Credit Cards and Other Payment Mechanisms

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

401

CHAPTER 11

CREDIT CARDS AND

OTHER PAYMENT

MECHANISMS

A. INTRODUCTION

In the previous chapters, payment mechanisms that presuppose the

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

cheques, debit cards, and electronic funds transfers. These are simply

different means by which a customer instructs his agent, his bank, to

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

chapter will consider payment 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 service, provided that the cus-

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

ments or transferring funds to a third party. Payment mechanisms 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 that no bank account is

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

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

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

cards, especially in the context of debit and smart cards. However, it is

also possible to discuss credit cards quite separately from other plastic

cards because they do present unique legal questions, and possession

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

BANK AND C USTOMER LAW IN CA NADA402

B. CREDIT CARDS

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 disappeared in the 1930s, the concept of giv-

ing creditworthy customers credit tokens was taken up in the 1920s

by the oil companies, which issued early 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 card provid-

ing credit and collection services for participating merchants. Diners

Club pioneered the tripartite contractual 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 business rather than consumer use. Modelled

on the Diners Club contractual arrangement, 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

“credit” ca rds.

In 1966, the Bank of America saw the possibilities of adding a line

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

established Bank Americard 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 their respective cards with their distinctive logos and col-

our schemes patented internationally as intellectual property.

In Canada, the normal practice is for a f‌inancial institution to be

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

card. No f‌inancial institution enjoys licences to carry both Visa and

MasterCard, although in the United States 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).