Credit Cards and Other Payment Mechanisms

• Author: M.H. Ogilvie
• Profession: Professor of Law, Carleton University
• Pages: 370-394

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 fu nds into an account. This chap-

ter will consider payment mechanisms or ser vices offered by banks for

which it is not strictly necessary for the customer to maintain an ac-

count with the bank selling the service, provided that the customer is

able to pay for the service, that is, the means of making payments or

transferring funds to a third party. Payment mechanisms to be con-

sidered are credit cards, travellers’ cheques, money orders, and bank

drafts. These are all conceptually quite different from one another and

are grouped together only on the basis t hat 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, since there is grow-

ing convergence of their distinct features in one card. 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.

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Credit Card s and Other Payment Mechan isms371

B.CREDIT CARDS

1) LegalNature

The historical prec ursor1 of the modern credit card was the credit coin,

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

to customers who were approved for purchases on cred it 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 serv ice the newly widespread use of automobiles. American air-

lines and railway s subsequently followed suit. In 1950, the f‌irst modern

credit card, Diner s Club, was introduced as an a ll-purpose card provid-

ing credit and collection services for participating merchants. Diners

Club pioneered the tripartite contractual arrangement characteristic of

credit cards tod ay. In 1958 the American Express c ard 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 cards

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

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

“credit” cards.

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-

tion al as socia tion of r egion al ban k card a ssoc iation s forme d Inter bank,

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 re-

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

1See generally (and the re ferences therein) M.H. Ogilvie, Can adian Banking Law,

2d ed. (Scarborough, ON: Ca rswell, 1998) at 702–4.