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  Charge It!: An Insider’s History of the Bank Credit Card
Charge It!: An Insider’s History of the Bank Credit Card
Charge It!: An Insider’s History of the Bank Credit Card
 
By Alexander Kish Jr.                                                              
Third of three parts
 
For many banks, losses continued to mount as more and more banks continued to offer charge card services to their customers. Each bank had fully-staffed charge card departments and had installed special computers, bookkeeping machines, imprinters, telephone authorization lines – all geared up to operate 24 hours a day, seven days a week, holidays included. 

Qualified personnel who were familiar with revolving credit such as that offered by retailers were at a premium. The expense was immense with no profit projected in the immediate future. The volume of accounts in many cases was insufficient to cover the cost.

Bankers after many years realized that, if they were to turn the tables, expenses would have to be cut while systems were upgraded. The answer was consolidation of the processing functions. 
 
BAND OF BANKERS
Eastern States Bankcard Association (ESBA), one of the first processing centers to form in the United States, was incorporated as a not-for-profit business by a large number of banks, including the members of Interbank, to manage and process Master Charge transactions for its members. The association set up a state-of-the-art computer center in Lake Success, N.Y., which included back-up computers, back-up electric generating systems and other sophisticated authorization systems. Other credit card processing operations such as Western States Bankcard Association (founder of Master Charge), National BankAmericard Inc. and Atlantic States Bankcard Association set up similar operations throughout the country.

Data, including new account information with variable interest rates, payments and other account data, was transferred to the data center by means of CRT units in each bank with dedicated phone company circuits directly to the central database. For those banks not equipped with CRT units, sales tickets were mailed or transferred to ESBA by courier. 

ESBA prepared embossed credit cards which they mailed directly to the bank’s customers. Monthly statements (including the sales tickets) were prepared and mailed by ESBA. Initially, ESBA operated a “country club” system but later converted to a “descriptive billing system” after being deluged with an ever-growing mountain of paper charge slips.

Delinquent payment notices were automatically prepared and mailed by ESBA. All credit card authorizations were performed by ESBA in accordance with the bank’s criteria. Individual delinquency reports were prepared for use of the bank’s collection personnel.

The functions of the bank were now reduced to distributing and approving the credit lines and performing the collections from data submitted by ESBA. The bank could revert back to its normal banking hours. The task for keeping the systems updated and developing new credit card programs was the responsibility of ESBA’s specially trained technicians. Banks were assessed activity charges on a not-for-profit basis. Economy of scale provided a substantial reduction in costs.

ESBA, under the leadership of President Roland Eppley, had a very aggressive growth record and before long had more than 150 banks in the northeast region of the country, including a bank in Canada and one in Bermuda. Manufacturers-Hanover was the largest to use their services. New banks anxious to get into the credit card business were now able to enter this new field of revolving credit without large expenditures of capital for equipment. This scenario was repeated across the country and into foreign countries.
 
BANKS SET THEIR OWN RATES
Applicants for credit cards submitted their applications directly to member banks. The applicants agreed to accept the terms and conditions governing the credit card. The revolving credit agreements named the banks as the card issuer, responsible for approving the credit, collection of the accounts and, if applicable, acceptance of fraud losses. 

The processing companies, in effect, became the banks’ bookkeepers. Based on the data submitted to them by credit card issuing banks, the processing company would set up the required accounting records, prepare credit cards which they would mail, post purchases, cash advances and payments and mail the monthly statements. One of their main functions was providing merchants with authorizations 24 hours a day, in accord with the credit lines approved by the member card issuing banks.

The processing centers did not issue lines of credit, nor did they influence the setting of the finance charges or other fees. They were simply record keepers. Over the years, the retail credit agreements became longer and longer as federal legislators required more and more disclosures. In addition to disclosing credit limits, how payments were applied, how finance charges were computed, how billing errors were handled and the liability for fraudulent transactions, a host of other disclosures were required in the contracts between the card issuer and the borrower.
 
MASTER CHARGE AND BANKAMERICARD
It wasn’t long after Interbank was established that a number of other banks joined the Master Charge (later MasterCard) and BankAmericard (later VISA) programs, utilizing the various processing centers that had aligned themselves with one card or the other. ESBA, for example, was a Master Charge shop. Interbank faded into the sunset.

In the beginning, BankAmericard prohibited banks from operating both plans. Competition was fierce. A bank was either a Master Charge bank or a BankAmericard bank member. 

This was not in the merchant’s best interest as it required merchants to open a checking account at two separate banks, one with a Master Charge bank and another with a BankAmericard Bank. It meant trips to two different banks each day – an inconvenience to say the least.

The BankAmericard credit card restriction was eventually lifted. First Jersey National Bank – an ESBA member and therefore a Master Card bank – immediately became the founding member of Eastern States Monetary Services (ESMS), which was established to process BankAmericard transactions. A number of ESBA banks also joined this group. Two card processors, one for each card, now covered the northeast region.

Manufacturers-Hanover, ESBA’s largest bank member (often referred to as a “400 pound canary” because of its size), hired a consultant that issued a 40-page report setting forth the dire consequences that would befall the bank if it chose to add BankAmericard to its product line. 

Several members of ESBA, including yours truly, immediately established a pool, each one of us guessing how long it would take before Manny Hanny trashed the consultant’s report. The guesses were in the vicinity of two to six months. It was actually less than three months later that Manufacturers made the decision to join ESMS and issue BankAmericard credit cards in addition to their Master Charge cards. 

Other banks across the country quickly formed new processing associations to process both VISA and MasterCard cards. Most were already using processing centers and it was a simple matter with a little computer programming to accommodate both cards without the necessity of adding a lot of new equipment and systems.

Today neither ESBA nor ESMS exist, each having been acquired by either the MasterCard or VISA organizations, which bought all the regional processing centers on their road to dominance of the modern bank credit card market.

These organizations continue to evolve, with MasterCard International just announcing Aug. 31 that it was abandoning the association structure on which it was founded to become a publicly traded company. It will use some of the proceeds from the IPO to redeem shares of Class B common stock from approximately 1,400 existing financial institution shareholders worldwide, who will retain 41 percent equity interest in the company.
 
ATMs ADD NEW SERVICES
Although the “Instant Cash” program, which gave customers access to cash through their bank credit cards, was a giant step forward, it had one major drawback – it was not available during non-banking hours. 

That all changed drastically in 1971 with the introduction of the first multifunction Automatic Teller Machines at Citizens and Southern National Bank in Atlanta – an early adopter (1959) of the bank credit card. These new machines were capable of handling cash withdrawals and payments and deposits to charge card, checking and savings accounts. Cash advances were available 24 hours a day, seven days a week including holidays. It was no longer necessary to wait for the bank to open to perform any of these services.

It was not long after that that dozens of organizations sprang up across the country agreeing to accept transactions from other banks and credit card organizations. This quickly expanded ATM services across the country. In addition to the installation of ATMs in banks, ATMs were located in all types of shopping malls, retail stores, gas stations, street corners, casinos and wherever there were potential customers.
A few banks established tellerless banking offices, where everything was handled electronically. Citibank in 1977 launched CitiCard Banking Centers anchored by ATMs and the CitiCard. 

Ironically, with all the promises of ATM-driven tellerless banking in the ’70s and the fact that the number of ATMs in the United States has exploded to 383,000 units in 2004, the number of branches still continues to grow substantially each year.

Driven by national ATM networks like Plus (owned by VISA) and Cirrus (owned by MasterCard), the ATM nonetheless deserves credit for propelling the acceptance and use of bank credit cards to new heights.
Bank credit card networks have likewise made their mark on the ATM world. Prior to April 1, 1996, Plus and Cirrus prohibited their member banks from charging ATM access fees. Under pressure from its members and 15 states that had passed legislation allowing surcharges, the networks relented, opening the door on that date to banks being able to charge non-customers for using their ATMs. Before access fees, ATM growth had stagnated – there were only 139,134 machines in the market in 1996. Four years later, in 2000, the number of ATMs had nearly doubled to 273,000.
 
A MAMMOTH UNDERTAKING
Nowhere in the world has such a mammoth consumer convenience network been undertaken than in the revolving credit bank card area. Today, authorizations for purchases all over the world are transmitted in a matter of seconds. Purchase data is processed with the aid of state-of-the-art super computers talking to one another and the use of the space-age satellites overhead.

The expensive multipart sales tickets have been eliminated along with the need to daily transport tons of paper tickets by truck, train and aircraft. Card readers attached to cash registers now read the cardholder name and account number embedded in the magnetic stripe. The card readers are connected directly to the bank’s processing center. The cardholder’s account is instantaneously charged the amount of the purchase and credited to the merchant’s checking account.

There is no need for the merchant to prepare deposits and wait for credit. The cardholder is issued a duplicate copy of the cash register receipt setting forth his purchases, date, name and account number. The cardholder is also sent a monthly statement showing all his credit card transactions for the month in addition to any other types of credit used, including cash advances.

A network of giant processing centers are linked together to provide uninterrupted service. When one processing center goes down in one part of the country for any reason, data traffic is diverted to other processing centers which access back-up data. The precision which takes place by this worldwide communications network is truly amazing and is a tribute to the men and women of the free private enterprise system who built and maintain it.
 
 BANK CREDIT CARD PIONEERS
Much of the success of the bank credit card goes to the dozens of early banking pioneers and their managements who sweated out some very unhappy times in pursuit of their convictions that the bank charge card could become a viable banking product. I am proud to have worked with many of them. 

Some of the active bankers I recall and worked with were Bill Grimmond, Franklin National Bank, New York City – where America’s first bank credit card was launched in 1952; Ed Brennan and Bob Serafine, Trenton Trust Co.; Charlie Landrain and Herman Talke, Plainfield Trust Co.; Don McBride, Bank of America; Frank Reichart, Citibank; Karl Hincke, Marine Midland Bank, New York City.; Larry Fanto, Marine Midland Bank, Syracuse; Frank Lewis, First National Bank, Montgomery, Ala.; Arnold Brandemihl, Security Bank, Mich.; Fred Vesperman, County Trust, N.Y.; Bob Hughes, First Citizens Bank, N.C.; Evan Housworth, Citizens & Southern, Atlanta, Ga.; Dick Plumb, Mellon National Bank, Pa.; Bill Bierer and Edward Miller, Manufacturers-Hanover; William Bierer, Philadelphia National Bank; and Marcel Dion of Montreal.

Special recognition goes to Roland Eppley, president of ESBA, and the many processing centers across the country. They enabled hundreds of banks to afford and provide credit cards to their customers that otherwise would have been forced to pass that product by.
 
 
 
 
 
 
Credit Card Facts
As compiled by the American Bankers Association
 
Average interest rate: 13.9 percent in 2002
(Federal Reserve: The Profitability of Credit Card Operations of Depository Institutions, June 2003)
 
Average outstanding balance: $4,100
(Federal Reserve: Survey of Consumer Finances, 2001)
 
Average number of bank cards per person: 2.4
(Federal Reserve: Survey of Consumer Finances, 2001)
 
Average number of credit cards per person: 4.9
(Federal Reserve: The Profitability of Credit Card Operations of Depository Institutions, June 2003)
 
Percentage of people who pay off their balances each month: 55.3 percent
(Federal Reserve: Survey of Consumer Finances, 2001)
 
Total Visa and MasterCard accounts: 525.3 million in the United States in 2002
(The Nilson Report, March 2003)
 
Credit card fraud losses: $1 billion
(Federal Reserve Bank of Cleveland: Economic Commentary, September 2002)
 
Total consumer debt: $2.1 trillion
(Federal Reserve: G19 Consumer Credit, October 2004)
 
Total credit card debt: $784 billion
(Federal Reserve: G19 Consumer Credit, October 2004)
 
Consumers 30 days or more overdue on their bank card payments: 4.26 percent
(American Bankers Association: Consumer Credit Delinquency Bulletin, third quarter 2004)
 
Total Credit Card Issuers: more than 6,000
(Federal Reserve: The Profitability of Credit Card Operations of Depository Institutions, June 2003)
 
The first bank card plan was offered by Franklin National Bank, New York, in 1952. Revolving credit feature was created in 1958. 
(American Bankers Association: The Bank Card Business: Today and Tomorrow)
 
 
 
           
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 kishal1@cox.net.

Posted on Friday, September 30, 2005 (Archive on Thursday, December 29, 2005)
Posted by kdroney  Contributed by kdroney
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Current Rating: 4.33
Rating: 5
I was there,too.From 1965 to 1980.NOW AGE 91.Bud Ellis ABA and ICA
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I had worked at ESBA from 1979 to 1984.
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