Credit Cards and Other Payment Mechanisms

• Author: M.H. Ogilvie
• Profession: Chancellor's Professor and Professor of Law, Carleton University
• Pages: 401-429

401

C H A P T E R 11

CREDIT CAR DS AND

OTHER PAYMENT

MECHANISMS

A. INTRODUCTION

In the previous chapters, payment mech anisms that presuppose the

existence of a bank account in funds have been discussed, including

cheques, debit cards, and electronic funds t ransfers. These are simply

different means by which a cu stomer instruct s his agent, his bank, to

pay funds from an account and collect funds into an account. This

chapter will consider pay ment mechanisms or services offered by

banks for which it is not strictly nece ssary for the customer to maintain

an account with the bank selling the serv ice, provided that the cus-

tomer is able to pay for the service, that is, t he means of making pay-

ments or transferr ing funds to a third party. Payment mechanism s to

be considered are credit cards, travellers’ cheques, money orders, and

bank draft s. These are all conceptua lly quite different from one another

and are grouped together only on the basis th at no bank account is

required for them, in contrast to the pay ment orders discussed earlier.

The odd payment mechanism out is, of course, the cred it card, which

could have been discussed in Chapter 10, along with other payment

cards, especi ally in the context of debit and smart c ards. However, it is

also possible to disc uss credit card s quite separately from other plastic

cards because t hey do present unique legal questions, and pos session

of a bank account is not a prerequisite for their use.

BANK AND C USTOMER LAW IN CA NADA402

B. CR EDIT CAR DS

1) Legal Nature

The historical precursor1 of the modern credit card was the credit coin,

originally i ssued by large American retail stores just before World War I

to customers who were approved for purchases on credit at those stores.

Although credit coin use disappe ared in the 1930s, the concept of giv-

ing creditworthy customers cred it tokens was taken up in the 1920s

by the oil companies, which issued e arly credit cards as identif‌ication

cards for use in purchasing gas at the chains of outlets forming at that

time to service the newly widespread use of automobiles. American air-

lines and railways s ubsequently followed suit. In 1950, the f‌irst modern

credit card, Diners Club, was introduced as an all-purpose c ard provid-

ing credit and collection serv ices for participating merchants. Diners

Club pioneered the tripartite contractu al arrangement characteristic of

credit cards today. In 1958 the American Ex press card appeared, and in

1959 the Hilton Credit Corporation introduced Carte Blanche. Both of

these were designed for busines s rather than consumer use. Modelled

on the Diners Club contractual ar rangement, none of these three card s

had a line of credit attached to them; rather, monthly payment of the

full outstanding balance was required. They were “charge” cards, not

“cre dit” ca rds.

In 1966, the Bank of America saw the pos sibilities of adding a line

of credit to the charge card and marketing this card to consumers, and

established Bank A mericard Service Corp. The following year, a na-

tional association of regional bank card associations formed Interbank,

to promote a rival card. The former promoted “Chargex” (changed to

“Visa” in 1976), and the latter promoted “MasterCharge,” changed to

“MasterCard” in 1981. Since the late 1960s, these two credit card cor-

porations have licensed f‌inancial institutions worldwide to issue and

administer thei r respective cards with their di stinctive logos and col-

our schemes patented international ly as intellectual propert y.

In Canada, the norm al practice is for a f‌inancial i nstitution to be

licensed by only one of these two parent U.S. corporations to carry it s

card. No f‌inancial i nstitution enjoys licences to carry both Visa and

MasterCard, although in the United St ates this may be done as a result

of litigation in which restrictions to one card only were found to be

1 See generally M.H . Ogilvie, Canadian Banking Law, 2d ed. (Scarborough, ON:

Carswell, 1998) at 702–4 (and t he references therein).