Credit Cards and Other Payment Mechanisms

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

CHAP TER 11

CREDIT CARDS AND

OTHER PAYMENT

MECHANISMS

A. INTRODUCTION

In the previous chapters, pay ment mechanisms t hat presuppose the

existence of a bank account in fund s have been discu ssed, including

cheques, debit cards, and electronic fund s transfers. These are simply

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

pay funds from an account and collect fu nds into an account. This chap-

ter will consider pay ment 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 ser vice, provided th at the customer is

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

transferr ing funds to a third party. Payment mechanism s to be con-

sidered are credit cards, t ravellers’ cheques, money orders, and bank

drafts. These are a ll 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 di scussed ea rlier. The odd

payment mechanism out is, of course, the credit card, which could

have been discus sed in Chapter 10, along with other payment card s,

especially i n the context of debit and smart card s, since there is grow-

ing convergence of their distinct feature s in one card. However, it is

also possible to dis cuss credit card s quite separately from other plast ic

cards because they do present unique legal questions, and possession

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

370

Credit Card s and Other Payment Mechan isms 371

B. CREDIT CARDS

1) L e g al Na t u re

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 t he 1920s

by the oil companies, which issued early credit cards as identif‌ication

cards for use in purcha sing 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 serv ices for participating merch ants. 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 C redit Cor poration i ntroduced Carte Bl anche. Both of

these were designed for busine ss rather than consumer use. Modelled

on the Diners Club contractual ar rangement, 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” ca rds.

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

of credit to the charge card and m arketing this c ard 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 f‌i nancial in stitutions worldwide to issue and

administer their respective card s with their di stinctive logos and col-

our schemes patented internationally a s intellectual property.

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

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

card. No f‌inancial i nstitution enjoys licences to car ry both Visa a nd

MasterCard, although in the United States t his may be done as a re-

sult of litigation in which restr ictions to one card only were found to

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

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