The Evolution of the Credit Card
American Express, true to its name, was once a freight company. John Warren Butterfield was driving stage coaches across New York state delivering packages when he joined with Henry Wells and William Fargo, two freight agents on his line, to form American Express. From the beginning, Wells and Fargo had big plans, as witnessed by the little company’s name despite a limited territory in upstate New York. When Butterfield balked at aggressive expansion, Henry and William headed for California to launch Wells Fargo & Company.
William’s son, James Congdell Fargo, stayed behind at American Express and eventually rose to the presidency. In the 1880s James Fargo set off on a European vacation, armed with letters of credit bearing the signatures of the most prestigious bank presidents in New York City. But Fargo was still not able to cash checks abroad. When he returned home a miffed Fargo introduced the American Express Travelers Cheque that featured pre-set denominations that merchants would honor overseas. American Express had pioneered international consumer finance transactions.
For the first time consumers could carry a substitute for cash and purchase goods. But the ultimate convenience of a credit card was still generations away.
Birth of the Charge Card
By the early 1900s many of the financial instruments familiar to consumers today had been invented – buying on time, money transfers by wire and traveler’s checks. Small merchants also occasionally dabbled in cards customers could use on accounts. But there was still no credit card. That would begin to change immediately after World War II. The catalyst was a banker in Brooklyn, New York named John Briggins. The creative financier looked out the windows of his Flatbush National Bank and saw millions of men and women returning from military service. This stampede of soon-to-be consumers would need goods for their new houses and new babies and Briggins devised a way to make all that purchasing easier.
The Flatbush National Bank “Charg-It” card could be presented to local merchants who would pass the bill along to Briggins who paid the debt in in full. The cardholders would then have 30 days to re-pay the loan to the bank. It was a bolt of inspiration but the “Charg-It” could only be used at local participating merchants and was available only to account holders of the Flatbush National Bank.
In 1950, the Diners Club International was created to give business members the opportunity to make charges for meals and entertainment and in 1958 American Express introduced its American Express card. It was indeed a card, just a piece of cardboard with a name and account number typed on it. The company gave the world the first embossed plastic cards shortly afterwards. To help build its merchant network, American Express required a membership fee that would help inspire merchant confidence in the financial stability of the card holders. But like the Charg-It, the new American Express card was still a “charge card” and not a “credit card.” Balances could not be carried and the full balance was required to be paid before the next billing cycle began.
Hello, Revolving Credit
Enter the Bank of America. Amadeo Pietro Giannini, a second-generation Italian-America, opened his Bank of Italy in 1904 in San Francisco. In the aftermath of the great 1906 Earthquake, Giannini was making neighborhood loans from an improvised desk of barrels and wood planks as the city smoldered in ashes. A series of aggressive mergers by Giannini in the 1920s created the Bank of America, which was the largest commercial bank in the world by the 1950s.
Also in 1958, the Bank of America introduced its BankAmericard and with it, the “cashless revolution.” Consumers could carry a balance beyond 30 days, paying off the charges – with a dollop of interest, thank you very much – over as much time as necessary. Smaller banks had experimented with revolving credit but did not pack the financial wallop to make the process work. Big retailers like Sears and Mobil Oil also had introduced revolving credit for preferred customers but these cards were restricted to company stores.
The BankAmericard was tested in select California markets before being rolled out across the state with acceptance by over 20,000 merchants. The Bank of America unleashed thousands of free cards – again just pieces of paper with typed names and numbers – with $300 credit limits unsolicited on an unsuspecting California. Unsurprisingly, consumers were very fond of their new credit cards and before the year was out the Bank of America had issued two million cards by the end of 1959.
The bank also had a delinquency rate of over 22% and the program losses were in excess of $20 million. Bank officials quickly tightened controls, streamlined operations and educated the public on how “buy now, pay later” was not free money. It was not long before other banks hustled to cash in on the revolving credit groundswell. The First National City Bank (Citibank, these days) blanketed New York with The Everything Card. Scrambling to head off the BankAmericard, California mega banks Wells Fargo, the Bank of California and Crocker Bank banded together to issue the “Master Charge: The Interbank Card.”
Facing the Future
In the 1970s, the BankAmericard was untethered from the Bank of America and became the province of regionally owned banks across the globe. It was also given a new name – Visa. Master Charge countered by becoming MasterCard in 1979 and by the 1980s, after two decades of mergers and acquisitions, the credit card market had settled down to two major players. In 1985 Sears entered the fray with its Discover Card which became a distant third in the market and American Express has expanded its services to including a revolving credit card.
For most of us obtaining a personal credit card is a rite of passage to adulthood, the power and convenience of the financial instrument is integral to modern life. The arrival of the digital age of ewallets and smartphones has caused many to prophesize the end of the plastic card. But issuers are not planning to see their cards tossed on the scrap heap of obsolescence along with the answering machine and videocassettes. Microchip technology is making modern credit cards ever more secure and multi-function smart cards provide access to several accounts and rewards programs. Credit cards are becoming even more convenient as all that is required is a pass or tap at many retail terminals rather than a swipe. The near future may wind up being void of physical cards altogether but revolving credit will remain at the center of consumers’ financial lives.
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