Remember the titans: Frank McNamara, bringing credit to the world

By Anant Gupta

The roots of the ubiquitous credit card can be traced back to the first Diner’s Club card, the birth of which took place, unsurprisingly, at a dinner table. After having dinner at Majors Cabin Grill restaurant in New York City in 1949 with a wealthy client, Frank McNamara realised he had left his wallet at home. Although his wife came to his rescue that day, the incident had a lasting impression on McNamara.

Faced with the embarrassment of not having the cash to pay the bill, he conceptualized a system where people could use one card at multiple merchants, and settle the bill at the end of every month. Taking this idea further, one year later, McNamara swiped a charge card to pay off the bill without using any cash. Hailed as the ‘First Supper’, that signalled the beginning of a new industry McNamara launched the Diner’s Club card in 1950 along with his lawyer-turned partner Ralph Schneider & Alfred Bloomingdale.

A revolutionary concept, aimed primarily at the New York elite, a Diner’s Club card eliminated the dependence on cash at major New York restaurants. By tying up with upscale restaurants, Frank allowed diners to freely swipe their cards and make a consolidated payment at the end of the month. The ‘charge card’ as it was called back then, paved the way for the now commonly known ‘credit card’.

The credit card vs. the charge card

While the credit card has been modelled after the charge card, there are subtle differences in the way money is routed to the merchant from the customer using either card. The credit card usually involves three parties – the customer, the merchant and the credit card company. The card company issues a card to the user and advances a line of credit known as revolving credit to the customer for a small fee. This revolving credit allows the customer to comfortably pay for their expenses, which may fluctuate every month, as long as they are under a certain limit. If the credit limit is reached, the user can take credit in advance to pay for other expenses, which will be paid back with an interest rate.

The charge card of the 1940s was based on a much simpler process. There was no third party involved which advanced a line of credit – hence the transaction was always routed from the user directly to the merchant. Since all transactions were paid back at the end of the month, no debt was carried over to the next month. This ensured that no customer would default on any payment, thus minimizing the risk of losing money.

Impact of Diner’s Club

The concept of Diner’s Club card spread like wildfire and was patronized by the consumers and merchants alike. People were enamoured by the option of swiping a card at multiple restaurants – which soon became a status symbol for the New York elite. Within one year, its popularity had soared, and its 42,000 members routinely swiped the card when dining. 330 restaurants also jumped in the fray, offering their services at special discounted rates exclusively for card-holders. Gradually, the services under which the card could be accepted were extended to a wider range of activities, thus continuing its steadily increasing patronage. Apart from meals, being a Club member also allowed them to settle hotel, entertainment and travel bills.

The Diner’s Club cleverly identified areas of high volume transactions and was successful in penetrating such industries. What started off as an instrument to ease payment and greatly improve convenience soon became a powerful tool to earn money. Leading banks quickly jumped ship, with Bank of America’s BankAmericard and American Express’ card competing with the Diner’s Club card. Later on, it was followed by Trip Charge, Golden Key, Gourmet Club, Esquire Club, and Carte Blanche.

Diner’s Club – Earning profit by offering discounts

Apart from introducing a revolutionary mode of payment, McNamara made a lot of money by selling these cards. Customers paid a $3 annual fee for the card as well as a 7% charge on every transaction. The restaurants partaking this scheme also had to pay a 10% charge for every transaction done by a customer. The credit card industry was booming, and within a decade of its launch, the Diner’s Club membership crossed the 1 million mark and was subsequently listed on the New York Stock Exchange.

Staying competitive

During the early 1960s, there was a saturation in the credit card industry with a sudden influx of players from big banks & boutique payment services firms. Due to uninterrupted economic expansion, the average income of the American household rose steadily, which led to higher spending and consumption. McNamara capitalized on this economic boom and extended the Diner’s Club card services to the travel industry as well. Additionally, McNamara also believed that effective promotion was imperative to growth and necessary to help the company maintain market leader status. This led to the club releasing their first major television commercial as a sponsor of the New York Giants American football team, and their card featuring prominently in the cult film Breakfast at Tiffany’s.

The biggest breakthrough for the company, however, came with the launch of its corporate cards. By offering corporates discounts on business travels and expensive client dinners, Diner’s Club put its card in the hands of thousands of office-goers and C-Suite executives, with separate cards for each category, of course. With money loaded in a card-sized piece of plastic, McNamara created a new industry and made ‘cashless’ the common parlance it is these days.

Anant Gupta is a writing analyst at Qrius