The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
April 1, 1977 --------- ------. - Two I n to On e? After an initial period of rapid growth and confusion in the mid1960's,the bank credit-card industry evolved into a $25-billion system built around two nationwide organizations, BankAmericard and Master Charge. But now credit cards are entering a new phase. Major banks in California and elsewhere, which had originally offered either one or the other of the two competing cards, are now beginning to offer both cards. The results of this change are yet to be felt, but with more banks marketing the two cards together, pressures to rationalize further could push toward a single common card. The next few years of trial and error were filled with more lossesthan profits, and a large number of separate card designs fell by the wayside. Most banks eventually came to use only BankAmericard or Master Charge, which had soon outgrown their California origins and were widely accepted nationwide. Large Chicago and New York banks, despite their vast resources, had been unable to move beyond their regional markets ,with their own card systems,and finally came to adopt either one or the other of the two cards, to gain the merchandising advantagesof national coverage. Nationwide cards The original rush into the creditcard business stemmed from the desire of many banks to expand their profitable consumer-lending activities, and from their increasing ability to handle a masscredit operation through potentially low-cost computer systems.Various banks had experimented with credit cards in the 1950's,with indifferent success, but not until 1965 were operating techniques refined to the stage where profitable operations became likely. More banks then entered the field, attracted by such features as interchange arrangements between separate card systems and licensing arrangements for training new entrants, and more banks followed, pulled in to match competition. A major factor stimulating industry growth was the development of two national interchange organizations-Interbank (for Master Charge) and National BankAmericard (NBI). These organizations, formed by the card-issuing banks, helped develop new techniques to facilitate national usage of cards, and in the process reduced the costs of authorization, processing, and fraud losses.Both Interbank and NBI later developed arrangements with foreign banks for acceptance of their cards outside the United States.These international intercharge agreements encountered problems of acceptance among foreign merchants because of their inability to establish common names in different foreign countries, and this name/design (continued on page 2) ()f ()f ()f Safl FrarlCisc(J ilc,r of tile 8()ard problem wasn't solved until just last year. Dual-issuebackground Card-issuingbanks-the key element in any credit-card systemwere prohibited by NBI bylaws from issuinganything except BankAmericard. For a decade banks issuedonly one card. However, an Arkansasbank belonging to NBI went to court to establishits right to issueboth cards. (The NBI view was that the prohibition was necessary to enstJre--compet-ition between "the"two credit cards.)After a rather complex seriesof legal maneuvers, the Department of justice declined to approve NBI's restrictive bylaw on dual membership,and in May 1976NBI dropped its prohibition. In the meantime, NBI had been moving to achieve greater international acceptanceby developing a card with a name and design which would avoid problems of language and ties to particular banks or countries. Eventuallythe various international partnersagreed on a new name,Visa,for a card using the familiar blue, white, and gold stripesof the original BankAmericard. With the unveiling of Visa,the final barrier to dual membership was removed. Dual issuearrives California's Master Charge banks, which would have been reluctant to issuecards bearing a name developed by their principal competitor, felt no such restraint against using the new Visacard. Conse2 j ti-H?Fecierai ReSE::fve quently, two large California banks, United California and Wells Fargo, lastyear announced their intention to join NBI so that they could issue their customersboth the new Visa card and their existing Master Charge. Not to be outdone, Bankof America then announced its intention to issueMaster Charge,and other California banks quickly followed by joining NBI. Sotoday, most California banks are able to offer both credit cardsto their cardholders and to their merchants. Similar-c0rnpetitive reactions-in "-'-- other statesshould soon make dual issuea national practice. The main advantagefor banksis that it helps them compete better for merchant accounts.About onequarter to one-third of a bank's credit-card 'revenuescome from merchant fees, and the convenienceof dealingwith only one bank, rather than two for each card, could attract many new merchant accounts. Of course, this advantage can be quickly matched by competitors, so that once an important· bank in any market issuesa second card, others quickly tend to follow. Moreover, the costsof joining a second card systemare relatively small; heavystart-up costsare associatedwith the initial entry, not the addition of a second card. Somenew cardholder accounts may also be attracted by such a move, but with many banksoffering two cards,any specialcompetitive advantagesshouId be soon Bankswould benefit from the new accountsof customerswho like to deal with only one bank, but many other customers might prefer to deal with two separate banks in order to have two lines of credit. When the shifting of customers among banks is completed, there might not be any net gain in new accounts for any bank. Consumers and merchants Thus, on balance, the competitive gains of dual issue are likely to be modest for most banks because of the ease with which competitors can respond. I n contrast, cardholders should have some clear benefits. By obtaining two cards from their bank, customers would have a wider choice of businesseswhere they could make credit purchases. Even those using only one card should find more merchants willing to accept that card, because merchants in turn would find their banks willing to handle both cards. Smaller merchants in particular should like the convenience of dealing with only one bank. The dangers of an overexpansion of consumer indebtedness under a system of dual issue should be relatively slight. Customers would have the same credit limit that they would receive if they were applying for only one card. After all, the issuing bank would realize that it is dealing with the equivalent of one credit account even when it issues two cards. The practice of California banks in this situation is to set the appropriate credit limit and let the customer decide on the allocation between the two cards. Any analogy to the mass issue of unsoli3 cited credit cards of the 1960's is inaccurate. In fact, since Congress has forbidden unsolicited card issuance, customers must ask for the second card. On balance, the addition of a second card in customers' wallets should not change spending habits but shou Id give some greater convenience. One bank? The end result of all these developments may be the emergence of only one bank-card system-an entirely different outcome from:what was expected when NBl's prohibition against dual membership was challenged. If most merchants in the nation accept both cards, and if most cardholders have both available, why should there be two sys- tems side by side to handle the same type of transaction? . Even so, any change is likely to be gradual. For a while at least, the differences in services and in procedures of the two credit-card systems-and the preference of many banks for either one or the other card-will justify the continuation of two separate systems. BankAmericard (or rather Visa) and Master Charge will survive in the same fashion as the three major nonbank credit cards (American Express,Diners Club and Carte Blanche) by their ability to meet different customers' needs. Yet over the longer run, their similarities could become greater than their differences, and at that point the rationale for two separate systems could disappear. Robert Johnston !! EMEH • • 4Eln • E! U.l0WE:) • EpEA8N .o4 EPI EUOZP'v' • E>jSEI'v' • jJ© :u BANKING DATA-TWELFTH FEDERALRESERVE DISTRICT (Dollar amounts in millions) Amount Outstanding 3/16/77 Selected Assetsand Liabilities Large Commercial Banks Loans (gross, adjusted) and investments* Loans (gross, adjusted)-total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)-total* Demand deposits (adjusted) U.S. Government deposits Time deposits-total* States and political subdivisions Savings deposits Other'time deposits:j: Large negotiable CD's 94,831 72,252 1,696 23,546 22,135 12,404 9,267 13,312 93,845 26,782 992 64,469 5,385 31,526 25,505 8,929 Weekly Averages of Daily Figures Week ended 3/16/77 Change from 3/09/77 + 1,562 + 864 + 190 + 225 + 95 12 + + 282 + 416 + 1,151 + 56 + 726 + 214 - 110 + 189 59 + + 100 Change from year ago Dollar Percent + 7,277 + 7,196 'I671 + 699 + 2,539 + 1,615 - 445 + 526 + 6,461 + 2,989 + 554 + 2,801 - 819 + 6,364 - 2)74 - 3,691 Week ended 3/09/77 + + + + + + + + + + + + - 8.31 11.06 65.46 3.06 12.96 14.97 4.58 4.11 7.39 12.56 126.48 4.54 13.20 25.29 8.19 29.25 Comparable year-ago period Member Bank Reserve Position ExcessReserves (+)lDeficiency Borrowings Net free(+)/Net borrowed H H + 83 1 82 13 1 14 79 + 140 + 1,543 461 + 108 + + + 25 1 24 + + + Federal Funds-Seven Large Banks Interbank Federal fund transactions Net purchases (+)l Net sales H Transactions with U.S. security dealers Net loans (+)l Net borrowings (-) 310 *Includes items not shown separately. :j:lndividuals, partnerships and corporations. Editorial comments may be addressedto the editor (WiII(am Burke) or to the author. . . • Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.
@FedFRASER