It’s easy to club different types of payments and cards together. But once you scratch the surface, it becomes clear just how varied the payments industry can be. At its bare bones, a ‘payment’ is just the action of paying or being paid. Which means how a payment is completed, and what comes with it, is completely variable.
Here at Moorwand, we think each payment type deserves its time in the spotlight. Which is why we’ve decided to put together a series called ‘The History of Payments’, where our team digs deeper into a handful of payment types. Crucially, we’ll dispel common myths, review the headway they’ve made since they started out, and highlight their individual benefits.
You can find our first installment here, which peers into the workings of the prepaid card. Now, for our second installment, we want to break down the credit card. It’s a market which is currently undergoing a serious revamp, as challengers continue to spin up hybrid offerings to disrupt the traditional credit model. In the UK, as of July 2019, some 61.9 million credit cards had been issued to residents.
But each country’s credit market is different. Whilst the UK and the US can be considered relatively mature credit markets, emerging markets such as India are yet to see mass credit card adoption. This means the entry point for new companies varies massively. In the US, there were 1.1 trillion credit cards in circulation as of 2018. Whereas in India, just 3.85% of consumers owned credit cards in 2020.
What is a credit card?
Straightforward credit cards allow a consumer to build up a continuing balance of debt. As well as a standard, or “revolving”, credit line which remains open until a lender shuts it, card owners can also – depending on their credit score – access a separate “cash line of credit” (LOC). This sees them borrow money in the form of cash advances on a one-time basis according to a pre-set limit, after which the line is shut. Then you have secured credit cards, where the cardholder “secures” the card with a cash deposit. Usually, the deposit is equal to a consumer’s credit limit.
Typically, credit cards charge annual percentage rates (APRs) on the money they lend out. Interest charges on the credit lent out kick in after a grace period if a payment is missed. But this period is only usually applicable if a consumer has paid the last two bills on time. In the UK, the average minimum grace period from a missed bill is 23 days. Similarly in the US, the legal grace period before interest can accrue is at least 21 days.
Credit cards also come with the ability to earn rewards day-to-day, which is why they’re often referred to as “rewards cards”. These benefits save consumers money and simultaneously give merchants an opportunity to steer consumer spending.
The evolution of the credit card
In the US, the concept of credit cards began in 1914 when Western Union provided a card to customers with deferred payment privileges. Then in 1950, Diners Club launched the world’s first multipurpose charge card. By the end of the year, some 20,000 consumers owned a card which was accepted at 27 different restaurants. Purchases made via charge cards are paid for by the card issuer. They don’t offer a credit facility like we know credit cards do today, so they have no spending limit or interest rate.
Whilst the Diners Club Card was cardboard, American Express introduced the first plastic credit card in 1958. As CreditCards.com explains: “AmEx had introduced money orders in 1882, invented traveler’s checks in 1891, and contemplated a travel charge card as early as 1946, before Diners Club beat it to the punch.”
Credit cards truly entered the mainstream in the 1960s, after Bank of America introduced its “BankAmericard” the same year as AmEx’s credit card market debut. In 1966, the card went national and a decade later, Bank Americard turned into Visa. Over in the UK, Barclaycard launched a charge card in 1966. But a year later, following the Bank of England’s agreement to offer revolving credit, it became the UK’s first credit card.
In 1977, the Consumer Credit Card Act came into force across the UK. It saw card payments safeguarded. Fast forward to 2006, the law was amended to create an Ombudsman scheme around it. Section 75 legislates that a credit card provider must protect purchases over £100 for free. A year after the amendment, contactless credit cards were introduced to the UK by Barclaycard. By 2012, credit card spending had reached £34 billion.
Now both mature and emerging markets are seeing disruptive, or hybrid, credit card models emerge. San Francisco-based challenger Point launched its debit-credit hybrid in July 2020. Whilst Payzello, an Indian start-up, launched its three-in-one card offering covering debit, credit, and forex capabilities in November 2020.
Benefits (and negatives) of a credit card
More often than not, applying for a credit card marks the beginning of a new chapter in a consumer’s life. Unlike a debit or prepaid card, which serve more practical purposes, credit cards come with a whole host of benefits which help the owners shape their financial futures.
At the core of a credit card is the ability to access instant credit. Consumers can borrow money, paying it back either in full by the billing date, or over time with interest applied. All the while, the card owners build up a credit profile which can later support a loan application for a larger, one-off purchase – the most common being a new house.
Whilst it might be an obvious point, credit cards are safer than cash – not least because £100 or more in payments made with them are protected by law. Smaller purchases can also be refunded, if they fall under the criteria of a chargeback scheme. But perhaps less obviously, credit cards are more accepted as a form of payment than charge cards and prepaid cards.
In addition to the ability to borrow money, credit cards also usually come with a bundle of freebies. Cashback is the preferred type of credit card reward, particularly among younger adults. It’s essentially a percentage of a purchase which goes back to the customer. But credit cards can also reward users with travel miles, or store discounts, to name a few other examples.
There are, of course, some negatives to credit cards. Though it depends on how they’re used. If a customer misses a payment, interest will be incurred. And these fees can climb, the riskier a customer becomes. Credit cards’ APRs are also usually higher than that of retail loans’. Credit cards can also incur extra fees, such as for exceeding the credit limit, or spending the card abroad. Although some credit cards are designed specifically for travelling.
Looking into the future
Credit cards are a traditional form of credit, but a number of alternative credit offerings have since emerged, both from incumbents and challengers. One which has already experienced huge gains is the buy now, pay later (BNPL) space. A review published by the Financial Conduct Authority (FCA) found the UK BNPL market to be worth £2.7 billion, with five million Brits using products under its umbrella since the start of the pandemic.
Similarly across the rest of Europe, the US, and Australia, the likes of Klarna, PayPal, and Afterpay are shifting consumers in their droves to credit-based payment offerings in these respective regions. And not all of them involve interest fees, hence leaving young people’s credit scores largely unscathed. It’s an exciting time for the credit market, and one where the card is not necessarily at the core of its future offering.
Discover more insights from Moorwand by reading our other articles.