Alexander Kish, Jr. Retired Credit Card Manager

Credit Cards Replace Cash
 

After decades of transporting mountains of sales charge tickets  and credits by armored car, trucks airplanes and trains and couriers,, state-of-the-art technology has caught up with the credit card.  With the advent of electronic cash registers and credit card authorization devices as part of a worldwide electronic network, credit card purchases are immediately charged to a cardholders account and funds transferred to a merchants bank account. 
    Credit cards are safer to carry rather than a large sum of cash.  The loss of cash or theft of cash cannot be recovered.  The credit card on the other hand guarantees payment to the merchant.  Fraudulent charges are absorbed by the issuing credit card agency.  Rental car agencies and hotels demand a credit card transaction rather than cash down payments.  The credit card provides identification in the event a car renter decides not to return the automobile as has happened in the past.  It also assures that payment is guaranteed in the event persons leave the hotel without paying their bill.
    Today, the smart traveler does not leave home without his credit card.

medium of exchange

Any item that is widely accepted in exchange for the goods and services offered to consumers in a given market.  Examples are currency and credit cards.  In the past no one thought of a credit card as being a medium of exchange.  However, it has in many instances replaced cash and millions of credit cards are  accepted in place of cash by retailers around the world.  Dating back to biblical times there have been many forms of a medium of exchange including beads, shells, coins, jewelry,  paper currency, drafts, etc.  Today, credit cards rule the roost.

Various Revolving Credit Plans set the Stage for Future Developments

Going back in time and as best my memory serves me, the bank credit card had a rough beginning and was slow to be accepted by the public and bankers alike.. It is reported that Western Union was issuing a metal credit card to their preferred customers in 1914 which was referred to as  "Metal Money'.  Pullman had issued credit cards to select customers who regularly traveled their trains from coast to coast.  As early as the 1930's a number of department stores were issuing charge plates and plastic credit cards. A bank in Manchester, Connecticut 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) which was honored by the member merchants.  When the account was paid in full, a new set of paper money would be issued.  A bank in New Jersey developed a similar plan which they issued "script".

Franklin National Bank in Long Island, N.Y., in 1951, one of the early pioneers in the race to come up with a viable revolving credit plan, introduced the "Charge It" card.  The plan was operated by Bill Grimmond. This service was available to customers and retailers in the bank's service area.  They  concentrated on a  freezer food plan .  They would finance food freezers under conditional bills of sale repayable over a number of months.   They then  provided a 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.

Enter T&E Credit Cards

In  1949,  Diners Club offered a revolving credit card 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 1000 establishments where members could charge.  Citi-Bank acquired it in 1981.

American Express began credit card issuance in 1959.  Due to their worldwide recognition, they had 17,500 establishments  who would accept their card, a tremendous send-off for a great service.  This augmented their travel services.

 Carte Blanche, started by the Hilton Credit Corporation in 1959 was sold to Avco Delco, Cleveland, Ohio in 1969.  Similar Travel & Entertainment 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.   Income was derived from annual fees and the discounts of retail merchants who were members of the plan. 

Oil Company credit cards were on the market as early as 1914 further expanding credit card usage to more than 70,000 active members by 1967

J.C. Penny who originally proclaimed that they were a "cash only" store changed direction and began issuing credit cards in 1958.  Within the next ten years, they issued more than 12 million credit cards accounting for 38% of the store's total sales.  This encouraged more department stores to issue their own credit cards.

Need for Improved Bank Revolving Credit

Actually, banks were late comers to the scene.  A number of bankers realized 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. Under that amount, consumers were forced to use the Small Loan Companies who charged excessive interest rates.  Consumers applying for bank loans in excess of $500 were required to fill out long loan applications before being notified by the bank a couple days later that their loan applications was approved.  Refinanced  loans also required new updated applications and more waiting  for new loan approvals. Not a quick way to handle customers who were in a hurry to obtain or refinance a loan.  Coupon books were prepared and sent along with the consumer's loan check.  Ledger  cards were set up for each loan to which the monthly payments were manually applied by bookkeeping machines.

A number of Banks venture into uncharted waters.

Franklin National Bank, one of the early pioneers in the bank credit card industry started the first credit card operation in August 1951. In the following two years, almost 100 banks, large and small in the quest of a profitable operation, decided to meet the challenges of a new era.  Due to lack of retail credit expertise and large losses, a number of these banks dropped out.  As Harry Truman once said, "If you can't stand the heat, get out of the kitchen,"

Although reports of profitability were scarce, a number of banks decided to try their hand  and  forge ahead in an attempt to tame  this mammoth new critter.  Credit and fraud losses were running high. The charge card operation was 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.  (This resulted in a change of "Bankers Hours.") 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.  Additional telephone lines were installed to handle authorization calls from Merchant members.  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 cost of the operation.  However, increasing volume meant increasing the number of staff.  It was estimated that it would take at least 5 years of losses before the average bank broke even. 

The Opposition was tremendous.

Never did anything cause such commotion as a bank announcing it was going to issue credit cards.  Competitors immediately felt the need to retaliate and garner 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 "5 cent 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.  This was a sign of financial weakness.   Accountants fearful of losing the lucrative auditing of accounts receivable, warned that the banks were charging as much as 60% (5% sales charge fee for 12 months equals 60%) for their service.  This is something they could not afford.  Rather than argue the point, Bankers responded by referring to a nominal 50% mark-up on goods which using the accountant's formula would amount to 600%. 

Professionals including physicians and dentists  insisted they had a special client/patient relationship with their patients and would not permit third parties to participate in collection of their accounts.  Retail Credit Managers were especially vehement about bank credit cards being accepted in their stores.  They could see the handwriting on the wall.  They did a good job in convincing their managements that the their store would lose identity and the loyalty of its customers.  Large grocery stores claimed they operated on a thin 2% margin and could not afford to pay for the bank service.  J.C. Penny claimed they were a "cash" store and would always be a "cash" store. 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 who came first, the chicken or the egg.

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 one prominent lady legislator in New York who gained substantial headlines when she charged that banks were building lists of books that customers were reading.  This presented a serious challenge to consumer privacy as this information could be used to determine customer affiliations and personal living habits.  This of course was false as the only things transmitted over the authorization network were the customers account number which identified the card issuer, the customer. a merchant number and the total amount of the charge.  Descriptions of merchandise purchased were never recorded.

Hard nosed legislation drove City-Bank to move it's 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, Delaware.

I personally called on many Mom & Pop stores in an effort to sign 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 cost studies revealed the cost to merchants for carrying their own receivables was in the vicinity of 12%, 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

American Bankers Association - Major Opponent

Members of the American Bankers Association were vehemently opposed to the bank charge cards as a banking product.  The reasons were many.  Most of these veteran bankers could see the end of "Banker's Hours".  Accounting for millions of small purchases to be charged to individual accounts would be very labor intensive.  Massive amounts of accounting and communications equipment would be required.  A dedicated telephone authorization system would be required 24 hours a day, 7 days a week. Facilities to house a large staff of employees and equipment were required.  Bankers would now be working around the clock to manage huge credit card loan portfolios.

However, after World War II, a new breed of young aggressive men moved into the banking industry.  We were determined to meet the "Challenge of Change" and that banking would be streamlined for the convenience of the customer.  Heretofore, customers were required to fill out long applications for a loan. You had to prove you did not need the loan in order to have it approved.  My bank had a separate application for (1) auto loans, (2) personal loans, (3) home improvement loans, (4) collateral loans (5) second mortgage loans, and (6) 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 add on to it a new application was required regardless of the customer's payment record.  A letter was sent to the applicant's employer asking that his employment be confirmed.  (This 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 must be a better way and a change in philosophy.

The Charge Account Bankers Association (CABA), was formed for the purpose of developing revolving credit cards as a viable banking service.  Credit would be instantly available regardless of the time of day or location.   The American Bankers Association however, composed of many non-believers, rejected the CABA for membership.  In view of the opposition,  it would take decades to build a  profitable volume portfolio of charge card customers    It was amazing how attitudes have changed with the passing of time.  The banks who pioneered the revolving credit card are to be commended for their perseverance and hanging in there when the success of the new service seemed impossible.

Country Club Systems Cumbersome and Inefficient

Banks entered the fray using the systems 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 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 the sales tickets and hand 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.  There must be a better way.

A few banks faced with ever increasing 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 not trusting the computer would  handle the daily processing by Computer.  However, the following day they took the computer output and used it to hand post the transactions on individual ledger cards. They now had the cost of two overlapping systems. Computer processing was expensive and required substantial volumes to make it cost effective.

R.H Macy Leads the Way to Less Costly Accounting

  R.H. Macy, the worlds largest department store had developed a million dollar credit card operation using 'descriptive" monthly statements.  They bit the bullet and discontinued mailing of the individual charge tickets.  This was a tremendous advance in credit card processing.  The cost of manually sorting and daily mailing of thousands of sales tickets was 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.

Bank Credit Card Early Birds

The chart below lists the some of the early birds who stepped forward to advance the acceptance and growth of the charge card. These banks had credit card balances of $3 million dollars or more outstanding as of September 30, 1967.  A number of banks had established "Check Credit" under various names.   In 1965, Bank of America issued licensing agreements to other banks allowing them to issue BankAmericards.  Citi-Bank is reported to have issued the "Everything Card" in 1967 later converting  to Master Charge in 1969.

Source: School of Credit Card Business Development

The Chase-Manhattan Bank began operations in 1958.  Four years later sold it's unprofitable operation for nine million dollars..  The bank was not able to convince the large New York department stores that they should honor the Chase credit card.  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 card holders would be coming through their stores who did not carry the stores credit card and were therefore unable to make purchases there.  Store credit managers resented the intrusion into their business by the banks.  In 1969, Chase decided to take another crack at running a revolving credit card operation and repurchased it's old credit card system for $50 million dollars.

Purchase of Accounts Receivables-An Expensive Way to Build a Credit Card Base

Volume was 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 accounts receivables, were willing to sign on to a bank credit card plan provided the bank purchased their accounts receivable,  This would provide capital for the purchase of new inventory.  The bank would purchase the accounts at discounts based on 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 effort 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.  It was the price to pay for building a bank credit card portfolio.

Bank Credit Card Interchanges

A major weakness of the Bank Credit Card which held back growth was the fact that it was not  honored outside of  the bank's marketing area which was usually confined to a large city. Connecticut National Bank of Bridgeport, Hartford National and First National Bank, New Haven had built credit card bases in their respective areas.  They joined together to form the first bankcard interchange in New England.  They then proceeded to add more banks in Massachusetts and Rhode Island.  They all agreed to give up their logos and reissue their credit cards using the Charge Account Plan (CAP) logo shown on the right.  This logo was now seen on merchandising establishments and advertising all over the State.  Each bank continued to do its own processing. A copy of one of the early ads naming all the banks in the CAP interchange appeared at the bottom. The number of Shopping locations were greatly expanded and bank 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.

Marine Midland, New York Initiates  Interbank

Banks joining the "Interbank" exchange 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-Master Charge card.  They adopted a small black and white Interbank  logo which would appear on their credit cards and in their advertising.  The market place was loaded with different looking bank credit cards which 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.  This called for a new common logo which would be promoted by all member banks.  This did not sit well with Citizens & Southern who had invested heavily in the promotion of their distinctive logo.  For a while they persisted  with the promotion of their own logo with the small Interbank letter "I" embossed on it.

One of the major functions of Interbank was the establishment of specifications for the sales tickets, imprinters,  plastic credit cards and systems..  Standards were absent and each bank was proceeding along its merry way.  One operation of interest was that of Chase Manhattan.  They had purchased thousands of credit card imprinters from Dashew, a Japanese manufacturer.  They had also purchased card embossing machines which produced credit cards with account numbers which  inverted the embossing of the credit card numbers.  In other words, instead of cards with raised embossing tipped with black ink, the numbers were in grooves.  In order to make the card numbers readable, 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  over to remove the excess paint and set aside to allow the paint to dry.  This presented a problem as the cards were not compatible with the Addressograph-Multi-graf imprinters in use by most merchants.

First National Bank of Boston Introduces "Check-Credit"

Not convinced that credit cards were the right way to go,  in 1955 First National Bank of Boston created a new form of revolving credit  to compete with them.  Lines of credit were issued to consumers much on the same order as commercial lines of credit.  However, the bank made the credit available by use of personalized checks which could be used at any time.  Other banks soon added this form of credit to their product line setting up separate accounts for the charge card and the Check-Credit accounts.  Banks now had two separate revolving lines of credit to monitor.  Two monthly statements to prepare each month and added maintenance and mailing expense.

The Master Revolving Credit Agreement developed and implemented by Connecticut National Revolutionizes Charge Card Industry.

 "Cost cutting and profitability were long the goal of the Connecticut National Bank in Bridgeport (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.    No question about it, CNB although not a leader in volume was the undisputed leader in innovation. On June 9, 1966 , CNB unveiled its, "New Concept in Retail Credit" to the members of the Charge Card Bankers Association at their Annual Meeting held in St. Louis.  The slide talk presented by Alexander Kish, Vice President in charge of consumer loan operations, displayed the first pictures of the new all credit inclusive bank credit card, statements, aging reports, sales tickets,  repayment tables, delinquency notices etc. 

Pictured below is a sample of the world's first all inclusive bank credit card.  Note that this credit card issued over 35 years ago continues to be the model  for today's modern credit cards. Immediately under it  is a sample copy of the descriptive monthly statement exhibiting 30, 60 and 90 day revolving credit transactions.   This simple statement (3rd picture below) was capable of handling all types of revolving credit including "check credit, cash advances etc.   The first and second pictures display a few of the special multiple part sales tickets which would be identified and recorded in the computer by a simple two digit code.

      The bank with the aid of Paul Shafer, a skillful attorney 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.  A gung-ho computer technician, Dan Hoyt,  had gone to work to extract the many  capabilities of the computer to carry out the programming requirements of the new state-of-the-art system.  In addition to the computer  programming changes, the credit philosophy and operations which governed them were advanced to meet the challenges of a changing  world..

A fully descriptive monthly statement (similar to that of Macys) was implemented 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" including an interest rate schedule separate from the accounting of credit card purchase.  The cost of collating and mailing sales tickets and the preparation of a second monthly statement was eliminated.  .

Credit lines were substantially increased and a new  repayment schedule was implemented which 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 the like.  Each month, the payment required changed to 1/24th of the new balance.  This was a shock to many of the old time credit men who believed customers should quickly pay off their balances in no more that ten (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.

The "Check-Credit" account, originally developed by First National of Boston, was now included within the credit lines which in most cases were raised.  The bank had previously set up separate accounts since September 1955. The added cost of dual statement preparation  and the attendant mailing expenses were eliminated.   Actually, it doesn't matter whether a customer uses a credit card or a check for his purchases or other expenses..  One payment a month will suffice.  I question why banks today will approve large credit lines for the credit card  but will restrict the amount which can be used to write checks  for "cash advances".

"Instant Cash" program revolutionizes Personal Loan Industry.  With the development and implementation of the Master Revolving Credit Plan by Connecticut National Bank,  "Cash Advances"  in any amount were instantly available  to bank credit card holders.  Simple "Instant Cash" forms were available on the bank's service counters. The customer would enter his credit card number, name, address, the amount of cash requested,  and his 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 $10.00 to the maximum of the the customer's credit line.  There was no minimum loan restriction of $500.00.  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.  "Intant Cash" was immediately available.

   This took the place of the personal loan which  always required the completion of a new loan application and approval time of 24 hours or more and preparation and mailing  of costly payment coupon books.

30, 60 and 90 day retail accounts used by many retailers were now available to merchants to help move merchandise.  Retailers have opted to adopt the current 30 day plan which provides a free service charge period which is less expensive to the retailer.

Travelers Checks and Bank Cashiers Checks were available.  "Cash Advances" could be used to purchase American Express Travelers Checks as well as other travelers checks and Bank Cashier's Checks  which guaranteed payment.

Delinquency Notices were prepared automatically and mailed at specified intervals.

Individual Delinquency Aging Reports were produced for use by the Bank's Collection Department.

 Feature articles were published in "Credit World", "Bankers Monthly", "Profit Previews" and other credit periodicals.  The phones at the Connecticut National Bank rang constantly and credit officers from around the world came to see what the Bank's , "New Concept in Retail Credit" was all about.   Most banks adopted this new credit concept and have expanded their operations to a point where Charge Card revenue has provided a higher return than any other banking service.  CNB had established new standards for credit card issuance for the bank credit card industry which after 35 years are still in effect today.

Automated Teller Machines (ATM) makes debut.

Although the "Instant Cash" program was a giant step forward, it had one major drawback.
It was not available during non-banking hours.  Along came the ATM to fill the gap.  An ATM had been developed which could accept deposits and withdrawals from credit card accounts, savings and checking accounts.  The ATM was activated by a plastic card, the same size as a credit card, and embedded with a magnetic stripe containing a credit card number, personal identification number (PIN) and other data..  These machines were installed in all bank offices which now made banking possible 24 hours a day, seven days a week.

    It was not long after that dozens of organizations sprung up across the country agreeing to accept transactions from other banks and credit card organizations. .  This quickly expanded the ATM services across the country.  In addition to the installation of ATM's in banks, they expanded into all types of shopping malls, retail stores, gas stations, street corners, casinos and wherever there were potential customers.

Not-for-Profit Processing Centers Save the Day

Fpr many banks, losses continued to mount as more and more banks continued to offer Charge Card services to their customers. Each bank had duplicated full charge card departments, installed special computers, bookkeeping machines, imprinters. telephone authorization lines and geared up to operate 24 hours a day, seven days a week, holidays included.  Qualified personnel who were familiar with retail 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.  Eastern States Bankcard Association (ESBA), one of the first processing centers to form across the country was incorporated as a not-for-profit business by a large number of banks   The Association  set up a state-of-the-art computer center in Lake Success, New York which  included back-up computers, generating systems  and other sophisticated  authorization  systems.  Other credit card processing operations such as Western States Bankcard Association, 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 lines directly to the data base.  For those banks not equipped with CRT units, sales tickets were mailed or transferred to ESBA by courier.  From this data, ESBA prepared embossed credit cards which they mailed directly to the banks 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 tickets).  Delinquent payment notices were automatically prepared and mailed by ESBA.  All credit card authorizations were performed by ESBA in accord 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 it's 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 they had over 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.  Of course this scenario was repeated across the USA  and into foreign countries.

Neither VISA nor MasterCard Processing Centers Issued Credit Lines or Set Interest 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 who was responsible for approving the credit and collection of the accounts including 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, neither 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 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 Advance

It wasn't long after that Interbank and a number of other banks Joined with Master Charge and BankAmericard programs.  However, banks, especially those overseas were unhappy about promoting Bank of America in their marketing areas. In the beginning banks were not allowed to operate both plans.   You were either a Master Charge Bank or a BankAmericard Bank member.  Competition was furious.   BankAmericard changed its name to VISA. MasterCharge changed to MasterCard.   MasterCard banks were not permitted to offer VISA credit cards. This was not in the merchant's best interest as he had to open two checking accounts, one with a MasterCard BanK and one with a VISA Bank. It meant trips to two different banks each day. It was inconvenient to say the least.

The VISA credit card restriction was lifted.  The First Jersey National Bank immediately became the founding member of Eastern States Monetary Services (ESMS),  to process VISA transactions.   A number of ESBA banks also joined this group.  Manufacturers-Hanover, ESBA's largest bank member (often referred to as the "400 pound canary" because of its size),  hired a consultant who issued a 40 page report setting forth the dire consequences that would befall the bank if it chose to add the VISA card to their list of retail products.  Several members of ESBA immediately established a pool each one guessing how long it would take before Manufacturers-Hanover  trashed the consultant's report.  The  guesses were in the vicinity of two to six months.  It was less than three months later that Manufacturers made the decision to join ESMS and issue VISA credit cards in addition to their MasterCards.  Other banks across the country quickly formed new processing Associations to process both  VISA and MasterCard credit 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.

Automated Teller Machines (ATMs) Add New Services

The early 1950's saw the introduction of newly developed Automatic Teller Machines which were capable of handling cash withdrawals, payments and deposits  to charge card accounts, 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.  The major drawback was the expense of installing the ATMs and maintaining them.  Customers were not eager to pay for these new services and decided they would continue their trips to the bank.
A small number of banks continued to work with them and set up a few tellerless banking offices where everything was handled electronically.  Citi-Bank in 1977, launched CitiCard Banking Centers anchored by ATM's and the CitiCard. Decades later, many customers have come to realize the value of this instant service and the number of ATM transactions continues to grow.
    Automated Teller Machines (ATM) were installed at all banking offices.  This allowed bank customers the ability to deposit and withdraw funds from their credit card accounts, checking accounts and savings accounts during hours when their bank was closed.
    Since then special card readers have been installed in major retail  stores which require a an ATM card with a PIN (personal identification number) for access to the customers checking accounts.

Individual Bank Credit Card Pioneers

Much of the success of the Bank Credit Card Plans goes to the dozens of the early banking pioneers and their managements who sweated out some very unhappy times in pursuit of their convictions that the Charge Card could become a viable banking service.  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, New York;  Ed Brennan and Bob Serafine, Trenton Trust, New Jersey; Don McBride, Bank of America; Frank Reichart, Citi-Bank; Charlie Landrain and Herman Talke, Plainfield Trust, New Jersey;  Karl Hincke, Marine Midland, New York;  Larry Fanto, Marine Midland, Syracuse; Frank Lewis, First National Bank, Montgomery, Ala; Arnold Brandemihl, Security Bank, Michigan; Fred Vesperman, County Trust, NY; Bob Hughes, First Citizens. NC;  Evan Housworth, Citizens & Southern; Atlanta, GA;  Dick Plumb, Mellon National Bank, PA;   Bill Bierer. Edward Miller, Manufacturers-Hanover.   Special recognition goes to Roland Eppley, President of ESBA and the many processing centers across the country,  who enabled hundreds of banks to provide this service who otherwise would be forced to pass it by.

Private Enterprise Provides Super Service to Customers Around the World

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 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 cardholders name and account number embedded in the magnetic stripe.  The card readers are connected directly to the bank's processing center.  The cardholders account is instantaneously charged the amount of the purchase and credited to the merchant's checking account. (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 additions 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 with back-up data.  The precision which takes place by this worldwide communications network is truly amazing  and a tribute to the men and women of the free private enterprise system who built and maintain it.

The Bank Credit Card World in the Year 2003

It was over 50 years ago that a small number of bankers introduced the bank credit card.  It was not very well received.  The vast majority of bankers called it "five and dime business" which did not belong in a bank.  The American Bankers Association also shunned this new innovative service as "not viable". The early bank pioneers however had a vision of the bank credit card becoming a major banking service.
    After many years of trial and error, and losses,, the credit card finally began receiving acceptance by the bankers and public alike.  From a modest $1000 credit limit in the beginning, credit card limits have soared over the years up to $50,000.  Credit cards today are big business and a large part of the economy becoming one of the most profitable departments in the bank.  Not a week goes by that my wife and I do not receive one or two  pre-approved applications for credit cards.   Competition is tremendous with a race to capture major market share.  This in many cases has resulted in the issuance of millions of credit cards to persons without much regard for their credit records or their ability to repay their debt.  This has led to a number of banks suffering  millions of dollars in credit losses forcing some to sell their creditcard  portfolios.
    Individual banks determine their own credit policies, credit limits, finance charges, annual fees, late charges, and grace periods.  Neither MasterCard  nor VISA have any part in this.  It pays to shop around.  Finance charges vary from 8.9 percent to over 20 percent.  Annual fees vary from FREE to over $50.00.  The banks who follow conservative credit policies are in a position to lower finance charges and annual fees  while others who suffer substantial credit losses are not.  All kinds of incentives are offered to consumers including free air travel, discounts on travel facilities, car rentals,  merchandise and cash rebates just to name a few.
    Although the cost of money is down substantially, the cost of unpaid uncollectible debt has risen substantially to offset it.    The current high unemployment rate is also keeping finance charges up.  In time this will change as the economy improves.
   

About the Author

Alexander (Al) Kish, Jr. joined the Consumer Loan Department of the Connecticut National Bank in Bridgeport upon his discharge from the US Navy in 1946. He worked in every position in the department from file clerk, bookkeeper, payment teller, collection manager, credit manager and finally 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 Al 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.

 Al 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 the First Jersey National Bank (now Fleet Bank soon to be Bank of America, )  where he took over the Consumer Loan Departments and  upgraded systems bringing profitability to the operations.  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; Chairman of the Instalment Credit Committee, Connecticut Bankers Assn and later Chairman of the Instalment Credit Committee, New Jersey Bankers Assn.  He instructed in bank card schools and gave lectures on Charge Card and Consumer Loan operations to numerous credit groups.

He retired from Fleet Bank (New Jersey)  in January 1987 and moved to River Bend, North Carolina where he lives with his wife Agnes.