Charging for products and services has become a way of life. No longer do people bring cash when they buy a sweater or a large appliance; they charge it. Some people do it for the convenience of not carrying cash; others "put it on plastic" so they can purchase an item they can not yet afford. The credit card that allows them to do this is a 20th-century invention.

At the beginning of the 20th century, people had to pay cash for almost all products and services. Although the early part of the century saw an increase in individual store credit accounts, a credit card that could be used at more than one merchant was not invented until 1950. It all started when Frank X. McNamara and two of his friends went out to supper.

The Famous Supper

In 1949, Frank X. McNamara, head of the Hamilton Credit Corporation, went out to eat with Alfred Bloomingdale, McNamara's long-time friend and grandson of the founder of the Bloomingdale's store, and Ralph Sneider, McNamara's attorney. According to company lore, the three men were eating at Major's Cabin Grill, a famous New York restaurant located next to the Empire State Building, and they were there to discuss a problem customer of the Hamilton Credit Corporation.

The problem was that one of McNamara's customers had borrowed some money but was unable to pay it back. This particular customer had gotten into trouble when he had lent a number of his charge cards (available from individual department stores and gas stations) to his poor neighbors who needed items in an emergency. For this service, the man required his neighbors to pay him back the cost of the original purchase plus some extra money. Unfortunately for the man, many of his neighbors were unable to pay him back within a short period of time, and he was then forced to borrow money from the Hamilton Credit Corporation.

At the end of the meal with his two friends, McNamara reached into his pocket for his wallet so that he could pay for the meal (in cash). He was shocked to discover that he had forgotten his wallet. To his embarrassment, he then had to call his wife and have her bring him some money. McNamara vowed never to let this happen again.

Merging the two concepts from that dinner, the lending of credit cards and not having cash on hand to pay for the meal, McNamara came up with a new idea—a credit card that could be used at multiple locations. What was particularly novel about this concept was that there would be a middleman between companies and their customers.

The Middleman

Though the concept of credit has existed longer even than money, charge accounts became popular in the early 20th century. With the invention and growing popularity of automobiles and airplanes, people now had the option to travel to a variety of stores for their shopping needs. In an effort to capture customer loyalty, various department stores and gas stations began to offer charge accounts for their customers, which could be accessed by a card.

Unfortunately, people needed to bring dozens of these cards with them if they were to do a day of shopping. McNamara had the idea of needing only one credit card.

McNamara discussed the idea with Bloomingdale and Sneider, and the three pooled some money and started a new company in 1950 which they called the Diners Club. The Diners Club was going to be a middleman. Instead of individual companies offering credit to their customers (whom they would bill later), the Diners Club was going to offer credit to individuals for many companies (then bill the customers and pay the companies).

Making a Profit

The original form of the Diners Club card was not a "credit card" per se, it was a "charge card," since it did not carry an account of revolving credit, and charged membership fees rather than interest. People using the card paid it off each month. For the first few decades, the revenue came from merchant fees.

Previously, stores would make money with their credit cards by keeping customers loyal to their particular store, thus maintaining a high level of sales. However, the Diners Club needed a different way to make money since they weren't selling anything. To make a profit without charging interest (interest-bearing credit cards came much later), the companies who accepted the Diners Club credit card were charged 7% for each transaction while the subscribers to the credit card were charged a $3 annual fee (begun in 1951).

Initially, McNamara's new company targeted salesmen. Since salesmen often need to dine (hence the new company's name) at multiple restaurants to entertain their clients, the Diners Club needed both to convince a large number of restaurants to accept the new card and to get salesmen to subscribe. After the U.S. tax system started requiring documentation of business expenses, Diners Club offered periodic statements.

Growth of the Startup

The first Diners Club credit cards were given out in 1950 to 200 people (most were friends and acquaintances of McNamara) and accepted by 14 restaurants in New York. The cards were not made of plastic; instead, the first Diners Club credit cards were made of paper stock with the accepting locations printed on the back. The first plastic cards appeared in the 1960s.

In the beginning, progress was difficult. Merchants didn't want to pay the Diners Club's fee and didn't want competition for their store cards; while customers didn't want to sign up unless there were a large number of merchants that accepted the card.

However, the concept of the card grew, and by the end of 1950, 20,000 people were using the Diners Club credit card.

Marketing

The Diners Club card became something of a status symbol: it enabled the holder to demonstrate his trustworthiness and membership in a club wherever it was accepted. Eventually, the Diners Club issued a guide to the merchants who accepted the card that would fit in a briefcase or glove compartment. The card was marketed primarily to white male businessmen who traveled; Diners Club also marketed to women and minorities, but it was the early 1950s.

From the start, African American business people were actively marketed to and issued Diners Club cards, but, especially in the Jim Crow south, there were Diner's Club merchants who turned away African Americans. Diners Club was a third party business, said the southern merchants, and they were not obligated to accept them instead of "legal tender." When traveling in the south, African Americans brought the "Green Book" of merchants who were African American or would safely transact business with them.

On the other hand, married women could obtain Diners Club cards associated with their husbands as a way to purchase luxury items and convenience, to "facilitate an afternoon of shopping." Businesswomen were encouraged to get corporate cards, issued from their employers.

The Future

Though the Diners Club continued to grow and by the second year was making a profit ($60,000), McNamara thought the concept was just a fad. In 1952, he sold his shares in the company for more than $200,000 to his two partners.

The Diners Club credit card continued to grow more popular, and early developments included monthly installments, revolving credit, rotating charge accounts, and interest-free periods. The card was still primarily for "travel and entertainment," and it continued on that model, as did its closest competitor, American Express, which first appeared in 1958.

By the late 1950s, however, two bank credit cards would begin to display their versatility and dominance: Interbank (later MasterCharge and today MasterCard) and Bank Americard (Visa International).

The concept of a universal credit card had taken root and quickly spread across the world.