A Staff Report from the Straight Dope Science Advisory Board

Is it safer not to sign the back of your credit cards?

October 28, 2008

Dear Straight Dope:

The other day I read a report claiming we shouldn't sign the back of our credit cards so we'll be forced to show our driver's licenses when we use them. That's suppose to protect us in case a card is stolen. But the back of the credit card says it's not valid unless it's signed. Who should we believe?

Dear Straight Dope:

I was looking at my Chase Visa card and was wondering what good the Visa logo actually does. The card alludes to its being issued by Chase Bank, pursuant to a license from Visa. What are they licensing? I'm borrowing money from Chase and paying money to Chase. What does Chase get by paying a licensing fee to Visa — a billing network? Additionally, why are Visa and Mastercard issued by individual banks but American Express and Discover have no bank logo?

Gfactor responds:

I'm going to take Christopher's question first and then turn to Derek's. The reason will soon become apparent.

There are several kinds of credit card arrangements. The original cards were what we call two-party cards. A merchant issued a card and allowed customers to charge items. In the 1920s, oil companies issued charge plates [link] to their customers and hotels issued credit cards to theirs. (We'll discuss the difference between charge cards and credit cards in a moment.) All these credit devices were merchant-issued — the lender was the merchant.

The next step came in the 1930s, when charge accounts covering multiple retailers were offered. Prof. Lewis Mandell, in his book, The Credit Card Industry: A History, says that by 1936, an outfit called the Retail Service Bureau of Seattle had lined up over a thousand stores, offering a single charge account and a single monthly bill to account holders.

The next step was the universal card — one that wasn't tied to specific retailer or product, allowed customers to purchase goods in many places, and, most importantly, offered a profit to the issuer. The first universal charge card was the Charge-It card, offered by Flatbush National Bank of Brooklyn, New York around 1946 or 1947. The card's usefulness was limited — you could only use it in stores within two square blocks around the bank.

The first universal card you could use lots of places was Diner's Club. The Diner's Club website claims founder Frank McNamara invented the card after he couldn't pay for a restaurant meal because he'd forgotten his wallet [link], but Prof. Mandell tells a different story. He says the idea came up at a lunch meeting between McNamara, his attorney Ralph Snyder, and Alfred Bloomingdale, the department store owner. McNamara was running a failing finance company. Conversation turned to a problem McNamara was having:

One of McNamara's clients … lent his charge accounts to his neighbors. If one of his poor neighbors needed a prescription in the middle of the night, [he] would tell the neighbor to go to a particular drugstore and use his charge account, which he would okay over the phone.

Placid times, those. Anyway, Mandell notes that the client charged his neighbors for this service. "If the prescription [was] $30, he would then charge the neighbor $40 and collect it over time." What impressed the men as novel was the middleman. The credit arrangements weren't new, but Mandell notes, the middleman, "who used his own creditworthiness to obtain credit from a store, extend that credit to an individual … and then collect the principal and interest … was an intriguing twist." Of course, the business model was far from perfect — McNamara found out about this arrangement because the client owed him $3,000.

The men decided they could improve the idea. They figured out where McNamara's client went wrong. First, he was lending to poor people. Second, by providing credit only in emergencies, he was needlessly limiting his target market. Finally, he was missing out on a profit opportunity — the men felt they could charge a seven percent discount to merchants for the additional business the merchant would see from credit card customers. At any rate, McNamara and his associates created the Diner's Club card, which soon took off.

Technically, Diner's Club wasn't a credit card but a charge card — the customer wasn't allowed to keep a running tab but rather had to pay the full balance within a given time. But other card issuers offered what was known as "revolving credit" — provided you paid a minimum amount each month, they'd let you owe the rest, charging you interest for the privilege.

By 1955 more than 100 banks offered credit card plans, Mandell says. Diner's Club remained the leading card until 1958, when American Express entered the market in the belief that charge cards might erode its traveler's check business, which dated back to 1890. Carte Blanche, originally the private credit card of the Hilton hotel chain, also entered the market in 1958, as did Bank of America, which introduced BankAmericard.

In 1966, Bank of America decided to license BankAmericard across the U.S. Several other banks formed the Interbank Card Association, which licensed a competing card. These systems were intended to solve a problem: Till then, all the merchants and cardholders in a credit card program had to have a relationship with the same bank. What was needed, Mandell explains, was a way "to transfer credits among banks if a cardholder served by one bank made a credit card purchase from a merchant served by another."

That was the beginning of our modern credit card system. BankAmericard evolved into Visa and the Interbank Card Association ultimately begat MasterCard. These cards were a good deal for all concerned. Banks wanted to make money (fees and interest) by offering credit cards. Merchants didn't want to deal with a lot of banks, nor did banks want to deal with huge numbers of merchants. Instead, each merchant set up what's called a merchant credit relationship with one bank. That bank had a relationship with an interchange (Visa or MasterCard), which also licensed banks (called issuers) to issue credit cards to customers. Yet another entity, called an acquirer, acted as a clearinghouse and sorted out all the transactions [link].

So there's the answer to your question, Chris. Banks such as Chase offer Visa because they don't have to have a relationship with every merchant that issues Visa cards. That lets cardholders like yourself use Visa almost anywhere, run up big bills, and owe bushels of interest to Chase. What's not to like?

Not all credit card systems are so complicated. Some card issuers avoid the licensing deal and maintain their own network — American Express is an example. The only place you can only get an American Express card from is American Express.

That brings us to Derek's question — should you sign the back of your credit card? You might as well, for a couple reasons. First, the signature on the back of the card isn't intended solely as a security measure; rather, it indicates you agree to the terms of your contract. More important, if you don't sign the back of the card, merchants are supposed to hassle you — in fact, they take a big risk if they don't. Here are typical instructions given to merchants:

While checking card security features, you should also make sure that the card is signed. An unsigned card is considered invalid and should not be accepted. If a customer gives you an unsigned card, the following steps must be taken:
• Check the cardholder’s ID. Ask the cardholder for some form of official government identification, such as a driver’s license or passport. Where permissible by law, the ID serial number and expiration date should be written on the sales receipt before you complete the transaction.
• Ask the customer to sign the card. The card should be signed within your full view, and the signature checked against the customer’s signature on the ID. A refusal to sign means the card is still invalid and cannot be accepted. Ask the customer for another signed Visa card.
• Compare the signature on the card to the signature on the ID.
If the cardholder refuses to sign the card, and you accept it, you may end up with financial liability for the transaction should the cardholder later dispute the charge.

The credit card companies actively discourage the "see ID" ploy:

Some customers write “See ID” or “Ask for ID” in the signature panel, thinking that this is a deterrent against fraud or forgery; that is, if their signature is not on the card, a fraudster will not be able to forge it. In reality, criminals don’t take the time to practice signatures: they use cards as quickly as possible after a theft and prior to the accounts being blocked. They are actually counting on you not to look at the back of the card and compare signatures — they may even have access to counterfeit identification with a signature in their own handwriting. “See ID” or “Ask for ID” is not a valid substitute for a signature. The customer must sign the card in your presence, as stated above.

The thing is, by law the consumer's liability for fraudulent charges is limited to $50. If a merchant accepts a credit card with no signature on the back or "See ID" written where the signature should go, he or she is on the hook for the charge (or at least the amount over $50) if you later claim it was unauthorized.

Of course, the fact that merchants are supposed to make you sign the back of the credit card doesn't mean they will. No doubt many will simply ask for ID, which is what you want them to do. It's not like failing to sign the card is against the law; you're liable for purchases you make with your card even if you don't sign it. All I'm saying is, if you don't sign, be prepared to get some grief.

References

Bellis, Mary, Who Invented Credit Cards, about.com: http://inventors.about.com/od/cstartinventions/a/credit_cards.htm

Bergman, Lowell, and Rummel, David, Frontline: The Secret History of Credit Cards, November 23, 2004: http://www.pbs.org/wgbh/pages/frontline/shows/credit/

Crestar Bank, N.A. v. Cheevers, 744 A.2d 1043, 2000 D.C. App. LEXIS 25 (D.C. 2000)

Dang, Dan Than, "Do credit cards require ID?" baltimoresun.com, March 11, 2008: http://www.mastercard.com/za/wce/PDF/12999_MERC-Entire_Manual.pdf

Danner v. Discover Bank, 99 Ark. App. 71, 2007 Ark. App. LEXIS 358 (2007)

Diners Club International: Heritage Facts: http://www.dinersme.com/dc_fifty_content.htm

The History of Credit & Debt__
History of Credit Cards, Myvesta.org: http://myvesta.org/history/history_creditcard.html

The History of Credit Cards: http://homepages.nyu.edu/~jac614/nyny/credit-card-history.html

The History of Credit Cards – It All Started In The 18th Century, the-history-of.net: http://www.thehistoryof.net/history-of-credit-cards.html

History of JPMorgan Chase, jpmorganchase.com: https://www.cardaccountservice.com/marriott/cma.aspx

Jasper, Margaret, Credit Cards and the Law (2007)

J.P. Morgan Chase Bank Cardholder Agreement: https://www.cardaccountservice.com/marriott/cma.aspx

Mandell, Lewis, The Credit Card Industry: A History (1990)

Mastercard, Merchant Rules Manual: http://www.mastercard.com/za/wce/PDF/12999_MERC-Entire_Manual.pdf

Press, David, "Card Association Rules to Work By," The Green Sheet, April 09, 2007, Issue 07:04:01: http://www.greensheet.com/gs_online.php?story_id=26

Regulation Z: http://www.fdic.gov/regulations/laws...6500-1400.html

Rules for Visa Merchants: http://usa.visa.com/download/merchants/card_acceptance_guide.pdf

Weisbaum, Herb, Merchants often violate rules on credit cards
Technically, MasterCard, Visa transactions have no minimum or maximum, MSNBC.com, July 11, 2006: http://www.msnbc.msn.com/id/13806200/

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