverse clients with, for example, a number of CCJs. Thus it remains difficult for individuals with severe financial worries to find a suitable lender with reasonably priced products.
Now, more than any other time in the history of the adverse market, it appears that a good, impartial broker is indispensable, in order to get adverse clients the best deal, keep them informed about the latest sub-prime mortgage news and explain to them the pros and cons of complex products. Only in this way can the burgeoning adverse market benefit the growing number of people in the UK with credit problems.