An Insider’s History of the Bank Credit Card
By Alexander Kish Jr.
[Editor’s note: Today we hardly give the bank credit cards in our wallets a second thought. It’s hard to imagine a time when they did not exist. Beginning in the 1950s, Alexander Kish Jr. was at the forefront of efforts to make the credit card a viable banking product. From his vantage point as vice president of consumer loans at Connecticut National Bank in Bridgeport, where he developed the first all-inclusive descriptive bank credit card statement, through his service as chairman of the NJBankers Installment Credit Committee and up until his retirement from Fleet Bank, N.A. in New Jersey in 1987, Kish saw the product he helped pioneer grow from infancy to full maturity.]
The bank credit card as we know it today traces its roots back to a Long Island bank in 1951. It had a rough beginning and was slow to be accepted by the public, merchants and bankers alike. I had the great privilege of being part of its evolution.
Several attempts were made in the first half of the 20th century to offer consumers a revolving credit product. Western Union reportedly issued a metal credit card to their preferred customers in 1914 which was referred to as “metal money.” The Pullman Co. had issued credit cards to select customers who regularly traveled their railcars from coast to coast.
As early as the 1930s a number of department stores were issuing charge plates and plastic credit cards. Oil company credit cards were on the market as early as 1914, further expanding credit card usage to 70 million users by 1967.
Although banks were slow to catch on to the product, a few did test the waters. A bank in Manchester, Conn., inaugurated a revolving credit plan within a small shopping center. Customers of a member group of stores were allowed to apply for revolving credit which was dispensed by means of a set dollar amount of paper money, or equivalent, that was honored by the member merchants. When the account was paid in full, a new set of paper money would be issued.
A Brooklyn, N.Y., bank developed an expanded version of the same product. Once customers were pre-approved by the bank for credit, they were issued a special currency that could be used at local merchants, with whom the bank had arranged to accept the special currency for the purchase of certain items. When a purchase was made with the special currency, the merchant deposited it into their account and the bank billed the customer in installments for the amount of the purchase at a previously-agreed upon interest rate. A similar plan in which “script” was issued and developed by John Biggins at a New Jersey bank.
ENTER T&E CREDIT CARDS
Credit cards got their first big push into mainstream society with the advent of three so-called “travel and entertainment” cards after World War II. To obtain one of these cards, you had to be a member of the issuing organization.
The first T&E card was introduced in 1949 by Diners Club, which offered a revolving credit line with a 60-day payback. It began with 200 members and a handful of restaurants in the New York area. A year later it had 10,000 members and 1,000 establishments where members could charge their meals. Citibank acquired it in 1981.
American Express began issuing credit cards in 1959. Due to its worldwide recognition, Amex had 17,500 establishments that would accept the card right off the bat, a tremendous send off for a new product that was a logical extension of the company’s existing travel services. American Express remains an independent financial powerhouse today and owns its own bank.
Carte Blanche, a product of the Hilton Credit Corp., also launched its card in 1959. It was sold a decade later to Avco Delco of Cleveland, Ohio.
Similar T&E clubs sprung up offering credit cards to cover travel and entertainment expenses. Use was limited to facilities such as hotels, cruise ships, elite restaurants, car rental agencies, airlines, major specialty shops and the like.
Most T&E credit cards were limited to consumers with high incomes and required that balances be paid in full each month. There were no interest charges since full payment was required in 30 days. Income was derived from annual membership fees and the discounts of retail merchants who were members of the plan.
A PENNEY CREDIT
Department stores began offering credit cards to increase sales. Even J.C. Penney, which ardently proclaimed itself to be a cash only department store, finally succumbed to market pressures in 1958 and began issuing credit cards. Within the next 10 years, the giant retailer issued more than 12 million credit cards accounting for 38 percent of the store’s total sales. Once Penney’s gave in to the ways of credit, the floodgates were open to even more department stores issuing their own credit cards.
THE NEED FOR IMPROVED
BANK REVOLVING CREDIT
Amidst the wave of non-banks issuing credit cards, bankers took notice and recognized the need for revolving credit lines for their customers. Most banks had a minimum personal loan limit of $500. Loans under this amount resulted in losses due to insufficient interest income.
For lesser amounts, consumers were forced to use small loan companies that often charged excessive interest rates of 20 percent or more. Consumers applying for bank loans in excess of $500 were required to fill out long loan applications before being notified by the bank a few days later that their loan applications were approved.
Refinanced loans also required new updated applications and more waiting for new loan approvals – not a quick way to handle customers in a hurry to obtain or refinance a loan. Installment loan coupon books were provided to customers, who sent a coupon along with each month’s payment. In the bank’s back office, ledger cards were set up for each loan, to which the monthly payments were manually applied by bookkeeping machines.
BANKS VENTURE IN UNCHARTED WATERS
In 1951, Franklin National Bank in Long Island, N.Y., one of the early pioneers in the race to come up with a viable revolving credit plan, introduced the “Charge It” card, under the leadership of Bill Grimmond. This service was available to customers and retailers in the bank’s service area.
The program concentrated on a freezer food plan. Franklin National would finance food freezers under conditional bills of sale repayable over a number of months. The bank also provided a four month revolving credit account to be used to fill the freezer with frozen food. The credit lines were small with repayment restricted to four monthly payments.
In the following two years, almost 100 banks nationwide, large and small, in the quest of a profitable operation, decided to accept the challenges of a new era. Due to lack of retail credit expertise and large losses, a number of these banks dropped out.
Although reports of profitability were scarce, a number of banks opted to forge ahead and stay the course in an attempt to tame this new beast. They faced numerous challenges. Credit and fraud losses were running high. Charge card operations were very labor intensive. A separate department was required which had to be staffed 24 hours a day, 365 days a year to handle credit card authorizations, thus putting an end to “bankers hours.” Additional telephone lines were installed to handle authorization calls from merchant members.
Security personnel were hired to run down runaway credit cards that were usually stolen. Payments and new purchases were posted each day by means of manually operated Burroughs bookkeeping machines. Special equipment was required to prepare and emboss credit cards. Merchants were equipped with imprinters and supplies of expensive multi-part sales drafts. Logos were distributed to be affixed to merchant member doors and store fronts.
Sales volume was a necessity as average balances on accounts were less than $500, producing hardly enough interest to cover the costs of operation. However, increasing volume meant increasing staff. Estimates at the time projected that it would take at least 5 years of losses before the average bank broke even on its credit card operation.
BANKS FACE OPPOSITION
Never did any new bank product cause such commotion in a given banking market as a bank announcing it was going to issue credit cards. Competitors immediately felt the need to retaliate and marshal their forces to counteract this new retail trend. They took their commercial calling officers and concentrated them on contacting their commercial loan customers.
Opposition to this service came from everywhere. Many bankers claimed that issuing charge cards was “five and dime” banking and had no place in the banking system. They warned their corporate customers that their business lines of credit would be terminated if they sold their receivables to competitor banks.
Accountants, fearful of losing the lucrative auditing of accounts receivable, warned that banks were charging as much as 60 percent (5 percent sales charge fee for 12 months) in merchant fees. Professionals, including physicians and dentists, insisted they had special relationships with their patients/clients and would not permit third parties to participate in collection of their accounts.
Credit managers of major retail stores were especially vehement about not accepting bank credit cards in their stores. They could see the handwriting on the wall. They did a good job in convincing their managements that their store would lose identity and the loyalty of its customers.
Large grocery stores claimed they operated on a thin 2 percent margin and could not afford to pay the banks’ fees. Merchants always asked, “How many cardholders do you have in my area?” Consumers asked, “How many prestige stores do you have as members where I may shop?” It was a question of which came first, the chicken or the egg.
LAWMAKERS WEIGH IN
Many state legislatures were hostile to the survival of the credit card and imposed low limits on interest rates, late charges and other costs. I recall Congresswoman Bella Abzug in New York gained substantial headlines when she charged that banks were building lists of books that customers were reading gleaned from their transaction records.
This raised the specter of consumer privacy as this information could be used to determine customer affiliations and personal living habits. Abzug’s charge, of course, was false, as the only data transmitted over the authorization network were the customer account number, which identified the card issuer and the customer, a merchant number and the total amount of the charge. Descriptions of merchandise purchased were never recorded.
Hard-nosed New York legislation eventually drove Citibank to move its credit card operations to South Dakota while a number of other New York City banks moved their credit card operations to a special trade zone in Wilmington, Del.
At Connecticut National Bank, I personally called on many mom and pop stores in an effort to sign them up for our charge account program. I often ran into merchants who were totally opposed to third-party charge cards believing that they would take business away from their businesses.
Often merchants would tell me they had 10 to 20 years experience in business. Their stores were often poorly stocked with merchandise and selling space was apparently no larger than when they originally opened their stores. Although studies revealed the cost to merchants for carrying their own receivables was in the vicinity of 12 percent, some merchants claimed they had no expense involved and proudly pointed to their wives in the back room who handled the billing and collections of accounts at no salary expense.
It took years to convince them that their sales should produce cash to be used for the purpose of replenishing merchandise inventory. Moving inventory into dormant accounts receivable was not the way to go.
THE CHARGE ACCOUNT BANKERS ASSOCIATION
In recognition of the growing bank credit card industry, the Charge Account Bankers Association was formed for the purpose of developing revolving credit cards as a viable banking product. Credit would be instantly available regardless of the time of day or location.
The American Bankers Association vehemently opposed bank charge cards as a banking product and repeatedly rejected CABA for membership. In light of that opposition, it would take decades to build a profitable volume portfolio of charge card customers.
CHANGING THE STATUS QUO
Fortunately after World War II, a new breed of young aggressive bankers moved into the industry. They were determined to meet the “challenge of change” and streamline banking for the convenience of the customer. Heretofore, customers were required to fill out long applications for a loan. Ironically they had to prove they did not need a loan in order to have one approved. Bank systems and credit philosophy were out of date. My bank had separate applications for auto loans, personal loans, home improvement loans, collateral loans, second mortgage loans and other type loans. I took all of these applications and combined them into one simple short form.
Loan applications of less than $500 were referred to the small loan companies. Each time a customer wished to obtain a new loan, refinance it or increase it, a new application was required regardless of the customer’s payment record. A letter was sent to the applicants employer asking that their employment be confirmed – replies to them often took days.
Next a telephone call was made to the local bank credit bureau requesting a credit report. These reports were then sent on to one or two loan approvers. The larger loan applications were forwarded to a loan committee. A check was normally sent to the customer along with a payment book which had to be assembled before mailing. There had to be a better way.
In the second installment, banks begin to adopt the credit card as a legitimate product line, but it takes the world’s largest retailer to show them how to do it efficiently.
ABOUT THE AUTHOR
Alexander Kish Jr. joined the consumer loan department of Connecticut National Bank in Bridgeport upon his discharge from the U.S. Navy in 1946. He worked in every position in the department from file clerk, bookkeeper, payment teller, collection manager and credit manager. He finally became vice president in charge of consumer loan operations. He knew the workings of every area and was in a position to upgrade operations to eventually include a profitable charge card department.
It was at Connecticut National that Kish developed his, “New Concept in Retail Credit” which became a standard of the bank charge card industry. He had the support of President Lewis A. Shea, a former federal chief bank examiner who always looked for new banking fields to conquer.
Kish was one of the first into the charge card arena, serving as statistical chairman and treasurer of the Charge Account Bankers Association. During his 40-year career in banking, he was employed by the Connecticut National Bank, Hartford National Bank and later First Jersey National Bank, which subsequently merged with Fleet Bank and later Bank of America – ironically the home of the VISA card. At Fleet he took over the consumer loan department and upgraded systems, bringing profitability to the operation.
He served as a member of the Interbank Operations Committee; director and chairman of the board of Eastern States Bankcard Association; founding chairman of Eastern States Monetary Services, which processed VISA credit cards; secretary of the Fairfield County Bankers Association; and chairman of the Installment Credit Committee, first of the Connecticut Bankers Association and later the New Jersey Bankers Association.
Kish instructed in bank card schools and gave lectures on charge card and consumer loan operations to numerous credit groups. He retired to North Carolina from Fleet Bank in January 1987, where he lives with his wife Agnes. He can be reached via e-mail at email@example.com.