An Insider’s History of the Bank Credit Card, Part 2
By Alexander Kish Jr.
Banks that did venture into credit cards early on operated with the system used by country clubs – that is they returned the charge card sales tickets to their customers each month along with their monthly statement. A ledger card was prepared manually and filed in numerical order for each account. Each day, thousands of sales tickets and payments were presented to be posted to the ledger cards on Burroughs or National Cash Register manual bookkeeping machines similar to those used on checking accounts.
Before posting, all of the sales tickets and payments were hand sorted into numerical order. At the time of producing the monthly statements, a large staff would correlate the sales tickets and manually stuff them into envelopes for mailing. Banks were stifled by mounting piles of paper which computers were supposed to eliminate. This was a slow and tedious process, especially when tickets had been manually misfiled. Not only that, but it was expensive.
A few banks, faced with ever-increasing credit card volume, decided to dabble in computer processing. However, they continued to use the “country club” billing system, believing that customers would not be amenable to accepting statements without backup documentation.
One bank in New Jersey did handle the daily processing by computer. Not completely trusting the fledgling world of data processing, the bank on the following day took the computer output and used it to hand-post the transactions on individual ledger cards. They thus shouldered the burden – and costs – of two overlapping systems. Computer processing was expensive and required substantial volumes to make it cost effective.
The country club credit card system thrived well into the 1960s and beyond in some cases as the operating system of choice for most banks and travel and entertainment (T&E) cards.
R. H. Macy Slices Macy’s Slices the Country Club
Not so in the world of retailing. R. H. Macy, the world’s largest department store, bit the bullet and discontinued mailing individual charge tickets, replacing them with descriptive monthly statements. This was a tremendous advance in credit card processing, and helped the store quickly build a million dollar credit card operation. The costs of manually sorting and the daily mailing of thousands of sales tickets were eliminated. Customer statements were completed more quickly and at substantially less cost. If a customer wanted verification of a special charge, a copy of the ticket was produced from microfilm records.
We in the bank credit card world learned much from Macy’s Credit Manager Harold Bachrach. What he implemented at Macy’s served as the inspiration for me and other bankers to later introduce descriptive summary credit card billing to their own customers.
Bank Credit Card Early Birds
The chart on the next page lists the some of the early birds who stepped forward to advance the acceptance and growth of the charge card. These banks each had credit card balances outstanding of at least $3 million dollars or more as of September 30, 1967.
As noted above, Chase-Manhattan Bank began credit card operations in 1958. Four years later it sold its unprofitable operation for $9 million dollars. The bank was unable to convince the major New York department stores that they should honor the Chase credit card. Store credit managers resented the intrusion into their business by the banks. Department stores were very possessive about their own credit card plans, which they believed established customer loyalty. It was difficult to convince them that thousands of bank cardholders would be coming through their doors who did not carry the store’s credit card and were therefore unable to make purchases there.
In 1969, Chase decided to take another crack at running a revolving credit card operation and repurchased its old credit card system for $50 million dollars and has gone on to become one of the world’s largest credit card issuers.
An Expensive Way to Build a Portfolio
Volume and higher outstanding balances were a necessity for profitability. Building a bank credit card base was an extremely slow process in light of the opposition. Many of the small merchants who had thousands of dollars of receivables were willing to sign on to a bank credit card plan, provided the bank purchased those receivables. This would provide capital for the purchase of new inventory.
The bank would purchase the accounts at discounts based on the aging of accounts. Some merchants would attest that all accounts were current (less than 90 days past due). However, once the initial billing went out from the bank, mail was often returned noting the addressee was no longer at the address given. Collection efforts revealed that some accounts had not paid their bills in over a year. Needless to say, the purchase of accounts receivable frequently resulted in losses for banks. It was an expensive price to pay for building a bank credit card portfolio.
Cap Is Born
A major weakness of the bank credit card which held back early growth was the fact that it was usually not honored outside of a given bank’s marketing area. For most banks serving metropolitan areas, that meant card acceptance was usually confined to a large city and its environs.
Three Connecticut banks decided to eliminate those geographic restrictions. My bank, Connecticut National Bank of Bridgeport, Hartford National Bank and First National Bank of New Haven had built credit card bases in our respective areas. We joined together to form the Charge Account Plan (CAP) – the first bankcard interchange in New England. Additional banks in Massachusetts and Rhode Island soon joined CAP.
Ultimately all agreed to give up their logos and reissue their credit cards using the CAP brand. A bank logo was like a sacred cow – that a number of New England banks would “brand” together was revolutionary.
The new CAP logo was soon seen on merchandising establishments and advertising all over the Northeast. Each bank continued to do its own processing. The number of shopping locations was greatly expanded and the credit card volume of each bank steadily increased. A number of banks on the West Coast formed similar associations which later would become part of an international network.
Interbank Expands Interchange
Carl Hinke of Marine Midland Bank in New York founded a new credit card interchange called Interbank. Banks joining Interbank, which included the members of CAP, agreed to promote the interchange of member bank credit cards among member banks.
In October 1969, First National Bank of Boston, Shawmut National Bank and Merchants National Bank set up a chain of 100 banks throughout New England to promote the Interbank charge card. They adopted a small black and white Interbank logo which would appear on their credit cards and in their advertising. Each participating bank’s credit cards, except for the little Interbank “I” logo, looked different.
The marketplace was now loaded with different-looking bank credit cards that were confusing to both customers and merchant members. There were numerous complaints that merchants were not aware of the Interbank exchange and refused to honor the credit cards presented to them from banks not in their market even though the cards displayed the Interbank logo.
One of the major functions of Interbank was the establishment of specifications for sales tickets, imprinters, plastic credit cards and systems. Standards were absent and each bank was proceeding along its own way.
Chase Manhattan’s credit card operation was a classic example of the need for standardization. The bank had purchased thousands of DASHEW credit card imprinters from a Japanese manufacturer. They had also purchased card-embossing machines which produced credit cards with reversed embossed credit card numbers. In other words, instead of cards with raised embossing tipped with black ink, the numbers were impressed in the plastic.
In order to make the card numbers legible, Chase had a paint shop in which dozens of employees in smocks would fill in the grooves with blue paint. The cards were then wiped to remove the excess paint and set aside to dry. This presented a problem as the cards were not compatible with the more standardized Addressograph-Multigraph charge slip imprinters in use by most banks.
Check Credit – The Alternative
Although First National Bank of Boston had been a leader in expanding the Interbank network, it hadn’t always been so receptive to bank credit cards. Unsure of the efficacy of the product, but recognizing the need for easier consumer access to credit, the bank in 1955 created a new form of revolving credit to compete with credit cards called check credit.
Lines of credit were issued to consumers much on the same order as commercial lines of credit. But the bank made the credit available through use of personalized checks that could be used at any time. Check credit caught on with other banks and proliferated along with bank charge cards.
Banks that adopted both products had to set up separate accounts for each. That meant two separate revolving lines of credit to monitor and two monthly statements to prepare each month, resulting in added maintenance and mailing expense.
At Connecticut National Bank (CNB), we thought this system was inefficient, expensive and needed improvement, and so we set out to change it.
CNB Revolutionizes the Industry
As with any bank, cost cutting and profitability were always the goal at CNB. Not being as large as the big city banks, CNB was in a position to constantly test-market new systems and institute new ones quickly, and thus our bank had a reputation for innovation.
On June 9, 1966, I unveiled CNB’s “New Concept in Retail Credit” to the annual meeting of the Charge Card Bankers Association in St. Louis. The slide talk displayed the first pictures of the new all-credit-inclusive bank credit card, statements, aging reports, sales tickets, repayment tables and delinquency notices. A director of a major Boston bank commented that the new concept was “10 years ahead of the industry.”
On the next page is a sample of the world’s first all-inclusive bank credit card statement. Note that this credit card statement issued nearly 38 years ago looks very familiar and continues to be the model for today’s modern credit cards. This simple statement was capable of handling all types of revolving credit, including check credit and cash advances.
The bank, with the aid of a skillful attorney named Paul Shafer, had developed a new “Master Revolving Credit Plan Agreement” which encompassed all forms of revolving consumer credit as well as those to be developed in the future. Dan Hoyt, a gung-ho CNB computer technician, went to work maximizing the capabilities of the bank’s IBM computer system to implement the programming requirements of the new state-of-the-art system.
A fully descriptive monthly statement, similar to that of Macy’s, was introduced describing each purchase by date, name of merchant and dollar amount. No descriptions of goods purchased were provided. The new monthly statement included an accounting of “cash advances” that displayed an interest rate schedule separate from the accounting of credit card purchases. The costs of collating and mailing sales tickets and the preparation of a second monthly statement were eliminated.
Philosophy Follows Technology
In addition to computer programming changes, we updated credit philosophy and the operations which governed them to meet the challenges of a changing world. Credit lines were substantially increased and a new repayment schedule was implemented that allowed for repayment periods of as long as 24 months. Customers were now able to afford the payments on large ticket items such as furniture, refrigerators, washers, dryers and other major appliances.
Each month, the payment required changed to 1/24th of the new balance. This was a shock to many of the old time bank credit officers who believed customers should quickly pay off their balances in no more than 10 months to allow new purchases. Today payments are often extended to 36 months or more and waived for vacations, holidays and for whatever reasons the marketing people dream up. The goal today is to bring up the account balances and hold them in order to earn more interest income.
Check Credit Reborn
The Check Credit account originally developed by First National of Boston was now incorporated within the credit lines, which in most cases were raised. Thus was born “Instant Cash” – cash advances in any amount instantly available to bank credit card holders. Simple “Instant Cash” forms were available on the bank’s service counters. The customer would enter their credit card number, name, address, the amount of cash requested and their signature. Upon presentation to a bank teller, the teller would call the charge card department for an authorization and the money would be immediately advanced.
Cash advances were now available in any amount from $10 to the maximum of the customer’s credit line. There was no minimum loan restriction of $500, and the interest rate was far below those of the small loan companies. There was no requirement that a new loan application be completed for each new cash advance. The waiting period had been eliminated. “Instant Cash” was immediately available and could be used to purchase travelers checks and bank cashier’s checks, which guaranteed payment.
This took the place of the personal loan, which always required the completion of a new loan application, waiting during approval time of 24 hours or more and preparation and mailing of costly payment coupon books. Thirty-, 60- and 90-day retail accounts used by many retailers were now available to merchants to help move merchandise. Retailers opted to adopt the current 30-day plan, which provided a service-charge-free period and was less expensive.
Delinquency notices were prepared automatically and mailed at specified intervals. Individual delinquency aging reports were produced for use by the bank’s collection department.
CNB Lauded By the Industry
Feature articles were published in “Credit World,” “Bankers Monthly,” “Profit Previews” and other credit periodicals applauding our “new concept.” The phones at the CNB rang constantly and credit officers from around the world came to see what our new credit card product was all about.
Banks overwhelmingly adopted this new credit concept and have expanded their operations to a point where charge card revenue provides a higher return than any other banking service. CNB established new standards for the bank credit card industry that are still in effect today.
In the final installment, banks form processing centers, the ATM debuts and bank credit cards finally prosper.
Alexander Kish Jr. pioneered the development of the bank credit card at Connecticut National Bank in the early 1950s. During his 40-year career in banking, he was also employed by Hartford National Bank and later First Jersey National Bank, which subsequently merged with Fleet Bank and later Bank of America. 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 firstname.lastname@example.org.