By recognizing the untapped demand for a portable credit device, the founders of Diners Club developed the first credit card and in the process created a viable and profitable industry, while beginning a culture of consumer debt that would define the economy of the late twentieth century.
In 1949, three old friends, Alfred Bloomingdale, Francis X. McNamara, and Ralph Snyder, met for lunch at a popular New York restaurant near the Empire State Building. McNamara was the head of an unsuccessful finance company, Hamilton Credit Corporation
The conversation turned to McNamara’s difficulties in collecting debts. One of McNamara’s clients would allow his poor neighbors to use his charge account with local merchants. He would later collect the principal that was charged and also a small fee. Although this sounded like an ingenious entrepreneurial idea, collecting debts from the poor was difficult; at that time, the gentleman in question owed Hamilton Credit Corporation more than three thousand dollars.
In discussing this concept, the three men found two flaws in the operation of McNamara’s customer. First, he was lending to the wrong people: The poor were less likely to pay back their debts. Second, he had to wait until his customers were in an emergency before they would come to him for credit. One of the men remarked that within one mile of where they sat were all the most important New York restaurants, many of which already operated their own credit systems for regular customers. Restaurants seemed to be the ideal market for a more universal credit system.
At the time, large retailers already used “charge plates” to keep track of purchases made on the accounts of their customers. These were metal strips, similar to military dog tags, that were inserted into a machine and copied with carbon paper. The three men discussed the innovative idea of becoming financial intermediaries and issuing these cards to consumers themselves. They conceived of credit as a product to be sold, an end in itself rather than simply a means to an end. The credit card was to become the vehicle for selling such credit. Although there was no precedent for such a company, these entrepreneurs forged ahead with their vision.
They talked to the proprietor of the restaurant at which they were eating and asked him how much he would pay for additional customers. He answered that they were worth 7 percent of their bills. This figure became the set discount rate for use of the card and the means of paying for the Diners Club operation. Yearly fees and interest rates for consumers were introduced later.
At the beginning, the three founders faced a serious problem. Businesses wanted to see a large customer base before they would accept the card, and customers wanted to see a large number of businesses willing to accept the card before they would sign up. Diners Club persevered, convincing many New York City restaurants to accept the card. For a customer base, the company aimed at traveling salespeople who wanted to charge their meals.
Bloomingdale returned to California and started a similar operation in Los Angeles called Dine and Sign. Three months later, as Diners Club began to show a profit, the three men decided to merge, and Diners Club became a nationwide organization. They soon extended their base of operations from restaurants into hotels, retail stores, and other establishments. In 1951, they created a franchise system and went international, extending into Europe.
The first Diners Club cards were more books than cards. Each person who signed up for the card was sent a book describing the places that accepted the card. To publicize new restaurants, a regular publication was issued to consumers.
After eight years of a Diners Club monopoly, other cards, such as Carte Blanche and American Express, entered the market. Other things also changed. The 7 percent set discount rate became variable based on the size of the average purchase at each location. Diners Club also began issuing insurance and gave loans of up to twenty-five thousand dollars on the card.
Credit card operations need a large amount of credit themselves to be able to extend credit to customers. Therefore, as business grew, the three founders of Diners Club found themselves constantly searching for more credit. Early in the business, they used what is referred to as the “float.” Since they had offices in both New York and Los Angeles, they paid the New York bills with checks drawn off the Los Angeles account and vice versa. Because checks took a few days to clear, they gained some time before needing money in the accounts.
As time progressed, banks became quicker at check clearing, and this avenue of free credit disappeared. As the company grew rapidly, a large influx of capital was necessary. To finance the company, Bloomingdale and Snyder went public. They each held on to 30 percent of the shares, and the other 40 percent were sold. McNamara had already sold his portion of the business to the other partners. As Diners Club became more successful, banks fought for the privilege of lending money to the company, so the difficulty in finding credit disappeared.
Other problems began to arise. Some customers simply did not pay their bills on time. Diners Club also sent unsolicited cards through the mail to increase its customer base, and some of these cards were lost or stolen and then used. No one could be found to hold responsible for these purchases, and Diners Club ended up paying. The practice of sending unsolicited cards later became illegal, insulating the credit card industry from incurring such losses.
The company continued to operate profitably. In 1970, it was purchased by Continental. While under Continental’s control, Diners Club became the first card accepted in China. In 1980, the company again was sold, this time to Citibank. It still aimed primarily at the business traveler market, competing primarily with Carte Blanche and American Express. Although it holds a relatively small market share, Diners Club holds a large place in the history of the credit card industry.
The main impact of the founding of Diners Club was the multibillion dollar global industry that followed. Although Diners Club was the first modern credit card, the concepts underlying this new industry had existed for a long time. Rather than introducing radically new ideas, the founders of Diners Club merely combined already well-known techniques for extending credit and created a new, mobile, credit card.
The Diners Club card influenced the society of the 1950’s by crossing product and store lines. This card was universal rather than product- or store-specific. Although many oil companies and retail stores issued their own credit instruments, they were usable only at outlets owned by the issuer. Diners Club introduced the novel idea of a card that could be used at any one of a number of different establishments for a variety of products, from dinner at a restaurant to goods in a retail store.
Innovations in the credit card industry came slowly. Technological advances usually were borrowed from other industries rather than created specifically for credit card usage. For example, neither satellite transmission nor computer authorization codes were invented for the credit card industry but were put to good use by it. The credit card industry thus influenced technology by offering a new outlet for innovative products and methods.
The use of credit cards has become a vital part of many banks’ business. Credit card use is seen in a more positive light in the United States than in other countries, and most credit card issuing banks are located there.
In 1952, after two full years of operation, Diners Club showed a profit of $61,222 on sales of $6.2 million. By 1986, 55 percent of all U.S. households held at least one credit card. Charge volume for the big three cards—Visa, Mastercard, and American Express—totaled more than $107 billion. This enormous growth in the credit industry has allowed consumers to purchase more goods and services than they dreamed possible. By allowing consumers to spread their debts over a long period of time but still allowing them to take home what they purchased, credit cards made it possible for consumers to live above their means.
There is a negative side to such purchasing power. Many poorer families purchase more than they can afford to pay for by charging purchases to credit cards. When the bills become due, the families are unable to pay them, and the debt rolls over. Every time the debt is allowed to roll over, interest charges accrue. The debt thus becomes even more difficult to pay off. Banks have attempted to insulate themselves against this by issuing cards only to those consumers above an income cutoff. In the face of increasing competition, however, banks began lowering the limit on income drastically in the 1980’s.
The credit card industry has been a peculiarly American development. Since the United States is so large geographically, as the population became more mobile, the personal trust that existed between merchants and their best customers eroded. It was this trust that enabled merchants to extend credit to customers. Customers needed a card that could be used across the nation, and retailers needed a third-party guarantor of the debt. Thus, the advent of the credit card industry affected the ability of consumers to leave their hometowns and still be able to purchase goods and services on credit.
Another impact of the advent of Diners Club, and subsequent credit cards, is the ability of people to cross international borders without the need to carry large amounts of cash to exchange. World travelers found their credit cards accepted at many locations outside their country of origin, making traveling easier.
When Diners Club and its competitors first introduced credit cards, merchants rejected the idea for two reasons. First, they did not wish to pay the 7 percent discount the card required. Second, they thought that the existence of a card that could be used at various establishments weakened their personal relationship with their customers. They soon found that the large increases in sales experienced by retailers who accepted credit cards more than made up for any loss of personalized service. Many customers will pass by a retailer who does not accept their credit card in order to purchase from one who does. This has led to an almost universal acceptance of most major credit cards.
When Alfred Bloomingdale, Francis McNamara, and Ralph Snyder sat down to lunch in 1949, they could not have predicted the size and scope of the multibillion dollar global industry they were about to begin. In the span of less than fifty years, credit cards changed the face of worldwide business and extended buying power to more people.
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Bagot, Brian. “Charged Up.” Marketing and Media Decisions 25 (April, 1990): 76-79. An in-depth comparison of the major credit card companies. Contains a section on Diners Club and discusses how Diners Club compares to the other large credit card companies. -
Evans, David S., and Richard Schmalensee. Paying with Plastic: The Digital Revolution in Buying and Borrowing. 2d ed. Cambridge, Mass.: MIT Press, 2005. Cultural analysis of credit cards, consumer credit, and their connection to the rise of electronic commerce. Bibliographic references and index. -
Hall, Carol. “Plastic Binge.” Marketing and Media Decisions 21 (April, 1986): 117-127. Good article on the state of the credit card industry. Informative chart on the spending patterns of credit card users. Comparison of Diners Club with other major credit cards. -
Hendrickson, Robert A. The Cashless Society. New York: Dodd, Mead, 1972. Discusses the future of a society that is no longer based on cash. Contains a chapter on the history of credit cards. Although it does contain some valuable information, it is written in a rather speculative, hypothetical manner. -
McManus, Kevin. “Wing Tips.” Forbes 130 (July 5, 1982): 150. When Braniff Airlines went bankrupt, many people were left holding tickets. This article discusses what Diners Club and the other major credit cards did for consumers who had used their cards to purchase Braniff tickets. Good discussion of the responsibilities of card-issuing companies. -
Mandell, Lewis. The Credit Card Industry: A History. Boston: Twayne, 1990. Discusses the history of the credit card industry, including a complete chapter on the founding of the Diners Club. The first book to focus primarily on the history of credit card usage. -
_______. Credit Card Use in the United States. Ann Arbor: Institute for Social Research, University of Michigan, 1972. Summarizes data from three nationwide surveys in 1970 and 1971 on specific uses of various cards, attitudes toward credit cards, and the incurrence of debt on credit cards. Contains a full copy of the survey used and data presented in clear, concise tables. -
“Playing Your Cards Right.” Consumer Reports 50 (January, 1985): 47-52. An excellent comparison of all the major credit cards. Concentrates on American Express, Visa, and Mastercard, but also includes data on Diners Club, Carte Blanche, and other smaller retail credit cards. -
“Serendipity.” Forbes 125 (February 4, 1980): 17. Discusses the international aspect of Diners Club. This article is about the entrance of Diners Club into the Chinese market, through Hong Kong. Details the visit of Continental chairman John B. Ricker, Jr., and his subsequent discussions that enabled Diners Club to be the first credit card company to enter the Chinese market. -
Sloan, Irving J. The Law and Legislation of Credit Cards: Use and Misuse. New York: Oceana, 1987. Although it does not discuss the history of credit cards, this book provides an interesting study of laws that relate to the industry. Contains appendixes of specific state laws as well as an overview of federal regulations.
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