At the beginning of the 1950s, the majority of banks did not promote consumer credit of any kind. If a bank had a consumer loan department, it was often found in the basement where no one could see the furtive borrower. Gradually, it became clear to the banks that, in contrast to their commercial loan customers, consumers were not as sensitive to interest rates. That difference meant that profit margins on consumer loans could be potentially much higher than on commercial loans. But it was not until the banking heavyweights, Bank of America and Chase Manhattan Bank, the country’s largest and second-largest banks, launched credit card operations that the banking industry entered the credit card field in earnest.
Initially, the bank cards operated much like the T&E cards except that bank cards required no annual fee. Consequently, since credit was extended on a thirty-day basis with no charge, the only revenue for the banks came from the discounts obtained from the participating merchants. The banks soon found, however, that these discounts were not sufficient to pay the operating costs of the cards. In 1958 and 1959, following the lead of the retailers, many banks introduced a new credit card plan that featured the option of repaying balances on a revolving credit basis. Aside from its attraction to cardholders, revenue from the monthly interest charge on balances usually made the difference between the profitability and no profitability of bank credit card plans.
The growth of bank credit card plans was slowed somewhat by startup and operational difficulties. A prime example was the Chase Manhattan Charge Plan (CMCP). Introduced in 1958 at about the same time BankAmericard was opening its operations on the West Coast, CMCP had 350,000 cardholders and 5,300 retail merchants by the end of its first year of operation. Cardholders were sent a single monthly bill. They were given a ten-day grace period to settle their bill, after which they were charged one percent of the unpaid balance. Credit could be extended for up to five months. Merchants were charged a 6 percent discount, with refunds on volume that could reduce this figure to as low as 2 percent.
By 1960, CMCP sales volume had grown to $25 million. However, the number of cardholders had fallen to 160,000, and as credit losses and operating expenses mounted, the entire operation fell back into the red. In January 1962, Chase Manhattan gave up and sold CMCP to Uni- Serve for $9 million. Uni-Serve was a new corporation that had been formed expressly for this purpose by Joseph P. Williams, who had gained experience in the credit card industry on the West Coast. Uni- Serve began to market the card under the new name of Uni-Card.
The demise of CMCP, coupled with the many operational difficulties experienced by the Bank of America, caused other banks to proceed very slowly. The general feeling at this early stage seemed to be that if the two largest banks in the country experienced problems and high expenses with their credit card operations, it was doubtful that smaller banks would be able to operate them profitably.
While other banks continued to have difficulties, Bank of America, in spite of its own operational difficulties, continued to grow rapidly. A major advantage was its large branch network throughout California, which gave it quick access to a large and affluent customer base. Because most bank card plans between 1959 and 1966 operated independently of each other, a large network was crucial to developing a sufficiently large cardholder and merchant base. Another key to its success was more apparent than real, as John David Wilson has noted in his 1986 book, The Chase. Unlike Chase Manhattan, which fully charged all expenses to its credit card operation, Bank of America chose not to charge the cost of funds or advertising to its Credit card operation. That practice allowed its credit card operation to appear profitable, while Chase’s more realistic accounting procedures showed its credit card operating at a loss. In 1966, Bank of America announced that it would license the operation of its BankAmericard across the United States. To compete with this formidable organization, several other large banks formed a second national card system, known as the Interbank Card Association.
The idea behind the national interchanges set up by BankAmericard and Interbank was to enable the cardholder to use a credit card for purchasing goods in areas served by other banks. Such an arrangement made it possible to transfer sales drafts from the bank of the merchant who accepted payment with the credit card to the bank of the cardholder for collection. Since merchants and cardholders were tied to local banks, a method was needed to transfer credits among banks if a cardholder served by one bank made a credit card purchase from a merchant served by another bank. The interchange, in effect, transformed local cards into national cards. By so doing, the cards became more useful to customers. In addition, since the size of the market became larger for merchants, the card also became more attractive to them. Formation of the inter-changes also put pressure on banks that were not already members to sign up in order to keep or generate business from the cardholding consumer, as well as from merchant depositors.
Some three years after its formation, Interbank did not have a satisfactory identification device similar to BankAmericard’s. Consequently, in 1969 it purchased the rights to “Master Charge” from the Western States Bank Card Association, and most Interbank members changed over to the Master Charge card. A year later, in 1970, as a result of pressure from BankAmericard franchise holders, the BankAmericard operation was spun off from Bank of America and placed under the control of the newly formed organization National BankAmericard, Inc. (NBI). NBI’s role was to unite member bank credit card operations and achieve a more uniform marketing plan. To do so, it was necessary to institute and enforce stringent operating regulations, which were backed by stiff fines. Eventually the Bank of America relinquished its central role in the bank interchange organization. As a result, the NBI and Interbank organizations became somewhat similar in structure, and both are now completely independent entities. The close of the 1960s marked the end of the first major period of expansion for the universal credit card industry. Through much effort, the groundwork had been laid for a period of major growth. National and international credit networks were in place, and the process of consolidation had begun. The earlier distinctions between the T&E and bank cards had been largely erased, and both now operated in fairly similar fashion.
The banks had also overtaken the T&E companies in number of cards issued and held a secure lead in that area. The one major remaining distinction was the annual fee imposed by the T&E cards. In the T&E field, Carte Blanche, Diners Club, and, in particular, American Express dominated the industry. Among bank cards, the two competing interchanges—Interbank and NBI—were clearly the leaders. What was needed was a mechanism to generate the large cardholder base needed to move to the next level of growth.