Whenever there was a dispute involving credit, there was always a chargeback in one form or another. What was the main root of the cause? It was fraud with an occasional scenario of jumbled records. Ever since the first merchant issued credit coins to the most loyal customers around 1865, patrons and merchants relied on each other’s compliance in order to make credit a new form of payment. In some cases, that meant merchants needed to chargeback whenever a farmer proved unauthorized billings like a family member using a credit coin without permission (i.e., the early days of friendly fraud).
It was only a matter of time for banks to try and become the middleman of this transaction, and that started in 1946 with John Biggins’ Charg-It card, the first bank card in the United States. Originated in Brooklyn, ‘Charg-It’ was the common phrase for consumers to make a charge at their local merchant. The credit involved was mainly self-imposed by the bank. How did it work? Biggins’ bank, Flatbush National Bank of Brooklyn, would pay participating merchants for their services, and it would assume responsibility by collecting debt from Charg-It cardholders. A chargeback would occur if cardholders experienced identity theft or friendly fraud or if merchants’ transaction records from cardholders did not match the compensation from Biggins’ bank.
While it was a good system, the Charg-It card was accepted by only a few participating merchants that were near Biggins’ bank. The concept of Charg-It evolved when another charge card emerged in 1950, which was called the Diner’s Club Card. Instead of it being limited to a few participating merchants, the Diner’s Club Card, created in 1950, was designed in hopes to work at every restaurant in New York and, eventually, across the United States. According to the Diner’s Club, the idea of the card came to Frank McNamara in 1949 while he was having dinner at a restaurant in New York City. When it was time to pay the bill, McNamara realized he had forgotten his wallet.
What happened next depends on whom you ask: According to “The Dollar Code,” McNamara negotiated his way out of washing dishes to pay for his dinner by signing for it instead and promising to pay the restaurant back. According to NerdWallet, he had to call his wife and ask her to deliver some cash.
However, according to the Pittsburgh Post-Gazette, the idea behind the Diner’s Club was sign now, pay later. Members of the club would be able to sign for their dinner, and then pay the bill later. McNamara, along with his business partner Ralph Schneider, started the club with 27 participating restaurants and 200 $3-memberships that he sold to his friends and acquaintances.
As the Diner’s Club Card gained momentum, Alfred Bloomingdale — the grandson of the founder of Bloomingdale’s department stores — founded Dine and Sign in Los Angeles, which was another credit card business, according to the New York Times.
After a friend notified Bloomingdale of the Diner’s Club, Bloomingdale had a series of meetings with McNamara and Schneider, and the end result was a merger of the two companies. Bloomingdale was named vice president of the new Diner’s Club.
A man ahead of his time, Bloomingdale was the one to predict the eventual demise of cash and rise of the credit card: “The day will come when the plastic card will make money obsolete,” he said.
According to NerdWallet, the Diner’s Club offered charge cards that allowed customers to borrow credit from a middleman, use that money to buy something, and then eventually pay the middleman back.
The Diner’s Club generated a profit by charging stores a 7% fee on all purchases and requiring customers to pay a $3 annual fee.
Although merchants weren’t exactly happy with the idea of a credit card that could be used everywhere — fewer people would be using their individual store credit cards — McNamara’s cards caught on quick with customers, expanding to 20,000 users in the first year. In its second year, The Diner’s Club made $60,000 and established franchises in Canada, Cuba, and France.
According to Bankrate, eight years after the founding of the Diner’s Club, American Express and Carte Blanche started issuing cards, along with banks such as Bank of America with its BankAmericard (now Visa). The American Express card turned into a national franchise that could be issued by local banks across the US (in 1958, national banks didn’t yet exist).
In 1966, a group of credit-issuing banks formed the InterBank Card Association (ICA). Along with being a competitor to BankAmericard, their objective was to create the first national crediting system not dominated by a single bank. Two years later, the ICA changed its name to MasterCard.
But as chargebacks were seen an informal ‘that’s part of business’, the U.S. Congress eventually acknowledged the problem as more associations adopted credit card. The term chargeback, or the closest definition of chargeback, was legally recognized in The Fair Credit Billing Act of 1974, and its purpose was “to protect the consumer against inaccurate and unfair credit billing and credit card practices.” The main focus of the act, which also extended its scope to the benefit of merchants, was to correct billing errors among creditors from card companies and banks. Within 60 days after the consumer or merchant received a statement from the creditor, the creditor must make be available to adhere any of the three actions listed below:
- The consumer and/or merchant want the creditor to identify any names or account numbers that seem suspicious on his or her statement.
- The consumer and/or merchant spot a billing error and the amount it took from his or her account.
- The consumer and/or merchant has reason to believe there is a billing error on his or her statement.
Credit card use did not really take off until 1978, when a Supreme Court ruling allowed nationally chartered banks to charge out-of-state customers the interest rate set in the bank’s home state.
From there, credit card use only grew. According to ABC News, more than 75% of Americans own at least one credit card to this day; and in 2012, there were a total of 26.2 billion credit card transactions in the US alone. From all the seamless transactions and all the necessities to provide chargeback management, none of that would have been possible if a few entrepreneurs didn’t think of charging payments on a plastic card.