Accountability

A credit card is a system of payment named after the small plastic card issued to users of the system. In the case of credit cards, the issuer lends money to the consumer to be paid later to the merchant. It is different from a charge card which requires the balance to be paid in full each month. In contrast, credit cards allow the consumers to ‘revolve’ their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions, and are the same shape and size.

The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Bellamy used the term credit card eleven times in this novel. He also predicted music being available in the home through cable transmission.

The modern credit card was the successor of a variety of merchant credit schemes. It was first used in the 1920s in the United States to sell gasoline to a growing number of automobile owners. Some charge cards were printed on paper card stock but were easily counterfeited.

The Charga-Plate was an early predecessor to the credit card and first used during the 1930. It was a rectangle of sheet metal similar to a military dog tag that was embossed with the customer’s name, city and state, but no address. It held a small paper card for a signature. It was laid in an imprinter first, then a charge slip was placed on top of it, onto which an inked ribbon was pressed. Charga-Plates were issued by merchants to their regular customers, much like department store credit cards of today. In some cases, the plates were kept in the issuing store rather than held by customers. When an authorized user made a purchase, a clerk retrieved the plate from the store’s files and then processed the purchase. Charga-Plates speeded back-office bookkeeping that was done manually in paper ledgers in each store, before computers.

The concept of paying different merchants using the same card was invented in 1950 with the Diners Club. The Diners Club produced the first general purpose charge card and required the entire bill to be paid with each statement. This was followed by American Express which created a world wide credit card network.

Bank of America created the BankAmericard in 1958, which eventually evolved into the Visa system. MasterCard came to being in 1966 when a group of credit issuing banks established the MasterCharge system. The fractured nature of the U.S. banking system meant that credit cards became an effective way for those who were traveling around the country to move their credit to places where they could not directly use their banking facilities.

There are now countless variations on the basic concept of revolving credit for individuals issued by banks and honored by a network of financial institutions, including organization branded credit cards, corporate user credit cards, store cards and so on.

It is important to note that many cultures were much more cash oriented in the latter half of the twentieth century. In these places, the adoption of credit cards was initially much slower. In many countries acceptance still remains poor as the use of a credit card system depends on the banking system being perceived as reliable. In contrast, because of the legislative framework surrounding banking systems, some countries were much faster to develop and adopt computer chip based credit cards which are now seen as major anti-fraud credit devices.

The low security of the credit card system presents countless opportunities for fraud. This opportunity has created a huge black market in stolen credit card numbers, which are generally used quickly before the cards are reported stolen.

The goal of the credit card companies is not to eliminate fraud, but to reduce it to manageable levels. This implies that high cost low return fraud prevention measures will not be used if the cost exceeds the potential gains from fraud reduction.

Most internet fraud is done through the use of stolen credit card information which is obtained by copying information from retailers, either online or offline. Despite efforts to improve security for remote purchases using credit cards, systems with security holes are usually the result of poor implementations of card acquisition by merchants. For example, a website that uses SSL to encrypt card numbers from a client may simply email the number from the webserver to someone who manually processes the card details at a card terminal. Naturally, anywhere card details become human readable before being processed at the acquiring bank, a security risk is created. However, many banks offer systems where encrypted card details captured on a merchant’s webserver can be sent directly to the payment processor.

Three improvements to card security have been introduced to the more common credit card networks but none has proven to help reduce credit card fraud so far. First, the on-line verification system used by merchants is being enhanced to require a 4 digit Personal Identification Number (PIN) known only to the card holder. Second, the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are intended to make forgery more difficult. Third, an additional 3 or 4 digit code is now present on the back of most cards, for use in transactions when the card is not present.

In recent times, credit card portfolios have been very profitable for banks, largely due to the booming economy of the late nineties. However, in the case of credit cards, such high returns go hand in hand with risk, since the business is essentially one of making uncollateralized loans, and thus dependent on borrowers not to default in large numbers.

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