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A Federal Reserve System Report

BANK
CREDIT- CARD
AND

CHECK- CREDIT
PLANS

A Federal Reserve System Report

To the Member Bank Addressed:

For your information, as

CARD

indicated in our Circular No.
6195? dated August 1, 1 9 6 8 .

CREDIT

Federal Reserve Bank
of New York

July 1968

Board of Governors ■ The Federal Reserve System

Price: $1.00 a copy; in quantities of 10 or more
sent to one address, 85 cents each. Copies may be
obtained from Publications Services, Division of
Adm inistrative Services, Board of Governors of
the Federal Reserve System, Washington, D .C .,
20551. Remittances should be made payable to
the order of the Board of Governors o f the Federal
Reserve System in a form collectible at par in
U.S. currency. (Stamps and coupons not accepted.)

PREFACE

The System Task Group on Bank Credit-Card and Check-Credit Plans was formed
as an ad hoc committee of the System Research Advisory Committee with the objective
of reporting upon and assessing recent developments in t i credit area. An announce
hs
ment in the March 1967 issue of the Federal Reserve Bulletin formally described the
reasons for the Task Group’ establishment and s t forth i s objectives:
s
e
t
T he Board of Governors of the Federal Reserve System announced on
M arch 1, 1967, that the System is undertaking a study o f recent develop
ments in the bank credit card and check credit field as one phase o f its
continuing interest in credit developments. Because o f the rapid spread of
a variety of credit card and check credit plans among banks in all parts of
the country, this type of credit is becoming one of the most im portant and
dynamic components of consumer credit. As such, the emergence of this
type of credit may have a significant impact on developments in the con
sumer credit area, both in extending the scope of expenditures made on
credit and in affecting the pattern o f consumer spending and saving.
T he study w ill assemble inform ation on the nature o f the various credit
card and check credit plans now in use by banks; assess the implications
o f bank activities in this area fo r bank competition, bank supervision, and
the banking structure; compile data on the am ount of this type o f credit
in relation to the total volume o f consumer credit; and evaluate the impact
that its further expansion may have on the financing o f consumer expendi
tures and on consumer savings. The inform ation is being gathered and
analyzed by a System task group made up o f members o f the research
staffs of the Federal Reserve Banks and the Board o f Governors. Results
w ill be published in aggregate form following completion o f the study.

The d t
e ails of the credit-card and check-credit picture continue to change rapidly,
and some of the findings may require modification in the l g t of these developments.
ih
Nevertheless, the basic objectives of t i study have been reached.
hs
Throughout the course of t i study, the work of the Task Group has been oriented
hs
toward the broader economic aspects of credit-card and check-credit developments as
they relate to the consumer, the structure of r t i i g commercial banking, and the public
ealn,
interest in general.
This report i based to a large extent on information collected by the Task Group
s
directly from the banks involved. At the time the Task Group was formed, there was
l t l information available— especially of a s a i t c l nature— on credit-card and checkite
ttsia
credit plans. To provide t i information, the Task Group suggested inclusion of a memo
hs
item on the Call Report of Condition requested in the spring of 1967. Similar requests
were made for subsequent c l dates.
al
To supplement t i information, the Task Group conducted a number of personal
hs
interviews with o f c a s of banks offering credit-card and check-credit plans, and in
fiil

December 1967 it conducted a special survey of all banks that reported credit-card or
check-credit plans on the October 1967 Call Report. The Task Group also examined
related credit-card plans offered by oil companies, department stores, and nonbank
credit-card companies. Finally, to insure the continued availability of current informa
tion, it assisted in the revision of the System’s current collection of consumer credit data
to cover bank credit-card and check-credit plans.
Members of the Task Group and their affiliation with the System were as follows:

M arg ret Beekel
Jack Cox (until year-end 1967)
J. H o w ard Craven (C h airm an )
Jared Hazleton
Irw in Jennings (examination consultant)
Robert Johnston
Patrick K ildoyle
Joe M cL ea ry
Robert Richard
K a rl Scheld
W alter Scott (legal consultant)
Joel Sarfati (secretary)
T ynan Smith
O rville Thompson
Ralph Young (until mid-year 1967)

Federal Reserve Bank ofCleveland
N e w Y o rk
San Francisco
Boston
San Francisco
San Francisco
N e w Y o rk
A tlan ta
Cleveland
Chicago
San Francisco
Board of Governors
Board of Governors
Board o f Governors
Board of Governors

Special counsel was provided unstintingly by Governor Andrew F. Brimmer, who
has served throughout the period of this study as the Board of Governor’s liaison with the
Task Group.
The Task Group is grateful, as well, to the many other individuals throughout the
Federal Reserve System who gave generously of their time and effort to assist in this
work. In particular, the Committee on Current Reporting Series provided invaluable help
in the preparation of surveys for the collection of data. Appreciation by the Task Group
is also extended to the numerous individuals outside the Federal Reserve System, especial
ly in the banking industry and the credit field generally, whose cooperation was an essen
tial ingredient to this study.

TABLE OF
CONTENTS

INTRO DUCTIO N

CHAPTER 1

SUMM ARY

CHAPTER 2

HISTORY AND CHARACTERISTICS OF
PLANS

7
9
11
11

Historical development
Geographic coverage
Major types of plans
Bank credit cards
Check credit
Travel-oriented cards
Other nonbank credit cards

13
15
16

CHAPTER 3

19
19

Selection of a plan
Credit cards
Check credit

22
23
24
29

Problems of implementation
Credit cards
Check credit

Staffing considerations
Profit and loss experience

30
30
30
33

IM PLICATIO NS FOR BANK OPERATIONS

General profitability
Credit losses

CHAPTER 4

34
35

35
36
36

EFFECTS ON BANKING STRUCTURE
Timing considerations: Effect of credit
cards on subsequent entry
Size considerations: Effects of credit
cards on small banks
A bility of small banks to operate profitable
credit-card systems with or w ithout com
petition from larger bank plans
Substitutes for independent credit cards

Geographic considerations: Impact on
market areas

CHAPTER 5

BANK SUPERVISION AND LEGAL
ASPECTS

39
41
41

Bank supervision
Legal aspects
Authority to operate credit-card or checkcredit plans
Supervisory authority
Various legal restrictions and limitations

42
43
46
47

Legal citations

CHAPTER 6

IM PLICATIO NS FOR THE CONSUM ERCREDIT AND RETAIL MARKETS

47
49

Credit-market setting
Prospective developments in consumer
credit held by financial institutions

49
51
51
51
51
52
52
57

Commercial banks
Sales finance companies
Credit unions
Consumer finance companies
Other financial institutions
Outlook

Credit-card potential in markets now served
by retail outlets and service establishments

CHAPTER 7

IM PLICATIO NS FOR THE CONSUM ER

Who uses credit cards?

Advantages and disadvantages of bank credit
cards for consumers

Does the use of credit cards increase
merchants’ costs, raise prices, and dis
crim inate against the cash customer?
Do bank credit cards lead consumers to buy
more than they would if they had to pay by
cash or check?
Do bank credit cards lead consumers into
debt, with serious results for the individual
and society in general?

59
60

CHAPTER 8

OTHER IM PLICATIO NS
Implications for monetary policy and inflation

61
62

Implications for the clearing mechanism

BIBLIOGRAPHY

APPENDICES (For list, see page 69)

LIST OF
TEXT TABLES
9

Table 1

n u m b e r o f b a n k s o f f e r in g o n e o r m o r e c r e d it c a r d AND CHECK-CREDIT PLANS, SEPTEMBER 30, 1967,

by Year Plan Was Started

NUMBER OF BANKS OFFERING CREDIT-CARD AND
CHECK-CREDIT PLANS, SEPTEMBER 30, 1967, by Year Plan
Was Started and by Federal Reserve District

BALANCES OUTSTANDING ON BANK CREDIT-CARD AND
CHECK-CREDIT PLANS, SEPTEMBER 30, 1967, by Federal
Reserve District

CHARACTERISTICS OF VARIOUS TYPES OF CREDIT-CARD
AFFILIATION

LOSSES AND LOSS RATIOS ON BANK CREDIT-CARD AND
CHECK-CREDIT PLANS: Charge-Offs During January-June
1967 Relative to Amounts Outstanding, September 30, 1967

BANK CREDIT-CARD LOSSES AND LOSS RATIOS, by Year
Plan Was Started

LOSS RATIOS ON BANK CREDIT-CARD AND
CREDIT PLANS, by Size of Bank

DELINQUENCY RATES ON CONSUMER LOANS AT COM
MERCIAL BANKS, SEPTEMBER 1967

NUMBER OF BANKS OFFERING CREDIT-CARD AND/OR
CHECK-CREDIT PLANS, SEPTEMBER 30, 1967, by Type of
Plan Offered and Size of Bank

IMPORTANCE OF CREDIT-CARD AND CHECK-CREDIT
PLANS IN TOTAL CONSUMER LOAN PORTFOLIOS OF
BANKS OFFERING SUCH PLANS, SEPTEMBER 30, 1967, by
Federal Reserve District

CREDIT OUTSTANDING ON BANK CREDIT-CARD AND
CHECK-CREDIT PLANS COMPARED WITH OTHER SE
LECTED FORMS OF CREDIT, DECEMBER 31, 1967

“ PLASTIC CREDIT” OUTSTANDING, DECEMBER 31, 1967

12
13

CHANGING IMPORTANCE OF COMMERCIAL BANKS IN SE
LECTED CATEGORIES OF CONSUMER CREDIT TRADI
TIONALLY HELD BY FINANCIAL INSTITUTIONS

CONSUMER LENDING BY RETAIL OUTLETS IN SELECTED
POSTWAR YEARS, by Type of Loan

CHECK-

POTENTIAL MARKETS FOR CREDIT CARDS: Distribution of
Consumer Credit by Financial and Nonfinancial Holders,
December 31 of Selected Years

INTRODUCTION

Both bank credit-card and check-credit plans
involve the extension to an individual of a pre
arranged line of credit available upon demand.
However, credit-card and check-credit plans
are not identical. Check-credit plans link the
extension of the line of credit to a checking ac
count without formal arrangement with a mer
chant. Bank credit cards, which are not tied
directly to a checking account, involve a threeparty arrangement among cardholder, bank,
and merchant. In brief, credit-card operations
involve the issuance to consumers of embossed

plastic cards that are used when the cardholder
makes charge purchases at stores belonging to
the card plan. The card-issuing bank bills the
consumer, who then has the option of repaying
within a prescribed period at no additional cost,
or on longer terms subject to a service charge.
The contents of the Task Group’s report are
summarized in Chapter 1. Chapter 2 provides
an overview of the detailed operations of the
various types of plans and of their historical
development. The implications of bank creditcard and check-credit plans for bank opera-

Credit-card
plans
Banks offering a plan (number) ................................................
197
Merchants participating (number) ..............................................
390,805
Accounts:
Total (number, in millions)
14.4
Active (number, in millions)
..................................... 5.1
Active relative to total (per cent)
35
Credit lines:
Average size (dollars) ...............................................................
355
Total authorized by banks (millions of dollars) ...................
5,113
Credit extended during September 1967 (millions of dollars)
125
Credit outstanding, September 30, 1967:
Total amount (millions of dollars) .....................................
633
Total per active account (dollars) .....................................
124
Total relative to authorized lines (per cent) ...................
12
Loss ratios (charge-offs January-June 1967 as
percentage of September 30, 1967 outstandings
1.97
Delinquency rates (per cent, based on dollar
volume of accounts delinquent 30-89 d a y s ) ................. ............1.99

Check-credit
plans
599
Not applicable

1.1
0.8
69
997
1,140
73
483
610
42
0.23
0.97

tions, banking structure, bank supervision and
law, consumer credit and retail markets, the
consumer, monetary policy, inflation, and the
payments mechanism are addressed in Chap
ters 3 to 8. Appendices provide supplementary
statistical information and more details on
specific aspects of credit-card and check-credit
plans.

The analysis in this report generally covers
developments through March of 1968.
The accompanying tabulation summarizes
data on bank credit-card and check-credit plans
in the United States. The statistics have been
derived from the Task Group’s special Decem
ber 1967 survey. The data reflect the situation
as of September 1967.

SUMMARY

1 . The development of bank credit-card
and check-credit plans has recently been one
of the most publicized aspects of commercial
banking. These plans not only have become
widespread within a short period of time but
also have evolved in a wide variety of forms
in adapting to differing environments and
opportunities. These banking services are still
expanding rapidly, and prospects for continued
change in form are undiminished.
2 . Of the two general categories, the credit
card is now the more important in terms of
credit volume, although more banks offer
check-credit plans. In September 1967, 197
banks extended $125 million through creditcard plans while 599 banks extended $73
million in check credit.
3 . The credit card tends to be a highvolume operation. For example, 23 per cent
of the banks offering credit cards had a volume
of more than $500,000 in September 1967,
but only 4 per cent of the banks with checkcredit plans reached that level. In fact, twothirds of the check-credit plans had a volume
of less than $25,000.
4 . Credit-card plans have exhibited a more
rapid rate of growth in recent years than have
check-credit plans. Of all plans surveyed in
September 1967, only one-third of the creditcard plans had been started before 1966,
whereas over half of the check-credit plans
were already in operation at the beginning of
that year.
5 . Despite the rapid spread of bank creditcard and check-credit plans, their importance
must not be exaggerated either in the area of
consumer credit or in that of commercial bank
ing activity generally. At the end of 1967, total
amounts outstanding under credit-card and

check-credit plans were only 1.5 per cent of
consumer instalment credit provided from all
sources and only 3.5 per cent of consumer
instalment credit held by commercial banks.
Indeed, if one restricts the comparison to just
those banks offering such plans, their out
standings under the plans are still only 6 per
cent of their instalment credit. Relative to total
bank assets, credit-card and check-credit out
standings are less than 1 per cent. Thus far,
at least, credit-card and check-credit plans are
still minor elements in both consumer credit
and commercial banking.
6 . Credit-card plans show considerable
variation in scope, ranging from one-bank,
locally oriented plans through regional plans
linking many banks to national interchange
systems. Many of the bank credit-card plans
have been expanded from their original local
retail emphasis by adding travel and enter
tainment features and cash-advance privileges,
to name two of the more important recent
options.
7 . The variety of organizational formats of
credit-card plans now provides a wide choice
for the individual bank that wants to “ offer”
a card plan— the operational burdens ranging
from minimal to full responsibility for all
aspects of a plan. Check-credit plans exhibit
a similar variety of forms. Some plans use
special checks for special accounts, whereas
others are formal overdraft arrangements tied
to existing checking accounts and using regular
checks.
8. Credit-card and check-credit plans are
natural extensions of the traditional creditgranting functions of commercial banks. The
basic legal authority of banks to establish such
plans seems generally to have been conceded,

started in 1955 or earlier, the ratio was only
1.03 per cent.
11. Recent entrants into the credit-card
field have profited from the experiences of
other banks and, in particular, have developed
more efficient techniques for minimizing risks
associated with mass mailings of unsolicited
cards. Mass mailing is not the same as indis
criminate promotion, and banks nowadays
seem to be exhibiting considerable caution in
the distribution of their credit cards. For
example, the cards are typically sent only to
persons meeting specified credit standards.
Despite some dangers, mass mailing seems to
be the most effective way of generating within
the period the volume of business that is neces
sary for a successful credit-card operation.
For these reasons, legislation forbidding the
unsolicited mailing of credit cards would seem
unnecessary and undesirable. Indeed, one of
the more serious consequences of such
legislation might well be to erect a barrier
against the entry of new banks into the creditcard field. Admittedly, unsolicited cards are a
nuisance to some recipients, but the problem
is not large over-all, and as a general rule the
liability of the unwilling receiver is readily
protected. Banks are increasingly recognizing
their responsibility to minimize this problem.
12 . Credit-card and check-credit programs
are operated most often by large banks, but
there is a definite role for the small-to-mediumsized bank in this field. Check-credit plans,
in particular, are readily instituted by small
banks, and recent innovations in the organiza
tion of credit-card plans provide expanded
opportunities for entry by the small bank. The
small bank does not have to face the problems
of starting a credit-card plan on its own. In
many areas it has the alternative of joining a
plan offered by a larger bank or a group of
banks. Under such circumstances it can act
merely as an agent to service merchants, or
alternatively, as a participating bank that
shares in varying degrees in the revolving
credit provided to its own customers. The
tendency is for large banks to open their plans
to at least agency participation. It should be

although some States have enacted specific
authorizations and related provisions. The law
in various respects is unsettled. Some pro
posals may require examination in the light
of the Federal antitrust laws and State usury
and related laws. Bank credit-card and similar
plans are covered under the recently-enacted
Federal statute relating to truth in lending.
9 . Credit cards, pose greater problems for
bank operations than do check-credit plans.
As the latter operate through checking
accounts and do not normally involve a link
with merchants, operational problems are
similar to those faced in banks’ conventional
activities. Credit-card operations, on the other
hand, are more complicated because of the
tie with the merchant involving the discount
ing of his sales slips, the monthly billing of
credit-card holders, the potential misuse of
cards, and the specialized processing require
ments.
Although control over the use of cards is
the major operating difficulty of credit-card
plans, banks have instituted methods for
reducing the misuse of cards. Nearly all of
the banks studied had established credit limits
on the cards issued. Customers are usually
required to sign their cards and are informed
of their credit limits. Purchases of more than
specified amounts require bank approval.
Misuse of cards has also been controlled by
periodic renewal of cards, by speeding up
sales-slip clearings, and by computer inspec
tion of accounts for over-limit purchases, un
usual activity, and delinquencies.
10 . Losses sustained under credit-card
plans do not appear to be excessive. For the
first 6 months of 1967 banks reported total
charge-offs (including those attributable to
fraud) equal to 1.97 per cent of amounts out
standing in September 1967. Check-credit
charge-offs over the same period amounted
to 0.23 per cent of outstandings. Furthermore,
the level of losses under card plans is probably
exaggerated by the heavy losses of the many
banks that began their plans in this period.
The average loss ratio for mature credit-card
plans is lower than for new plans; for plans

noted, however, that the agency arrangement
allows the large bank to tap the other bank’s
consumer credit market. On balance, creditcard and check-credit plans have not had a
significantly adverse effect on the size-structure
of banking.
13 . Credit outstanding under credit-card
and check-credit plans, though likely to in
crease gradually over time as a share of total
consumer credit, is not expected to exert any
significant influence on consumer attitudes
toward debt. There remain important credit
categories such as automobile finance and
home-improvement loans — which together
account for about half of total instalment
credit— that have not as yet proved suitable
for the credit-card approach. As the plans
grow, however, some changes should be dis
cernible in the composition of sources of lend
ing. Banks are likely to gain gradually at the
expense of some classes of finance companies
and retailers, despite the present reluctance of
major retail chains to accept bank-credit plans.
14 . Bank credit cards have had little
impact thus far on consumer spending habits
and on the prices consumers pay for goods and
services, and any future influence is likely to
be gradual. There is no indication of over
borrowing in general, and it is to the interest
of banks to administer their credit-card pro
grams to keep overborrowing to a minimum.
15 . Credit-card and check-credit opera
tions, like other recent banking innovations,
have some futuristic elements that are sugges
tive of a “ cashless and checkless society.” But
for the moment, at least, credit cards generate

more rather than less paper for banks to
process. The need to reduce the burden of
handling this paper should stimulate the
development of technologies that might also
be applied to an instant-payment mechanism.
16. Current examination procedures appear
to be sufficient to insure that banks follow
reasonable credit practices and develop effec
tive controls to prevent excessive losses.
Losses experienced to date— although heavy
in some cases during the start-up period and
sometimes weighted by the effects of unusual
instances of fraud— have not been a threat
to individual banks, and the basic soundness
of credit cards and check credit is demon
strated by the successful plans of many banks.
Federal bank supervisors, it appears, believe
that current powers and procedures are
sufficient to keep proper control over the
operations of individual banks, but they plan
to continue watching developments closely to
insure sound banking practices in this area.
17 . For the near future, credit-card and
check-credit plans will have little, if any,
impact on general credit conditions. At present
levels and rates of growth, these plans are not
large enough to have any noticeable effect.
18 . In view of the rapid changes still taking
place in this field, the Federal Reserve System
should continue to collect on a regular basis
statistics on the volume of credit-card and
check-credit plans and should review these
data systematically in order to keep abreast
of developments and to remain alert to new
implications of these plans for the various
public interests.

HISTORY AND
CHARACTERISTICS
OF PLANS

unexpectedly high cost of starting a creditcard program and the long time usually re
quired to overcome the initial losses incurred.
Aside from the need for additional equipment,
the banks had to hire extra personnel and make
large outlays for advertising. These expenses,
when taken together with a lack of experience
in this form of lending, proved too much of
an obstacle for many banks to overcome;
therefore many dropped out. Of the nearly
200 banks with credit-card balances outstand
ing in September 1967, only 27 had started
their card plans before 1958; many of these
banks are located in the New York and
Chicago Federal Reserve Districts.
Check-credit plans have developed inde
pendently of bank credit cards. The first one
was introduced in 1955 by the First National
Bank of Boston. Two years later there were
still fewer than 20 banks, many of them small
or moderate in deposit size, offering this form
of consumer credit. This early interest in check
credit was due at least in part to a desire to
find an alternative to credit cards that was less
costly to operate.
A major stimulus to bank credit cards came
in 1958 and 1959. By that time a number of
banks had become convinced that credit cards
could be profitable. The Bank of America
introduced its program in 1958, and toward
the end of the year Chase Manhattan Bank
began credit-card operations. Several other
large banks followed quickly' and by the end
of 1959 more than 40 banks had entered the
field, many of them in New York and on the
West Coast. After that there was a rapid in
crease in the number of banks offering either
credit cards or check-credit plans. Indeed, of
the nearly 800 plans reported at the end of

HISTORICAL DEVELOPMENT
At the start of the twentieth century a few
hotels began to issue credit cards to their
regular patrons, and as early as 1914 large
department stores and gasoline-station chains
were issuing cards. In those days credit cards
had three basic functions: (1) They were
often prestige items issued only to valued
customers. (2) They were more convenient to
use than cash. And (3) they provided some
degree of safety. During World War II the
use of credit cards virtually disappeared
because of Government restraints on con
sumer spending and credit. After wartime re
strictions were lifted, many that had previously
issued cards reinstated their plans, and in 1947
railroads and airlines began to issue their own
travel cards. In 1949 the Diners Club was
established to sell credit cards that were
designed for use in restaurants; later that plan
was extended to cover general travel and
entertainment purchases. The Diners Club card
was followed in a short time by similar
arrangements through American Express and
Carte Blanche.
Bank participation in charge-card credit
plans came rather late in the game. The
Franklin National Bank in Franklin Square,
New York, started the first of the current bank
credit cards in August 1951, but its program
did not achieve full-scale operation until April
1952. In the next 2 years almost 100 banks—
primarily small ones— entered the credit-card
field in the belief that profits would be very
substantial, but about half of them discon
tinued the service in a short time.
The extraordinary profits did not materialize
and, in fact, losses were prevalent, due to the

O
^

age of their programs by signing correspond
ents on an agency basis. And various banking
groups have agreed to interchange their cards,
that is, to honor cards in the other’s trade area.
One example is the Interbank group.
Agent banks have a limited role; they sign
up local merchants under a card plan and
forward the sales drafts of these merchants
to the principal bank, the one operating the
plan. The principal bank is usually responsible
for issuing cards to consumers, for operating
the central accounting system, and for carry
ing any revolving credit that is generated. In
some areas, however, agent banks do share
in the revolving credit and, less frequently,
issue cards in their own name through the
principal bank.
Partly because of the trend toward national
coverage, a large number of banks adopted
credit-card plans or some form of check credit
in the 2-year period 1966-67. In fact, slightly
more than half of the 800 plans in operation
at the end of September 1967 had been started
in the previous 21 months. Of the plans
started in 1966-67, 129 were credit-card and
277 were check-credit plans. This jump in
check-credit plans brought the total number
of banks having these programs to almost 600.
Meanwhile, credit-card banking was showing
a parallel rate of growth, with the total reach
ing nearly 200. If agent banks also were con
sidered, the actual number involved with creditcard plans would be raised by more than a
thousand. The distribution of these plans by
years in which they were started is shown in
Table 1.
By September 1967 the volume of outstand
ing credit under both plans combined passed
the $1 billion level. Credit cards accounted for
$633 million of the total with more than 5
million active accounts. Check-credit plans—
of which almost 800,000 were active— ac
counted for $483 million.
To summarize, the banking industry has
experienced three periods of credit-card and
check-credit growth. During the 2 years 1952
and 1953 almost 100 banks across the nation,
primarily smaller banks, began to offer credit-

September 1967, 235 were first established
during the 2-year period 1958-59.
But as it turned out, the two largest banks
ran into difficulty with their credit cards not
long after the programs were initiated. Chase
Manhattan appears to have been discouraged
by inability to generate sufficient volume, and
in January 1962 it sold its credit-card business.
The reluctance of the large department and
specialty stores in New York City to give up
their well-established credit offices contributed
to Chase’s difficulties. The Bank of America
also encountered difficulties in the early
phases of its program. Evidently these experi
ences discouraged many smaller banks from
entering the field.
Bank interest has been renewed in all types
of revolving credit plans in the past few years.
Between 1961 and 1965, only a handful of
plans came into existence, but in the summer
of 1965 the two largest banks in Pittsburgh—
Mellon and Pittsburgh National— introduced
their credit-card programs. (Both had had
check-credit plans for several years.) Within
a short time, reports in trade papers indicated
that bankers were again becoming interested
in credit-card programs. In contrast to the
situations in 1953 and 1959 many recent en
tries have made use of feasibility studies—
conducted by the banks themselves or by out
side marketing research organizations— to un
cover problems and determine profit potential.
Until recently, bank credit-card programs
were primarily local retail plans. Within the
last 2 years, however, many practices have
been introduced that have resulted in the
spread of the cards beyond their former
geographic limits. The Bank of America and
two firms offering travel and entertainment
cards— American Express and Carte Blanche
— have been offering their programs to other
banks for a fee. Bankers have been bombarded
with ideas and proposals relating to card pro
grams that would be national in scope. Banks
in various regions have grouped together to
study or introduce interregional plans. Some
banks, such as the principals in the Midwest
Bank Card program, have increased the cover

Table 1
NUM BER OF BANKS OFFER IN G O N E OR
M ORE C R ED IT-C A R D AND C H E C K -C R E D IT
PLANS, SEP TEM B ER 30,1967
By Year Plan Was Started

Credit-card plans

C heck-credit plans

Y e ar started

N ew
entries

Cum ulative
total

New
entries

1955 or earlier..............

26
230

1956 5 7 ............................

1 Cum ulative
total

1958 5 9 ............................

204

1960 6 1 ............................

262

1962 6 3 ............................

283

1 9 6 4 -6 5 ............................

322

1 9 6 6 -6 7 ............................

129

197

277

599

N o t e .— W h ere a span o f years is indicated, it covers 2
for exam ple, 1 9 5 6 -5 7 means 1956 and 1957.

full years—

card services. At the end of the decade the
second wave of interest in credit cards swept
the industry, leading not only to the entrance
of some of the country’s largest banks for the
first time, but also to the strong emergence of
check-credit plans. Current interest has in
duced almost all of the very large banks in
the country to offer either credit cards or check
credit, or both, and a number of the plans
have crossed State and regional boundaries
for the first time.

GEOGRAPHIC COVERAGE
To explain the variations in coverage among
Federal Reserve districts, allowance must be
made for the actual organization of each plan,
for a single plan can be limited to one city or
it can be a statewide system. Typically, state
wide or regional plans are most common where
branch banking is permitted, but they have
also been organized in unit-banking States
when banks have formed associations and have
signed agents to obtain local outlets.
Credit cards effectively blanket the entire
San Francisco District. With the exception of
Alaska, which has one localized plan, there
are statewide systems operated either by large
branch banks or by an association of banks in
each of the other eight States in the Twelfth
District (Arizona, California, Hawaii, Idaho,

Nevada, Oregon, Utah, and Washington have
such systems). Statewide systems similarly
dominate the Chicago District (Illinois, Indi
ana, Michigan, and Wisconsin— the exception
is Iowa where no banks operate card plans).
Statewide plans also operate in or are planned
for Colorado, Tennessee, Georgia, North Caro
lina, South Carolina, Virginia, and Connecticut.
Important regional systems— less than state
wide— cover large parts of the following
States: New York, Massachusetts, Pennsyl
vania, Ohio, Maryland, Kentucky, and Arkan
sas. Furthermore, in many of the above States,
plans operate in neighboring States through
agent banks.
In every one of the States having either
statewide or regional plans operational or
planned, at least one bank is linked to some
interchange system that reaches across State
boundaries. A major interchange system, Mid
west Bank Card, operates in the Chicago
District in the States of Illinois, Indiana, and
Michigan; in New England two systems link
Connecticut and Massachusetts. The two
national interchange plans are BankAmericard
and Interbank Card Association. These two
systems have similar coverage in the West and
in the Northeast, with the major difference as
of early 1968 being the greater strength of
BankAmericard in the South. But important
markets remain open. By the spring of 1968
neither national interchange system had signed
up banks in New York City, Chicago, or
Florida, although both were continuing to ex
pand in other areas.
Independent credit-card plans— that is,
those limited to a single bank, with no agency,
franchise, association, or interchange connec
tions— vary from large statewide operations to
a single-town plan. The largest statewide in
dependent plans are in Georgia and Michigan,
and large independent plans operate in the
New York City area. Alabama and New Jersey
have several medium-sized independent banks
offering credit cards. Texas has the largest
number of independent bank plans of any
State, but most of these plans are small. In
Florida, only small independent plans have

been operating. Generally, only in the South
are small or medium-sized independent plans
present in any number.
The distinction between independent status
and membership in an interchange arrange
ment should not be taken to imply anything
more than the geographic coverage of a par
ticular plan. The distinction does not reflect
differences in the size of the banks involved
because small banks can, and do, belong to
major interchange systems; on the other hand,
an independent plan may be operated by a large
bank.
In summary, credit-card plans are either in
operation or are planned in most of the
country west of the Rockies and east of the
Mississippi. As Table 2 indicates, the biggest
gaps are in the center— that is, in States
between the Rockies and the Mississippi; plans
in the Dallas, Kansas City, and Minneapolis
Federal Reserve Districts are relatively sparse.
There has been a marked trend toward plans
with wider geographic coverage. Of the 41
largest card plans, more than 30 represent
multibank plans, with either regional or na
tional coverage through ties with other banks.
Check-credit plans follow a geographic
Table

pattern somewhat similar to that of credit
cards, but there are some noticeable differ
ences. In terms of numbers of banks and levels
of credit outstanding, check credit is relatively
most important in the Northeast. Although the
San Francisco District has the greatest dollar
volume of check credit outstanding, this amount
is less than half of its credit-card total, and
the number of banks in that District offering
check credit is smaller than the number offering
credit cards.
A similar position with respect to outstanding
balances exists in the Chicago District, and if
agent banks were considered, the number of
banks involved with credit cards would also
be greater than the number offering check
credit. The number of banks offering these
plans in the Chicago District is large because
unit banking is predominant there.
Only in the New York, Boston, and Phila
delphia Districts are check-credit outstandings
high enough relative to credit-card balances to
suggest that local banks have promoted with
success check credit as a substitute for credit
cards. In the St. Louis and Cleveland Districts
the relative differences are so small that it is
really not possible to say that either plan is

NUM BER O F BANKS OFFER IN G C R ED IT-C A R D AND C H E C K -C R E D IT PLANS,
S EP TEM B ER 30, 1967
By Year Plan Was Started and by Federal Reserve District

Year started

Boston

N ew
Y ork

Phila
delphia

Cleve
land

Rich
mond

Atlanta

Chicago

St.
Louis

M in ne
apolis

Kansas
City

Dallas

San
Francisco

Total

Credit-card plans
1

1955 or ea rlier..
1 9 5 6 -5 7 .............
1 9 5 8 -5 9 ............
1960-61 .............
1 9 62 -6 3 .............
1 9 6 4 -6 5 ...............
1 9 6 6 -6 7 ...............

1
10

2
3

T o t a l................

2
1

1
1

1
23

31
3
2
5
129

11
1
1

197

4
2
5
2
1

1
1
7
3
1
1
14

4
27

13
13
204
32
21
39
277

599

Check-credit plans

1
1
28
3

1955 or ea rlier..
1 9 5 6 -5 7 ...............
1 9 5 8 -5 9 ...............
1 9 6 0 -6 1 ...............
1 9 6 2 -6 3 ...............
1 9 6 4 -6 5 ...............
1 9 6 6 -6 7 ...............

1
2
19
2
3
2
28

6
30

T o t a l................

2
2
11

10
7
2
2
9

5
43

1
2
35
2
6
11
54

111

23
3
1

N o t e .— W here a span o f years is indicated, it covers 2

1
18
2

full years— for

2
20
3
3
4
9

4
2
9
4
2
2
18

exam ple, 1 9 5 6 -5 7 means 1956 and 1957.

13
1

covered in the Federal Reserve System’s special

favored. But in the San Francisco, Chicago,
Richmond, and Atlanta Districts credit cards
are predominant. The remaining three Districts
— Dallas, Kansas City, and Minneapolis— are
not notable for any type, for in each of these
Districts amounts outstanding were less than
$10 million for each type, as is shown in Table
3 below.
Table

survey.

Bank Credit Cards
Bank credit cards are used chiefly as a
means of charging retail purchases. The card
plays the dual role of providing evidence to
the merchant that the bank has granted a line
of credit to the customer and of being a con
venient, accurate means of imprinting sales
drafts. A credit-card plan requires a direct
connection with retail merchants who agree to
accept the use of the cards for charging the
purchases of goods and services. The merchant
must open an account with the bank, if he
does not have one. The merchant may deposit
his sales slips either with the card-issuing bank
or with one of its agents. In either case he
receives immediate credit (less a discount) in
his own account. Thus, the bank in effect takes
over the financing of the merchant’s accounts
receivable. At the end of September 1967,
almost 400,000 merchants were honoring bank
credit cards. Nearly half were in the San Fran
cisco and a fifth in the Chicago District.
Credit cards are issued to consumers, who
may or may not be depositors of the issuing
bank. There is no charge for the card itself.
Generally, the larger banks have introduced
their cards by an unsolicited— but not indis
criminate— mailing of cards and/or applica
tions to selected individuals. The individuals
usually have been selected on the basis of their
deposit or loan relationship with the cardissuing bank. Normally, bank credit-card plans
require the owner’s signature on the card.
Under many plans the cards expire automati
cally within a given period, usually 1 year.
At the issuance of a credit card, the card
holder is usually assigned a credit line, con
stituting the maximum amount of credit the
bank will extend through the card. Only one
bank with a large plan reported issuing cards
with credit lines as low as $50; $100 was much
more frequently reported as the smallest credit
line assigned by the bank. According to the
September 1967 survey, only a small propor
tion of the banks with the largest card plans

B A LA N C ES O U TS TA N D IN G ON BANK
C R ED IT-C A R D AND C H E C K -C R E D IT PLANS,
SEP TEM BER 30,1967
By Federal Reserve District
(In millions o f dollars)

Federal Reserve district

Credit-card plans

C heck-credit plans

B osto n ...........................................
N ew Y o r k ..................................
Philadelphia..............................

2 1 .8
6 4 .8
1 2 .3

5 7 .3
9 8 .0
6 0 .6

C lev e la n d ....................................
R ich m o n d ...................................
A tla n ta .........................................

2 6 .9
2 8 .2
3 0 .6

3 2 .0
1 7 .2
2 2 .2

C h ica g o ........................................
St. L o u is......................................
M in ne apolis..............................

1 2 6 .2
1 2 .3

5 3 .4
11 .5
5 .6

K ansas C it y ...............................
D a lla s...........................................
San Francisco...........................

6 .4
8 .1
2 9 5 .3

9 .4
4 .5
111 .5

A ll districts................................

6 3 3 .0

4 8 3 .2

If plans announced since September 1967
were included, the above conclusions would be
modified by shifting the St. Louis and Kansas
City Districts relatively more toward credit
cards. Nevertheless, on the whole, the geo
graphic pattern of credit cards tends to be re
peated in the pattern of check credit, except
that the relative emphasis is stronger for
check credit in the Northeast.

MAJOR TYPES OF PLANS
A wide variety of credit-card and checkcredit services are being offered through com
mercial banks. Many are still in a formative or
transitional stage, but certain common charac
teristics have developed. Following is an over
all description of the plans, as of September
30, 1967, based on details reported by banks

Floor limits on services range higher, reaching
as high as $500 for airline tickets, for example.

reported that they had set no maximum limits
on the size of the credit line they might
possibly assign to one or another of their card
holders. Occasionally, in those plans in which
the bank’s general policy ceiling on credit lines
is relatively low, the issuing bank may allow
a cardholder to exceed his stated credit line
for a short time. The ceiling averaged $355
for those banks that set a limit on the size of
credit lines.

The merchant is charged a discount on his
sales slips by the bank. The discounts vary
widely, from as low as one-half of 1 per cent
of sales-slip volume to as high as 8 per cent,
with an average of about IV2 per cent. In
contrast, discounts on sales of airline tickets
are much lower, averaging about 1V2 per cent.
A common addition to bank credit cards is
the cash-advance feature. Almost $25 million
of the total dollar volume of $125 million of
credit extended through credit-card plans in
September 1967 represented cash advances.
In a few cases, banks have consolidated the
processing of all their small personal loans
through the credit-card operation. Others offer
overdraft privileges to their customers. That
is, in the event of an overdraft in a customer’s
checking account, the bank automatically
makes a cash advance and adds the amount
of the advance to the credit-card bill. Banks
are also varying their repayment schedules
to match the practices of some businesses in
offering 60- and 90-day interest-free grace
periods.

The bank credit card entitles the holder to
charge purchases at retailers who have signed
with the plan. The bank bills the cardholder
monthly, but the cardholder has the option of
repaying the full balance within a specified
grace period— usually 30 days— without any
service charge. If he does not pay in full within
the grace period, his account is placed on a
revolving-credit basis. Most card-issuing banks
require a minimum repayment— for example,
$10 a month.
Service charges on the unpaid balances re
ported in the special survey ranged from Va to
IV2 per cent per month. Of the 197 banks re
porting credit-card outstandings in September
1967, 156 were charging IV2 per cent per
month. Three-fifths of the banks offering cash
advances with their credit cards had an effec
tive monthly service charge of IV2 per cent
on such advances, although many banks
charged only 1 per cent. It should be noted,
however, that there is greater variability in
the charges for cash advances. Three-fifths of
the reporting banks computed their service
charges on the balances of their credit-card
customers after allowing for returns and pay
ments, while a fourth of the banks used open
ing balances, and the remainder used other
bases for computation. Charging on the open
ing balance, it should be noted, raises the
actual credit cost to the customer.

The total number of credit-card accounts is
very large— exceeding 14 million at reporting
banks in September 1967— and the actual
number of cards is still higher because of
duplicate cards inadvertently issued to the
same family or even to the same individual.
Only 35 per cent of the accounts were con
sidered active. As might be expected, the
mature plans showed a higher proportion of
active accounts.
Approved credit lines for all cardholders
totaled approximately $5 billion (three-fifths
of this was at banks with more than $1 billion
in deposits), but this figure represents a ceiling
that is well above actual usage. To illustrate,
total outstandings on September 30, 1967,
equaled only 12 per cent of total credit lines.
The largest credit line granted to any individual
cardholder in each of the largest banks aver
aged about $3,500, but the most frequently
approved line was closer to $350.
Banks extended about $125 million through

Most banks set floor limits on retail pur
chases, limiting the size of an individual trans
action that can be made without the merchant
obtaining specific approval by the card-issuing
bank. A commonly reported floor limit on
retail merchandise was $50, although the limit
seems to vary by type of store and/or location.

The so-called “check-guarantee” card—
which is not a credit card— is another device
that is sometimes tied to an overdraft account.
Essentially, for purposes of cashing checks, it
identifies the customer and indicates that the
bank will honor the check. Thus, the value of
ordinary checking accounts is enhanced by
broadening the acceptability of the check.
These cards usually bear an identification
number, an expiration date, and the customer’s
signature. In general, no direct relationship
between the merchant and the bank is re
quired. The actual risk to the bank is small
since the customer’s credit standing was
verified when the card was issued. This guaran
tee feature is often used to increase the com
petitive attractiveness of the bank’s overdraft
plans. But not all “guarantee” cards require
overdraft arrangements. Some banks issue
them as a service to preferred customers with
out requiring any formal overdraft application.
Such cases, of course, do not constitute either
a credit-card or a check-credit plan.

credit-card plans in September 1967, with $117
million accounted for by banks with deposits
of $100 million or more. Four-fifths of the
credit involved retail purchases; the remaining
one-fifth represented cash advances. A few of
the plans make no provision for cash advances.
This was true, for example, of plans that had
not been developed by the banks but rather
had been purchased from retail credit organiza
tions.

Check Credit
Check-credit plans are basically a form of
instalment credit connected with a bank check
ing account. In their variety of forms, checkcredit plans combine elements of cashiers’
checks, travelers checks, overdraft banking,
and “check-guarantee” programs.
Essentially, two general types of check credit
can be distinguished. First, there are those
plans relying on the individual’s regular check
ing account and using his ordinary checks, but
providing a prearranged automatic line of
credit that is activated the moment the indi
vidual’s account is overdrawn, thereby per
mitting the honoring of checks— up to his
authorized line— that would otherwise be
returned to the sender. These plans are often
called overdraft accounts. In some plans the
bank covers with a loan that is exactly the
amount of the overdraft; in others, the bank
credits the account with loans in $50 or $100
increments.
Overdraft plans often permit the customer to
borrow as a separate credit transaction without
having to overdraw his account. The loans are
then repaid on a revolving basis, sometimes
being liquidated as ordinary deposits are
made to the account or, in most plans, requir
ing more formal, separate loan repayments to
the bank. In addition some banks offer over
draft privileges to their customers through
their credit-card plans; these will be discussed
under credit cards, not check credit. In Sep
tember 1967, 274 banks reported offering
overdraft plans of one sort or another; most
of these were of fairly recent origin— having
been started in the 2-year period 1966-67.

The second type of check credit involves
plans in which a prearranged line of credit is
activated by employing a special checking
account and special checks provided by the
bank. This is the more prevalent type of check
credit; 410 of the 599 banks offering checkcredit plans in September 1967 provided these
separate checking accounts and special checks.
These checks may have special designs, or
they may be identical in format with regular
checks except for the encoded number of the
check-credit account. Sometimes their use also
involves the presentation of an identification
card by the check-user at the time he makes a
purchase. Such a card, like the check-guaran
tee card, is not a bank “credit card” since it
is not used to imprint a sales slip as a means
of payment in lieu of check or cash.
Checks with special designs indicating the
bank’s guarantee approach the nature of a
cashier’s check except that they are signed by
the customer, instead of by a bank officer, and
they activate credit instead of drawing on a
previous cash payment. In some cases the
special checks are pre-denominated and in that

ual bank. That is, a bank may inaugurate a
check-credit plan reserved for its largest depos
itors only, or a bank may institute more than
one check-credit plan, each being designed for
a different group of depositors. The free credit
given customers under credit cards (between
the purchase date and the expiration of the
grace period) generally is not present in checkcredit plans. Moreover, check-credit plans are
made available only upon application and after
bank approval, thus placing these credit lines
under the close control of the offering bank.

event compare closely with travelers checks.
Again, aside from the practice of having
travelers checks presigned, there is this differ
ence— namely, that the funds against which
travelers checks are drawn have previously
been deposited in cash by the traveler in a
special clearing fund, whereas in the case of
check credit these funds are either automati
cally borrowed from the bank at the time a
check is presented for payment, or— in the
case combining overdraft banking and pre
denominated checks— they remain in the
customer’s regular checking account. As the
customer writes checks on his check-credit
balance, he draws down his credit line. Re
payments to the check-credit account re
plenish the line, thus providing credit on a
revolving basis.

Compared with credit-card plans, the differ
ent method of customer selection under checkcredit plans has resulted in higher dollar figures
for individual accounts and fewer such
accounts, but for all banks with such plans,
the dollar aggregates are lower. Maximum
credit lines authorized under check credit
generally are larger than those for credit cards;
indeed, at many of the largest banks offering
both types of plans in September 1967, the
check-credit maximum line was more than
twice as large as the credit-card maximum for
an individual account. The size of the credit
line most frequently approved for check credit
by the larger banks, $1,100, was three to four
times as great as for credit cards, and the aver
age approved line, $997, nearly three times as
large. Moreover, the activity of check-credit
plans— 69 per cent of total accounts were
classified as active— was virtually double the
activity ratio for credit cards. In September
1967 the average amount of credit outstanding
per active account was $610 for check credit
compared with $124 for credit cards, while
the amount outstanding relative to total ap
proved credit lines was 42 per cent for check
credit against 12 per cent for credit cards.

Unlike the case of credit cards, the customer
participating in check credit must have a
checking account with the bank offering the
service. It is not necessary that he have a
regular checking account since special check
credit is operated through separate accounts.
On the other hand, overdraft plans do require
that the customer have a demand deposit
account or that he open such an account.
The connection with the retail merchant is
generally not found in check-credit plans. In
fact, check-credit services are not limited' to
use in stores that have entered into special
agreements with the issuing bank. In contrast
to credit cards, however, check-credit plans
are more localized, in that interbank ties are
not so well developed. Although two checkcredit plans have some national coverage,
neither has developed a very large dollar
volume. In fact, check-credit plans seem to
appeal particularly to small and medium
sized banks, in part because such plans are
less expensive than credit-card plans in terms
of advertising and maintenance costs. About
half of the nearly 600 banks with check-credit
plans had total deposits of $10 million to $100
million in September 1967.

Nevertheless, the selectivity exercised by
banks on check-credit customers has been so
high that only 1.1 million accounts existed on
September 30, 1967, in contrast with 14.4 mil
lion accounts under credit-card plans. Con
sequently, despite the fact that three times as
many banks offer check-credit plans as offer
credit cards, and despite the relatively intense
individual activity of check-credit plans, the

Check-credit plans also are more flexible
than credit-card plans, in that they frequently
can be adapted for specific uses of an individ

able to have much higher credit limits. With
certain exceptions, the customer is supposed to
pay his bill within the specified grace period. So
the major source of revenue for these plans is
not— as is true for bank plans— from revolvingcredit charges, but from the annual member
ship fee and merchant discounts (which tend to
be somewhat higher than those now charged by
banks). Customers are allowed to pay for air
and sea travel fares with deferred payments and
are charged interest on the unpaid balance.
T&E plans allow maximum extension of credit
varying from 12 to 24 months. Revolving credit
is also available when arrangements are made
with banks participating in a joint plan with the
credit-card companies. The revolving-credit por
tion is a relatively small part of T&E business.

aggregate results for check credit are over
shadowed by those of credit cards. Total out
standing balances under check-credit plans often
are smaller than credit-card balances when both
types of plans are offered by the same bank.
Moreover, for the United States as a whole the
volume of credit issued during September 1967
under check-credit plans was not quite $73 mil
lion, compared with $125 million extended
through credit cards, and total check-credit out
standing at the end of the month amounted to
$483 million, well below the $633 million in
bank credit-card outstandings.
Perhaps because check-credit lines tend to be
extended to preferred customers, the banks’
charges against unpaid balances were smaller
than the comparable credit-card charges. Gen
erally, the service charges range from 3 per
/4
cent to 1Vi per cent, with a very large majority
of the banks charging 1 per cent per month.
About half of the banks computed charges on
the basis of average outstanding balances.

These joint plans are not set up in such a way
that banks become involved with transactions
at the merchant level; rather they allow the card
holder to tap the banks’ credit resources for
revolving credit and cash advances. Under these
joint arrangements, the banks sign up customers
with the appropriate credit status (they are is
sued a card if they do not already have one),
and the bank offers the cardholder a line of
credit. This line is activated only when the cus
tomer indicates to the company on his monthly
bill that he wishes to repay on a revolving-credit
basis. Cash advances may be obtained upon re
quest at the bank.

Travel-Oriented Cards
The travel-oriented cards issued by American
Express, Diners Club, and Carte Blanche should
not be confused with bank credit cards. They are
issued and administered by nonbank corpora
tions. Some banks it is true have been associated
with certain aspects of these cards, such as ex
tending revolving credit to holders of these
cards; and this has probably led to the confusion
with bank credit cards. While travel-oriented
cards operate in a fashion similar to bank credit
cards on the merchant level, their emphasis is
different. They provide national and interna
tional coverage for charge purchases for trans
portation, hotel accommodation, and dining to
meet the needs of businessmen and tourists. For
this reason they are often called travel and en
tertainment or T&E cards, even though they can
be used for other kinds of purchases.

American Express’ plan is called Executive
Credit, and the minimum credit line is $2,000.
The cardholder also has the privilege of buying
travelers checks and of cashing personal checks
at any American Express office. Carte Blanche
offers its Bankers Club cardholders a minimum
credit line of $ 1,000 and the privilege of buying
travelers checks or cashing personal checks at
the offices of participating banks.
In October 1967 banks held just $16 million
in T&E credit compared with $640 million in
bank credit-card plans. Since cardholders may
obtain extended payment anyway without sign
ing up with a bank and since customers who
meet the strict credit requirements are also less
likely to borrow on an extended basis, it is not
surprising that the resulting volume of credit is

There are more important differences on the
customer side of T&E operations. These plans
not only charge an annual fee but also apply
certain credit standards more strictly than do the
banks— a minimum of $10,000 in annual in
come is usually required. As a result they are

nection with air transportation. While UATP
cards are used primarily for air travel, they may
also be used at a number of hotels, motels, and
restaurants throughout the world.
All UATP member airlines honor the cards
of other member airlines, and each airline bills
its cardholders for all trips charged on its card,
including flights made on other airlines partici
pating in the UATP. Thus, the cardholder re
ceives only one monthly bill, which is payable
within 10 days. There is no centralized account
ing system for these cards, but there is a clearing
arrangement whereby the member airlines pe
riodically clear their interline UATP charges in
a manner similar to bank clearings.
In addition to participating in the UATP, a
few airlines offer their own private credit cards,
which are completely separate from the UATP.
“On-line” cards are geared primarily for the
consumer market and thus have many of the
characteristics of other consumer credit cards.
Unlike the UATP cards, these private cards
must be ticketed by the airline issuing the card,
and at least a portion of each trip charged must
be taken on this airline. Another point of dif
ference is that revolving credit is an integral part
of these private cards. Cardholders are given the
option of remitting the entire balance within 25
days or paying the charge in instalments.

low. Banks participate in these joint plans more
as a customer service than for the credit gen
erated.

Other Nonbank Credit Cards
This section examines the credit-card plans
offered by major airlines, oil companies, depart
ment stores, and specialized companies.
Airline Credit Cards
The Universal Air Travel Plan (UATP) is a
cooperative venture in the credit-card field in
which all major airlines in the world participate.
It is the oldest credit card in the airline industry.
Presently 46 airlines issue UATP cards, and
138 airlines honor them. The UATP card is de
signed primarily for the use of businessmen, and
about 111,000 companies have UATP accounts.
Issuance of several cards to a subscribing com
pany is common, and in late 1967 there were
more than 1.5 million cards outstanding. The
total volume of credit-card extensions during
1967 was more than $1 billion. All cards issued
by airlines participating in the UATP look alike,
except that the cardholder’s identification num
ber has a two-letter prefix that indicates the air
line originating the card.
In order to open a UATP account, a deposit
of $425 is required, but this single deposit may
cover as many cards as a company may desire.
Interest is paid on the deposit, but it is com
puted in such a way that the more the card is
used, the less interest the cardholder will receive
on his deposit.

Oil Company Credit Cards
Practically all the major oil companies, and
quite a few lesser-known companies, have some
type of credit-card program. Typically, these
credit cards are of the standard form, in that
payment is due upon receipt of the bill. Very
recently, however, a few oil companies initiated
revolving-credit plans that permit the cardholder
to pay all of his balance or to pay as little as 10
per cent of his statement balance each month,
if he so desires. These plans have revolvingcredit charges similar to those used by the
banks.
There are no cardholder fees for oil cards.
According to industry figures, there were about
70 million active oil company credit cards in
existence in 1967.
Oil company cards may be used for a variety
of purposes, but the major charges on these

UATP cards are available in two colors. The
green card is used for travel internationally, and
the red card is limited to travel on the North
American continent. There are also cards desig
nated “P”, “K”, “Q”, and “X ”. The “P” card
may be used to purchase transportation for the
cardholder only. With a “K” card one may buy
tickets for himself or members of his firm who
do not have their own cards. With a “Q” card
one may obtain credit for anyone at all, includ
ing members of his own family. “X ” cards are
extra-privilege cards and enable the holder to
charge land accommodations as part of an air
tour, plus certain surface transportation in con

cards are for gas, tires, batteries, and acces
sories. Quite a few oil companies permit card
holders to charge larger purchases on an ex
tended payment basis. This differs somewhat
from a revolving account, however, and is ana
logous to consumer loans made by commercial
banks. While there are no standard charges for
extended payments throughout the industry,
cardholders typically are not charged for very
short periods, such as 3 months or less.
Many petroleum companies have agreements
among themselves to honor others’ cards in cer
tain areas. This is done primarily to extend the
geographical coverage of the cards. These ex
change agreements are usually entered into by
companies that do not serve the same geo
graphical areas. The exchanges may be either
bilateral or unilateral— that is, there may be a
mutual exchange, or only one of the companies
may accept the card of the other.
Over the past few years many of the major
oil companies have been extending the services
available through their cards, by signing up
hotels, motels, restaurants, and other types of
businesses to honor their cards. Oil company
cards are thus becoming, to some extent at
least, directly competitive with the major T&E
cards, since both are trying to establish relation
ships with the same kinds of companies. The
discount rates they charge also appear competi
tive with those of American Express, Diners
Club, and Carte Blanche. Typically, the rates
charged are about 4 per cent.
The major impetus behind this drive seems to
be a desire on the part of the oil companies to
provide their cardholders with a wider variety of
services, so that dormant accounts will be re
opened and larger charges will be made for gas
and related expenses. Oil companies are anxious
to generate greater use of their cards, for they
have found that the average credit-card purchase
at gas stations is nearly $5 whereas the average
cash sale is less than $3. It has also been sug
gested that holders of credit cards are more
willing to have minor repairs made and that they
have the oil changed more frequently, for ex
ample, than cash customers.
Charge-offs for oil company cards usually run

about one-half of 1 per cent. Some companies,
however, have experienced losses of as high as 2
per cent, part of which have been ascribed to
unsolicited mailings.
Department Store Credit Cards
Department stores have been involved in
credit cards for many years; an examination
of the credit plans of such national chains as
J. C. Penney, Montgomery Ward, and Sears
Roebuck will probably provide an adequate
view of the characteristics of credit cards offered
by department stores in general.
The J. C. Penney credit plan has been in
existence since 1958, and in 1967 it had about
12 million credit-card accounts that could be
considered active. Credit sales make up about
38 per cent of the company’s total sales. In 1967
Penney had 1,700 stores from which its credit
sales arise, and in the same year more than $1
billion was billed through its credit operation.
Of this total, about 90 per cent represented
credit advanced with Penney’s charge card. To
handle this large volume of paper, Penney has
set up 11 regional credit offices that are fully
equipped with third-generation computers and
deal only with the credit operations of the com
pany. All of Penney’s credit accounting opera
tions are handled in these centers; there are no
credit departments in the retail stores.
Recording of credit transactions at the store
level is by means of a cash-register imprinting
of punch cards. These cards are forwarded to
the appropriate regional credit office where they
are processed directly into the computerized
system.
Periodically, the regional credit office pro
vides stores with authorization lists for approv
ing sales in amounts above established floor
limits. These limits vary with season and geo
graphic areas. All accounts are on a monthly
billing cycle, and beginning balances that are not
paid within 30 days incur a monthly service
charge of 1Vz per cent or less as required by
certain State regulations. Instalment payments
are on a schedule of approximately one-tenth
of the balance up to $500. Amounts in excess
of $500 are due in 30 days.
Bad debt losses, net of recoveries, as a per

January 31, 1968, Sears had 8.7 million active
revolving accounts— active being defined as an
account with a balance outstanding during the
month.

centage of credit sales averaged less than 1 per
cent in the last five fiscal years.
Montgomery Ward’s “Charge-all” credit-card
plan, introduced during 1963, had about 6.5
million active cardholders by 1967, of which
about 4 million were billed in any given month.
“Charge-all” cardholders may use this optionalfeature plan as a 30-day, no-service-charge ac
count or take up to 24 months to pay with a
monthly service charge of IV2 per cent of the
opening balance.
The Sears Roebuck plan does not appear to
differ to any considerable extent from the es
sential features of the J. C. Penney or Mont
gomery Ward cards. The card incorporates a
30-day charge account with a 10-month revolv
ing credit account. Sears charges 1V2 per cent
of the unpaid balance at the beginning of each
month. In addition to being the largest factor

O ther Retail C redit C a rd s

In some areas there are specialized com
panies issuing credit cards that allow charge
purchases of goods at local small and medium
sized retail businesses. As in bank plans, the
companies’ revenues come from merchant dis
counts and interest on revolving credit. There
is no membership fee. The card is issued only
upon application. The cardholder has the op
tion of paying his bills on revolving credit and
being charged interest on the unpaid balance or
paying in full within a specified grace period
and avoiding any charges. Basically these re
tail credit-card systems are like the early bank
cards in that they are designed for local retail
use and seldom have the transportation or other
features now offered by many bank cards.
They are merchant-oriented in that they offer
to others a charge-account service competitive
with those of department and specialty stores.
In a number of cases, the local plan has been
purchased by a commercial bank to serve as a
foundation for a bank credit-card plan.

in the retail market, Sears is also the largest
holder of department store receivables. For the
year 1967, Sears’ sales were $7.9 billion, with
credit sales accounting for 57 per cent of the
total; 31 per cent was granted by way of the
Sears charge card, and 26 per cent through
Sears extended payment plan, which is primar
ily designed for higher priced goods. As of

IMPLICATIONS
FOR BANK
OPERATIONS
SELECTION OF A PLAN

Bank credit-card and check-credit plans are
important innovations in banking services.
However, the impact of these plans on bank
performance, organization, and operation is
likely to be far less significant than frequently
implied in the trade and in the public press.
Bank credit plans are only one of a number of
banking innovations in recent years, and the
development of these services has significant
implications for only a few of the many facets
of commercial banking activity.
Bank credit-card and check-credit plans are
an outgrowth of increased commercial bank in
terest in the expansion of banking services. This
interest has been stimulated both by changes in
the orientation of bank management and by
increased competitive pressures. Commercial
banks have become more aware of their busi
ness opportunities and have become more in
terested in obtaining additional growth, diver
sifying their customer orientation, and increas
ing their profits by making additions to or
modifications in their banking services. Banks
have also been under increased competitive
pressures from other banks and other financial
institutions and have tended to become more
aggressive in an attempt to retain, reassert, or
expand their position in the financial com

Credit Cards
Credit-card plans are considered by banks to
have obvious marketing advantages. Bankers
contend that credit cards allow them to offer a
new service to existing customers, to provide a
means of penetrating new consumer and mer
chant markets, and to increase the opportunities
for promoting other bank services. In particu
lar, many large wholesale banks, in recent years,
have decided that a major bank should also
provide a full line of services to consumers and
retailers. The credit card is a means of attaining
this objective. Other banks, already heavily in
volved in such lending, have become convinced
that the credit card has distinct advantages in
expanding their markets.
On the retail market level, the credit card
opens up a new relationship between the bank
and the retail merchant. Prior to the credit card,
the bulk of a bank’s business with a merchant
had been in financing sales of big-ticket items;
financing of a merchant’s accounts receivable
had been largely on an indirect basis. By switch
ing to direct lending to the merchant’s custom
ers, the bank can offer at least the same services
to the merchant as before and, in many cases,
can increase the financial services available.
With a credit card a bank not only improves
its prospects for retaining merchant customers
but also has an opportunity to attract new cus
tomers. A merchant agreeing to accept the
bank’s credit card must have a demand deposit
account with the bank in order to handle the
clearing of its sales slips. If he doesn’t already
have such an account, he must open one. In
such instances this requirement is a major
source of new accounts and new uses of other

munity.
While the desire to expand banking services
is the major underlying factor in banks’ deci
sions to adopt credit plans, a number of other
considerations— such as cost, image, and tech
nology— are important in the decision process.
Both the absolute and relative importance of
these factors vary from bank to bank— depend
ing upon management objectives, the potential
markets to be served, and existing or expected
competition.

The possibilities of extending the consumer
market for other bank services has been a
relevant consideration for a number of banks.
For example, in one bank involved in a creditcard plan for more than 10 years, an analysis
was made of holders of credit cards who were
not customers of the bank prior to opening a
credit-card account. Seventy-three per cent of
these customers made use of other services in
the bank, a clear indication that credit-card
banking can create other benefits and income
sources.
The bankwide marketing advantages of the
credit card should not be discounted as a factor
in the decision process. The improved identifi
cation of the bank in the minds of its customers
has been a consideration in some cases. Many
banks have become sensitive about their image,
and credit cards, at least in some areas of the
country, have provided an opportunity to es
tablish or reassert a reputation for innovation.
The rapid increase in the number of banks
adopting credit-card plans in the mid-1960’s
has been viewed by some observers as a reck
less rush into credit cards as a result of increas
ing interbank competition. Commercial banks
have been aware of the changing relationship
among consumers, merchants, and banks, and
undoubtedly some felt that if they did not enter
the market by way of a credit card they might
be foreclosed by the competition from entering
at a later date. Many were concerned that
their current hold on consumers and merchants
might be eroded by the competition. Despite

services: Small businesses are often unwilling
to carry multiple bank accounts and therefore
shift all their banking to the credit-card bank.
In any event, there is an opportunity for in
creased marketing of other bank services to
both old and new retail customers. To date
efforts to sell other services appear to be re
stricted largely to banks that have offered a
credit card for some years, but these marketing
efforts are likely to be imitated by other banks
as their credit plans mature.
Most banks argue that credit cards provide
similar opportunities for penetrating the con
sumer markets; that is, a card-issuing bank can
offer a service not previously available, is in a
better position to attract new consumer busi
ness, and has an avenue for selling other bank
services to both new and existing customers.
The charge-account feature of the bank credit
card represents a new type of service for banks,
and it is contended that this service is very at
tractive to consumers largely on the basis of
convenience. The revolving-credit aspect of
the bank credit card is akin to traditional in
stalment lending activities and as such is con
sidered to be a natural addition to the bank’s
range of financial services. Banks have found
this feature to be highly salable to consumers
on the grounds of ease in handling uneven ex
penditure patterns and of borrowing for emer
gencies. From the bank’s standpoint, the revolv
ing-credit aspect becomes attractive because
it provides an opportunity to handle small con
sumer loans more efficiently and profitably

the pressures of competition for precipitate

through the cash-advance privilege, in addi
tion to the basic retail credit function.
One of the more important advantages of the
credit card to some bankers is the opportunity
it provides to tap new consumer markets. No
prior banking relationship is necessary, a fea
ture especially important to banks in unit-bank
ing or limited-branching States. Area markets
otherwise closed to these banks can be more
easily penetrated. Also, exposure of the bank
and its services can be increased to merchants
and consumers throughout a broad area. At the

entry into this field, the Task Group found no
evidence of inadequate consideration of the
likely costs and the potential profits involved.
An additional reason for entry into the
credit-card field has been the desire of banks to
keep abreast of developments that may ulti
mately lead to the establishment of an electronic
money-transfer system. This factor does not ap
pear to have been an overriding consideration
for any bank, but it has played a role in the
decision process. For most banks the factor is
rationalized in terms of competitive pressures.

least, the bank issuing credit cards expands its
share of consumer credit in the area.

Banks do not want to be at a competitive dis

ment, in the early 1950’s, of all the various fac
tors considered, the merchant potential made
the strongest relative appeal. During the second
stage of development, in the late 1950’s, the
same set of factors was considered, but at that
time the desire to attract new consumers ap
pears to have been given greater weight in the
decision process than the desire to attract new
merchant accounts. The developments of the
mid-1960’s are, of course, the most relevant of
all for an understanding of the current situa
tion. Although the same reasons were still given
most weight by banks in recent decisions to
start credit-card operations, the relative impor
tance of profit prospects and of competitive
pressures for entry have increased.
In the early 1950’s bank revenue from credit
cards was dependent largely on the merchant
discount, since the common practice of the
banks involved in such plans was to extend credit
to customers only on a 30-day basis. The con
cept of a line of credit to holders of credit cards
had not yet been developed. By the late 1950’s,
however, many merchants had adopted revolving-credit plans, and major banks in the creditcard business began to impose service charges
on balances outstanding after the specified grace
period. This change meant a greater revenue
potential from the credit-card operation. Not

advantage when the electronic payments mech
anism is established.
In the final analysis, the decision to enter the
credit-card field depends to a large extent upon
the bank’s assessment of the profit potential of
this service. Not all commercial banks have
weighed the potential profits equally. Some
have contended that profits are the major mo
tivation for entry, while others— with different
corporate objectives— have suggested that it is
only necessary to break even on this service.
Only a few banks have indicated that they
would start credit-card plans even if they lost
money on the operation itself, but they also
indicated that they would do it only if the credit
card were really a major step in the develop
ment of bank technology. The relevant point is
that the bank must be convinced that the credit
card will be profitable either directly or indi
rectly. Even if the credit card were not profita
ble directly, a bank could become involved in
the activity. The necessary condition is that the
costs involved must be offset by benefits re
ceived, such as developing the experience neces
sary to keep in step with changes in banking or
to offset potentially debilitating inroads by com
petitors.
While it is difficult to obtain estimates of
profitability, since there are many variations in
accounting procedures'among banks, the data
available to the Task Group indicate that credit
cards can be profitable. After an initial start-up
period, credit-card plans normally produce
yields that are comparable to, if not above,
those of other instalment lending operations in
the bank. To the extent that card-issuing banks
are also able to increase the sales of other bank
services by way of the credit card, the true
profitability picture is even more appealing.
The relative importance of the several rea
sons for entry varies not only among banks at
any moment but over time as well. From the
outset, the chief attractions of the credit card
have been the opportunities it provided for ob
taining new merchant accounts, for attracting
new consumer accounts, for selling other bank
services, and for lending on revolving credit.
During the first phase of credit-card develop

only could customers be offered a line of credit
to cover their charge purchases, but also ordi
nary small instalment loans could be processed
through the credit-card operation.
Nevertheless, in their early stages, these de
velopments were not clear enough to be widely
convincing, and most banks, if they considered
it at all, chose to shun this innovation. Prior to
the mid-1960’s many banks thought that local
markets were not ready for bank credit cards.
Other banks were simply conservative, and they
felt that the credit card was a departure from
the traditional banking business and not a true
banking function. But the common view, which
argued against getting involved in the creditcard business, was that bank credit-card plans
were not profitable. Banks were aware that
there had been failures. They knew that operat
ing problems were sizable, and that introducing

a credit-card plan was both costly and timeconsuming. It was also clear that some type of
mechanical equipment was needed to handle
efficiently the paper associated with credit-card
activity. Many banks did not install computers
until the early 1960’s, and conversion priority
was given to such high-volume applications as
demand deposit accounting.
However, by the mid-1960’s the environment
had changed markedly. Evidence became avail
able that bank credit cards could be profitable.
In some instances plans after 2 or 3 years had
begun to break even and had produced profits
to the bank that were comparable to, if not
above, those of normal customer lending
operations. Furthermore, by that time credit
cards had grown in acceptability on the part of
both merchants and customers. The wide distri
bution of credit cards for gasoline, travel, and
entertainment and for purchases at department
stores and other retail establishments had made
the cards generally acceptable. Many banks had
acquired the computer facilities and the skills
to use them effectively for handling large vol
umes of accounts and transactions. A body of
experience had been built up, and particular
requirements for success were becoming known.
Expertise could be purchased through either
consultants or licensing arrangements. Finally,
concern about increased competition from other
banks and financial institutions led more banks
to view the credit card as a means of maintain
ing their consumer market position.

Check Credit
Check-credit plans do not have the retail link
common to credit cards. Consequently the rea
sons for initiating check-credit plans are largely
a subset of the considerations involved in adopt
ing credit cards. Like credit cards, check credit
is a device for expanding the financial services
available to consumers. Total business of old
customers may be increased, and new customers
may be attracted to the bank. But check credit
does not offer a similar set of advantages in the
merchant area. Usually the merchant is not
aware that the individual is purchasing goods
on a credit arrangement; he cannot identify any
sales increase as being attributable to the bank’s

offering of the financial service (except where
check-guarantee cards or specially designed
check forms are used), and the merchant cannot
promote his sales by identifying this credit
source.
On the other hand, a unique advantage of
check credit is that it is not limited to use in
stores that have entered into special agreements
with the bank, as is the case with credit cards.
The customer may purchase in any store that
will accept his check.
Check-credit plans are loan-oriented rather
than transaction-oriented. Because of its orien
tation check credit does not compete in a direct
way with the charge-account facilities of retail
establishments nor with the charge aspects of
the bank credit card. Although the consumer
may use the check-credit service wherever his
check is accepted, some customers may not
want to write checks for small amounts in order
to make purchases. Unlike either the bank
credit card or the merchant charge account,
there is no extra element of “float” involved;
the customer’s account is charged the moment
the check is cleared.
In many instances check credit may be the
most appropriate means of expanding financial
services to consumers. Check credit can be
offered at lower service charges than revolving
credit under a credit card and is, therefore,
more readily marketed as a device for handling
purchases of big ticket items or to cover emer
gency borrowing. The System’s survey con
firmed that check-credit interest charges are
lower— typically 1 per cent monthly compared
with 1Vz per cent for credit cards.
In large measure, the reasons for adopting
check credit rather than credit cards depend
upon the over-all goals and longer-range plans
of the bank. There is little question that many
banks are interested in check credit because
they are trying to find a less costly means of
providing lines of credit to consumers than the
credit card provides. As to establishing a link
with the retail merchant, it is possible that some
banks would not find the absence of such a link
to be a serious disadvantage.
Check credit also appeals to bankers who

provides greater opportunity for flexibility and
growth than do either special check-credit ac
counts or credit cards. The overdraft privilege
directly enhances the appeal of the basic checking-account service. For the more conservative,
it minimizes the deviation from accustomed
practice and yet eliminates the embarrassment
of returned checks; for the less traditionminded customer, it is replete with connotations
of progressive banking. It is also the view of
some of the banks that many other innovations
can be accomplished more easily by way of an
overdraft tied to the basic checking account
than through other means. For example, the
overdraft account provides the flexibility in a
person’s checking account that may ultimately
provide for greater acceptance by the customer
of automatically billed payment plans, which
in turn, would reduce check processing.
The decision to utilize an overdraft approach
may be the result, in part, of the competitive
situation in which the bank finds itself. The
overdraft provides a noncard bank with an
alternative in markets in which the bank credit
card has already been exploited. The overdraft
service can be used— furnishing a revolving
line of credit at the same time it provides a
better checking-account service. In many areas
banks have provided overdraft-account cus
tomers with check-guarantee cards to further
enhance the attractiveness of the basic check
ing account. Thus in many respects, overdraft
banking offers the same benefits to consumers
that a credit card would offer. But in addition,
like a special check-credit plan, it permits the
use of credit at many places that the bank
charge card has not penetrated.

view a credit-card program as an inappropriate
adaptation of traditional commercial banking
practices. Further, some bankers feel more com
fortable with check-credit plans since they can
be operated successfully with more rigid and re
stricted controls over credit extensions than can
credit cards. These banks, in adopting check
credit in lieu of a credit-card program, not only
save the cost of soliciting merchants but also
avoid some of the problems of fraud and loss
of cards.
However, the two approaches are not in
compatible. Some banks use check credit as a
supplement to the credit card in order to pro
vide creditworthy customers with lines of credit
for larger financial needs.
In general, check credit provides the bank
with an opportunity of increasing financial serv
ices with a minimal investment. Start-up costs
and promotional and operating expenses are
significantly smaller with check credit than with
credit cards.
Some banks have concluded that, in relation
to their corporate objectives and long-range
plans, overdraft banking is the most appropriate
means of providing for an expansion of con
sumer services. In the past 2 years, more banks
have chosen this form of check credit than have
chosen plans relying on special accounts. Over
draft banking is a dramatic way of offering a
combination of small loans, the convenience of
protection against returned checks, and checking-account services. In consequence, the bank
is able to sell demand deposit services more
effectively.
In common with the credit card, overdraft
banking makes it possible to handle small loans
at a profit. By lending small amounts automati
cally through overdrafts on checking accounts or
utilizing overdraft lines of credit for direct lend
ing, the bank eliminates the necessity of review
ing and evaluating each loan application. Con
ventionally handled, individually generated
loans can entail sizable acquisition costs, but by
utilizing a revolving line of credit, it is possible
to spread the acquisition cost over a large
volume of lending.
In the view of some banks, overdraft banking

PROBLEMS OF
IMPLEMENTATION
The decision to initiate a credit service is not
made without reference to the operating prob
lems and considerations associated with each
type of plan. However, for purposes of evaluat
ing bank credit-card and check-credit plans, it
is helpful to separate the basic decision process,
treated in the previous section, from the more
specific operating considerations. The objective

of this section is to identify the general operat
ing problems confronting the bank in introduc
ing a credit plan. Although common solutions
are enumerated, evaluation of these solutions is
not possible. The policies, organizations, and
objectives of individual banks determine the
relative merits of the approaches taken.

primarily on the individual bank’s situation. The
characteristics of these affiliations are shown in
Table 4.
Affiliation with a nonbank, travel and enter
tainment card is not, strictly speaking, a means
of offering a credit-card plan. From the bank’s
side, the T&E plan operates more like check
credit. The bank has no merchant contacts. The
customer is not tied to the bank when using his
card unless he decides to repay his purchases
on revolving credit, which differs from check
credit only in that it is initiated by use of a
nonbank credit card rather than a check.
The franchised credit-card option allows the
bank to appeal to a mass market with its own
credit card. The major advantage of the licens
ing arrangement is that the bank obtains a sub
stantial amount of assistance on credit-card
planning, marketing, processing, and promo
tion at a cost less than that which would other
wise be required if a bank were to set up its
own credit card. The major disadvantages of a
franchise affiliation are the partial loss of bank
identification and of some degree of freedom,

Credit Cards
Ty p e s of Affiliation

An important decision facing a bank that has
decided to offer a credit card is the type of
affiliation that should be undertaken. The bank
may become involved in a credit-card program
in one of several ways: (1) by starting its own
credit-card plan, (2) by entering a licensing
or franchise arrangement with another com
mercial bank that operates a plan, or, in some
instances, (3) by becoming a so-called partici
pating or associate member of another bank’s
plan, or (4) by becoming an agent of another
bank that offers a credit-card plan. Each type
of affiliation has its advantages and disadvan
tages, and again the ultimate decision is based
Table

C H A R A C TE R IS TIC S OF VARIOUS TY P E S OF C R ED IT-C A R D AFFILIATIO N
Interchange arrangements

Operating responsibilities o f bank

Type o f affiliation

Bank operating full card system
1. Independent bank:
(a) N o interchange

(b) M em bership in inter
change system or
association

2. Licensee bank

Bank with limited responsibilities
under a principal bank
3. “ A ssociate” bank
(som etim es called licensee)

4. “ Participating” agent bank

Sets credit
standards
for card
holders and
issues cards

Carries revolv
ing credit o f
cardholders and
is responsible
for any losses

Y es

Yes

Y es

Yes

Y es

Yes

1
N o , can recom issue to
ow n customers

\m end
5. “ Sim p le” agent bank

Yes

Operates
Agrees to
basic
Inter
use
accounting changes
specified
system
withother
card
card plans
design
for plan

Pays fees
to other
banks or
to an
association

Receives
technical
assistance

Yes

N o , can
choose own
design

Usually

Y es

Varies—
som etim es,
specified
design
with space
for bank’ s
name

Varies

Usually

Signs
and
services
merchants

Yes

Specified
design with
space for
ow n bank’ s
name

Yes

Y es

Specified
design with
space for
own
bank ’s
name

Principal
bank oper
ates system
for fee

Shares
some
fraction

Y es

1
Determined
J

by principal

bank

tions and greater geographic coverage for its
own plan.
Independent banks can form an association
that assumes certain operating responsibilities,
such as central accounting and advertising, and
administers the interchange system for the
cards. For instance, the Western States Bank
card Association performs these functions for
banks offering individual card plans in four
western States under the Master Charge name.
In other cases, the association may only look
after the arrangements for interchange and
some advertising.

and the necessity to accept and handle sales
slips generated by holders of credit cards of
other, conceivably competing, banks. The de
cision to use a franchise service will be depend
ent, in part, on the bank’s technical capabili
ties, on its long-range goals and plans— in par
ticular the view that it wishes to represent to
the community— and on the state of competi
tion in the markets that the bank wishes to
serve. In effect, the franchise arrangement is a
means of buying expertise and interchange
privileges, which can be nationwide in scope.
The bank that is affiliated as an agent with
another card-issuing bank has the advantage of
providing a credit-card service without having
to assume the responsibilities of starting its own
card. The basic cardholder connection remains
with the bank issuing the card rather than with
the agent bank. The decision to become an
agent for another bank’s card appears to have
been made most frequently in markets where
banks have felt that they could not afford their
own credit card but where they were concerned
that competition from other banks might result
in a loss of customers. There are obviously few
possibilities of selling additional services to
consumers under such an arrangement. How
ever, the agent bank retains the ties with the
merchants and may be able to use the creditcard contact to offer other services to the mer
chant. It receives a portion of the merchant dis
count to cover processing costs on sales slips
deposited with the bank and may, in some in
stances, share in the revolving credits generated
by its cardholder customers. In general, the
direct return to the agent bank is nominal.
However, there are alternatives between sim
ple agency status and full operation of a plan.
A “participating” agent shares in a portion of
the revolving credit of its customers. A bank
with “associate” status not only carries the re
volving credit but also can issue a card bearing
its own name. The associate bank receives many
of the advantages and b.r.rs only part of the
costs of full independent sponsorship. This is,
therefore, an attractive choice for medium-sized
banks. The principal bank provides the cen
tralized computer and accounting facilities in
return for a fee based on the associate’s opera

C a rd h o ld e r and M erchant Solicitation

The decision to introduce a credit-card plan
forces bank management to face several related
problems. The bank must attract a wide enough
range of merchants into the program to make it
worthwhile for individuals to accept and use the
bank’s credit card; simultaneously, it must at
tract a large enough group of cardholders to
make it worthwhile for merchants to become
associated with the plan.
(i)
C a rd h o ld ers.
Insofar as cardholder
solicitation is concerned, the bank has a num
ber of decisions to make, including: How many
cardholders are necessary to make the plan a
success? What criteria should be used to define
an acceptable cardholder? How should the po
tential customers be selected for the initial dis
tribution of cards?
Bank credit-card plans require volume if the
service is to generate a profit for the bank. The
minimum number of cardholder accounts re
quired cannot be readily established since it is
dependent upon such factors as the extent to
which the cards are used by the customers, the
amounts of credit balances outstanding, the
form and extent of advertising required, and
the processing procedures utilized by the bank.
Successful plans have been introduced with as
few as 10,000 to 15,000 credit cards outstand
ing. Smaller plans can be profitable if a large
proportion of the accounts are active, if mer
chant discounts are not eroded, and if process
ing can be handled without substantial addi
tions or modifications in the bank’s processing
facilities. For smaller plans it also appears that

Where credit plans need a high volume of
sales and of credit outstandings to cover high
operating expenses, the mass issuance of cards
appeals to the bank. In many cases in which
mass mailing has been used, an acceptable
credit risk has been defined as an individual
on whom no negative information is developed.
When large numbers of cards are being issued,
however, it is both very difficult and very ex
pensive to check the credit rating of every name
to which an unsolicited card is sent. Under
such circumstances, the source of the list of
names becomes very important. Most com
monly, in past practice, lists were made up of
customers on the rolls of the bank or on the
rolls of agent banks. Cards were sent to individ
uals having personal checking accounts with
satisfactory balances and no record of checks
drawn against insufficient funds; to staff mem
bers and officers of the bank itself; to passbook
savings customers who had received a minimal
$10-$20 in interest during the past year; to
mortgagors whose property was within specified
areas and who had a satisfactory record of
meeting their obligations; to direct-consumerloan customers unless, for example, their ac
counts were 30 days past due; and to consumer
credit customers whose closed accounts had
been repaid within the past few years and who
had had a satisfactory credit rating. Such in
ternally generated lists (that is, those generated
from the bank’s own records) are most reliable,
and names can be cross-checked to avoid dupli
cate mailings and minimize customer irritation.
Lists of potential cardholders purchased from
outside sources have proven to be less reliable.
The type of card distribution used is depend
ent largely upon the competitive situation con
fronting the bank. When there is a need to
obtain the widest possible coverage of the po
tential credit-card market, a mass mailing may
be the most feasible solution. Only a small per
centage of individuals receiving unsolicited
cards— less than 1 per cent in specific cases
examined— returned them or otherwise ob
jected to this method of distribution. In con
trast, those banks that tried solicitation of per
sonal applications as a basis for issuing credit
cards were disappointed in the response. In

lack of local competition is an important factor
for success.
In general, mature credit-card plans have
been able to penetrate 30 to 60 per cent of the
households in an area. Although there is some
variation among areas, the marketing studies
conducted by banks indicate that the popula
tion served by larger-scale plans usually repre
sents a large urban-suburban group. The aver
age preferred customer is married, is between
the ages of 24 and 45 years, lives in a relatively
high growth area of the community, and has
an income of $6,000 to $15,000 a year.
A number of methods may be used to get
the cards into the hands of those most likely
to use them. In the plans started in the early
and late 1950’s, merchants’ conversion of their
own customers’ accounts was frequently util
ized. The names of the potential cardholders
were provided by the merchants who agreed to
have their accounts-receivable function taken
over by the bank. The satisfactory accounts
were, in effect, purchased by the bank while
poor credit risks were refused cards. This ex
perience was not entirely successful. In some
cases the merchants tended to keep the best
accounts on their own books and gave the
banks the poorer accounts. In other cases banks
found that the lack of negative information on
the accounts obtained from the merchant was
not always a satisfactory guide to acceptable
credit-card risks.
Instead of using merchant conversion, some
banks have issued their cards on a basis of se
lection involving the prior detailed credit ap
praisal of each potential cardholder. Under this
technique, the bank will not issue a card unless
it has received a signed application from the
potential customer. This method has the advan
tage of achieving a higher percentage of users
than any other technique. It is further argued
that the closer control on cardholders provided
by this selective approach to card distribution
reduces the bank’s exposure to loan fraud
losses. The major disadvantage of this approach
is that such a considerable period of time is
needed to build up sufficient cardholder ac
counts for profitable operation that success may
be precluded.

1966, for example, Marine Midland experi
mented in different areas with unsolicited mail
ings and with a campaign of solicitation. In the
latter case, the results of 33,357 promotional
mailings were 221 applications for charge
cards. When the bank sent out 731 charge
cards directly, without solicitation, the usage
within a short period was 19 per cent and the
retention of such cards exceeded 99 per cent.
If mass issue is not used by the bank, it may
be used by a more aggressive competitor who
is thus able to command greater customer loy
alty and higher earnings through the larger
number of cards distributed. Mass mailings or
unsolicited mailings need not imply, however,
an indiscriminate mailing of the cards. All of
the banks utilizing mass mailings have under
taken some screening of the customer list.
These banks utilized mass mailings with the
realization that there could be some problems
and some losses during the initial stages as a
result of this method of distribution. However,
as a matter of business judgment, they found
this procedure to be the most effective means
of obtaining cardholder accounts.
(ii)
M erchants. With respect to merchant
membership, several major considerations arise,
including: How many merchants must be signed
up? What procedures should be used for select
ing suitable merchants? What means should
be used to determine the most appropriate
schedule of merchant discounts?
While the largest possible number of mer
chant participants is desired in order to insure
that the cards are utilized by the cardholders,
the business orientation of some merchants
makes them less suitable for participation in the
plans. Rapid check-out establishments, such as
small discount stores or newsstands, and lowprofit-margin supermarkets are not generally
considered to have much potential for the credit
card. Some establishments are simply of such a
small size that solicitation and maintenance of
the accounts may not be economical. Although
it would be desirable to include major depart
ment stores and specialty shops with their own
cards in the merchant base, it may not be pos
sible for the bank to convince these businesses
to use the bank card.

A further consideration in approaching mer
chants for participation in a credit-card service
is, of course, the discount that will be required
on sales slips generated by the merchant. To a
significant extent this discount is determined
by the extent of competition in the area in
which the card is to be operated. In areas with
nonexistent or relatively low levels of competi
tion, discounts tend to approach 5 per cent of
the dollar volume of the transactions. On the
other hand, where competition is strong, the
typical rate of discount tends to fall to 2.5 per
cent. Within the market area, further variation
in the discount rate is possible as a result of a
difference in (1) type of merchant and (2)
size of merchant’s sales. In general, certain
types of sales, such as airline tickets, are given
lower rates of discount than other types of
merchandise or service. Similarly, department
store and other high-volume activities that
generate sizable sales transactions are normally
given a lower rate than those of smaller estab
lishments. As a general rule, merchants are
not allowed to levy any special charge whatso
ever for the customer’s use of a credit card.
Cost of Im plem entation

The costs of introducing a credit card vary
greatly from bank to bank depending upon the
type of credit-card service chosen, bank man
agement’s schedule for penetration of the rela
tive markets; the size and composition of the
market; the availability of appropriate per
sonnel and equipment within the bank; and the
type and the extent of competition.
Start-up costs are as difficult to determine as
profitability because of variations in accounting
practices. To obtain some estimate of these
costs the Task Group contacted a small number
of banks and asked for their estimates of start
up costs— defined as allocated overhead or
general expenses, operating expenses, promo
tional and advertising costs, and other expense
items but not including equipment outlays, cost
of funds, or fraud or credit losses. The start-up
costs for the banks contacted averaged 2 per
cent of total bank operating expenses. The
usual bank experience with credit cards has
been that current revenues will match current

expenses of the plan after approximately IV2
to 2 Vi years of operation. Initial start-up costs
are generally recovered in 3 to 4 years.
The least costly method of entering the
credit-card business is also the most limited—
the agency status. Both merchants and card
holders must be solicited by the bank. The
major cost is incurred in obtaining merchant
participation since contact with the merchant
is required. With respect to cardholders, lists
of the bank’s customers are normally supplied
to the card-issuing bank, and no further solici
tation of the potential cardholders is necessary.
A more costly type of credit-card installation
is that using a franchise service. The initial
license or franchise fee covers most of the basic
developmental costs including processing-systems development and marketing plans. How
ever, the bank bears the full cost of soliciting
and contacting prospective merchants and card
holders, and the promotional costs to the bank
are determined, to a large extent, by the pos
ture the bank wishes to assume.
The most costly type of operation is one in
which the bank decides to issue its own credit
cards. Feasibility studies, determination of sys
tem specifications, development of over-all
marketing plans, development and use of pro
motional kits, advertising expenses, basic electronic-data-processing-equipment (EDP) ex
penses, personnel requirements, writing and
testing of EDP and manual systems— all of
these can be extremely costly. The full burden
of merchant and cardholder solicitation, of
course, must also rest with the card-issuing
bank. If the bank joins with others to form a
credit-card association, merchandising and cer
tain other costs per bank may be reduced.
Problem s of Interchange

In making its decision to adopt and imple
ment a credit-card plan, the bank must also
consider the policy it wishes to take with re
gard to the interchange privileges associated
with the card.
The interchange question has been answered
if a bank enters the business by way of a

franchise. Under the franchise arrangement the
bank agrees to handle sales slips generated by
its merchants even though the cardholder may
be associated with another bank in the same
franchise system. In turn, the bank’s card
holders can utilize their cards whenever the
franchise card is acceptable, and banks under
the same franchise system in other market areas
are required to remit sales slips generated by
the bank’s cardholders. Thus the usefulness of
the card to the customer is increased, and more
volume may be generated.
The bank operating its credit-card plan
through a joint credit-card association, such as
the Western State Bankcard Association, has
obviously adopted a policy of interchange.
Cardholders from any of the association’s mem
ber banks may use their cards at signed mer
chants in the other banks’ territories.
Some banks issuing their own cards are not
interested in interchange privilege. They feel
that the credit control they have over their
customers is improved if the card cannot be
used over wide areas, that the costs of credit
authorization over long distances are too great,
that their exposure to fraud and other losses is
increased because of delays in clearing sales
slips, and that they may have increased competi
tion from other banks in their home territories.
Some other banks, nevertheless, are in
terested in interchange privileges, and such
arrangements, on either a regional or a national
basis, usually require the individual banks to
use cards with a compatible design— that is,
cards that can be easily identified as acceptable
by merchants participating through any bank
in the interchange system. The same oppor
tunities are thereby provided for national inter
change as those that exist under the franchise
system, and increased opportunities are avail
able for regional interchange in many areas.
Under the compatible card system, each spon
soring bank (and its participating correspond
ents, if any) is at liberty to select the persons
to whom it issues credit cards, to determine the
limits on the credit extended, and to set its own
service-charge schedule. Each bank in the sys

oriented, it is not necessary to become involved
in the problems of achieving more or less
simultaneously the large number of merchant
participants needed to attract cardholders and
in turn the large number of cardholders needed
to attract merchant participation. Creditworthy
customers can be investigated and added grad
ually under check-credit or overdraft plans.
The ability to build these plans slowly is also
related to the method of processing required
for these services. Both use the check as a basic
vehicle for loan extension. The procedures for
handling checks are already well developed in
most banks and usually require little modifica
tion to accommodate check-credit or overdraft
banking.

tem may enroll merchants and establish its own
discount rate structure in dealing with the mer
chants. The merchant, in turn, is at liberty to
deal with any bank in the interchange
system.
Compatibility has different implications for
competition among banks, depending on
whether a particular card program is widely
scattered throughout the country or operates
in a single geographic area. Where the banks
are widely scattered, the opportunities for
direct competition are minimal and the purpose
of interchange is to expand the geographic
scope of acceptability for the individual bank’s
credit card. In a close regional system, how
ever, the banks are in direct competition with
one another. A multiplicity of cards without
compatibility would probably cause confusion
in the minds of both cardholders and mer
chants. With a compatible system it is likely
that competition, instead of leading to chaos,
will lead to wider use of the credit-card service
by both the merchant and the consumer.
General acceptability of the card appears to
be a common goal Q many of the banks in
f
volved in the credit-card business. They en
visage the day when their card may be used
throughout the country. Others view this de
velopment with disfavor— preferring to main
tain the protected position they now hold in
their own market. However, if local competi
tion appears, an individual bank has a better
chance of surviving in the credit-card business
if it offers a compatible card.

STAFFING CONSIDERATIONS
A decision to offer one or more of the varie
ties of check-credit would not pose the same
kind of staffing problems as would a decision
to undertake a credit-card program. As has
been mentioned previously, the operations of
check-credit are very much akin to those of
traditional banking, and personnel well versed
in credit analysis and accounting, for example,
might with a minimum amount of additional
training administer an overdraft plan or a pro
gram utilizing special accounts and special
checks.
Not so with credit cards. This type of pro
gram is essentially one in which the banker is
taking his product to the market, rather than
waiting for the market to come to him. Al
though there is some “selling” in most aspects
of modern American banking, a study by
Donald M. T. Gibson indicates that the mer
chandising effort required to make a success of
a credit-card venture is far greater than the
traditional banker is normally called upon to
exercise. And the conduct of a credit-card oper
ation requires some personnel whose interests
and/or experience in marketing are sufficient
to assure that this vital element in the card
program is handled with timely initiative and a
sensitivity to the merchandising problems.

Check Credit
The bank that introduces a check-credit or
overdraft plan encounters far fewer problems of
implementing the service than does a bank that
offers a credit card. There are two major rea
sons for the greater ease of introduction. First,
introduction can occur gradually; and secondly,
processing procedures are similar to those al
ready established for other bank services.
Neither special check-credit nor overdraft
plans require mass or rapid solicitation of cus
tomers. Since these services are not retailer-

PROFIT AND
LOSS EXPERIENCE
One of the most frequently expressed con
cerns about credit cards is the potential for
loss to the banks involved. Several types of loss
may be identified: (1) General operating losses
on the credit-card program; (2) fraud losses;
and (3) credit losses. The latter two are con
sidered together in the body of this report be
cause adequate data are not available to permit
accurate separation.

General Profitability
The view that credit-card operations may not
be profitable to banks had its origin in the
events of the early and late 1950’s. A number
of credit-card plans were launched without suc
cess during this period, and these failures were
widely publicized. The unfavorable experience
of some large banks led many to conclude that
if large banks could not develop a profitable
credit-card operation neither could smaller
banks. Nevertheless, despite the impression
given by this adverse publicity, the fact remains
that many of the plans started in the 1950’s
were successful. Sixty-eight banks that started
credit-card plans prior to 1960 were still oper
ating such plans at the time of the Task Group’s
1967 survey. These plans would not have re
mained in existence if they had not been profit
able either directly or indirectly.
By the mid-1960’s evidence had accumu
lated to indicate that bank credit-card plans
could be profitable. The favorable experience
of one very large bank, the Bank of America,
was widely publicized. At the same time many
smaller banks began to publicize their ex
periences, frequently stating that credit-card
operations provided one of the highest yields
in their banks, if not the highest yield on in
vested funds in any bank activity. To a signifi
cant extent, the tremendous growth of bank
credit cards in the last few years attests to the
profitability of credit-card plans. The claims
of the banks with experience in credit-card
activities were substantiated in the extensive
review and examination made by those banks

interested in the possibilities of providing
check-credit services.
While bank credit-card operations can be
profitable, not all such operations are neces
sarily so. As in any commercial activity, the
success of the credit-card plan depends im
portantly upon the market, which is variable
in both place and time. A market that has re
ceived one credit card well may receive another
quite differently, and the net result in any par
ticular case cannot be forecast except by analy
sis of the specific situation. Under the pressures
of increased competition, some change in the
relative profitability of credit-card activities can
be expected. In some markets, increased com
petition has been accompanied by increased
profits to all competitors, as their merchandis
ing efforts have been mutually reinforcing.

Credit Losses
The data collected by the Task Group pro
vided the first general statistics on losses ex
perienced by credit-card and check-credit
plans. The results show that credit-card plans
can involve relatively heavy losses compared
with check-credit plans and with other forms
of consumer lending. But they also show that
many plans operate with quite low loss ratios,
so heavy losses should not be regarded as an in
herent feature of bank credit-card programs.
Some important qualifications must be noted:
The data gathered in the 1967 survey covered
the month of September during which several
important plans were just starting, and poten
tial losses, if any, were not known; on the
other hand, write-offs were collected for the
first half of 1967, a period when a major plan
was getting into operation and was having to
write off unexpectedly heavy losses. In conse
quence, extreme values were gathered on both
sides of the loss spectrum for credit-card plans.
The mass-market orientation of bank credit
cards and the lower risk inherent in check
credit are apparent in the charge-off experience
of banks offering these services. For the nation
as a whole, as Table 5 shows, charge-offs
amounted to 1.97 per cent of the outstandings.
The charge-off experience for credit cards is

Table 5
L O SS ES AN D LO SS R A TIO S ON BANK C R ED IT-C A R D AND
C H E C K -C R E D IT PLANS:
Charge-Offs During January-June 1967 Relative to
Amounts Outstanding on September 30,1967

Credit-card plans

Federal
Reserve
district

Check-credit plans

T housands o f dollars

Charge-offs
Jan. 1—
June 30, 1967

A m ou nts
outstanding
Sept. 1967

Th ousan d s o f dollars
Loss
ratios
(per cent)

Charge-offs
Jan. 1 —
June 30, 1967

A m ou nts
outstanding
Sept. 1967

Loss
ratios
(per cent)

B o sto n ..................
N e w Y o r k ..........
P hiladelphia. . .

263
332
135

2 1 ,8 0 0
6 4 ,8 0 0
1 2 ,3 0 0

1 .2 1
.51
1.0 1

229
135
110

5 7 ,3 0 0
9 8 ,0 0 0
6 0 ,6 0 0

.31
.1 4
.1 8

C leve lan d ...........
R ich m on d ..........
A tla n ta ................

403
204
193

2 6 ,9 0 0
2 8 ,2 0 0
3 0 ,6 0 0

1.4 1
.7 2
.6 3

30
32
51

3 2 ,0 0 0
1 7 ,2 0 0
2 2 ,2 0 0

.0 9
.1 9
.2 3

C h icago...............
St. L o u is .............
M in n e a po lis. . .

7 ,2 3 3
16

1 2 6 ,2 0 0
1 2 ,3 0 0
100

5 .7 3
.1 3

104
36
3

5 3 ,4 0 0
1 1 ,5 0 0
5 ,6 0 0

.1 0
.31
.0 5

Kansas C it y . . .
D a lla s ...................
San Francisco. .

58
151
3 ,4 9 5

6 ,4 0 0
8 ,1 0 0
2 9 5 ,3 0 0

.91
1 .8 6
1 .1 8

12
6
381

9 ,4 0 0
4 ,5 0 0
1 1 1 ,5 0 0

.1 3
.1 3
.3 4

A ll districts..

1 2 ,4 8 3

6 3 3 ,0 0 0

1 .9 7

1 ,1 2 9

4 8 3 ,2 0 0

.2 3

significantly above that for check credit. Chargeoffs on check credit amounted to less than onequarter of 1 per cent during the period. As the
table indicates, the loss ratio was particularly
heavy in the Chicago District. Elimination of
this District would reduce the national average
loss ratio to 1.04 per cent, or by almost half.
If credit-card plans are classified by the
year started, as in Table 6, it is apparent that
banks with the most recent plans had the
heaviest losses. Plans initiated in 1966 and
1967 had an average loss ratio of 3.25 per
cent and accounted for more than three-fifths of
total charge-offs. However, as of early 1968,
none of the banks that had started plans dur
ing the 2-year period 1966-67 had abandoned
them due to heavy losses. Generally speaking,
the longer a plan has been established, the
lower its average loss ratio tends to be. In
brief, with experience and time, banks find ways
to reduce losses and to eliminate bad accounts.
Deposit size at first glance seems to be rele
vant in determining a bank’s loss ratio (Table
7). Banks with $1,000 million or more in de
posits had a loss ratio averaging 2.42 per cent,
and those with deposits between $500 million

and $1,000 million averaged 1.64 per cent.
Smaller banks had average ratios between 0.96
and 0.36 per cent. But these results really re
flect the impact of the year started rather than
deposit size. For example, 12 out of the 18
banks with deposits of $1,000 million or more
started their plans in the 2 years 1966 and
1967 as did 10 out of 13 banks in the $500
million-$ 1,000 million deposit size group. For
check-credit banks, deposit size and the loss
ratios exhibited no regular pattern; in fact, the
highest ratio was for banks with deposits be
tween $10 million and $25 million.
Table 8, which compares delinquency rates
on credit cards and check-credit plans with
such rates on other kinds of regular consumer
instalment loans of banks, shows that banks
experience somewhat greater difficulty in col
lecting credit-card balances due than they do
in collecting other consumer loan balances.
But the difference is not excessive, especially
when some allowance is made for the heavy
concentration, in the period surveyed, of credit
plans that were relatively new and thus some
what more prone to collection problems. Credit
cards actually have a better record than one

category of instalment loans— those on home
appliances— and this is the category that is
closest to the kinds of transactions typically
made through credit cards. Not unexpectedly,
check-credit plans had delinquency rates uni
formly more favorable than those for credit
Table 6
BANK C R E D IT-C A R D L O S S ES AND
LO SS R A TIO S
By Year Plan Was Started

Thousands o f dollars

Y e ar started

C harge-offs,
Jan. 1 June 3 0 , 1967

A m ou n t ou t
standing on
plan
Sept. 30, 1967

L oss
ratio
(per cent)

1955 and earlier.......................
1 9 5 6 -5 7 ........................................
1 9 5 8 -5 9 ........................................
1 9 6 0 -6 1 ........................................
1 9 6 2 -6 3 ........................................
1 9 6 4 -6 5 ........................................
1 9 6 6 -6 7 ........................................

563

5 4 ,6 0 0

1 .0 3

3 ,3 9 2
4
5
629
7 ,8 9 0

2 8 9 ,2 0 0
2 ,1 0 0
400
4 4 ,1 0 0
2 4 2 ,4 0 0

1 .1 7
.1 9
1 .2 5
1 .4 3
3 .2 5

T o t a l.........................................

1 2 ,4 8 3

6 3 3 ,0 0 0

1 .9 7

T otal excluding 19 66 -67.

4 ,5 9 3

3 9 0 ,0 0 0

counts. Delinquency rates in Districts such as
San Francisco and New York where major
systems have been operating for some years
compare very favorably with those of con
sumer instalment credit. Heavy losses appear
to be a phenomenon of the first years of a plan
and not an inherent shortcoming of credit
cards. The knowledge derived from the ex
perience of banks in the Chicago District has
been applied to reduce losses on later plans—
for example, recent plans in New York City
and California seem to have avoided excessive
losses— so there is reason to expect better per
formance in the future. Check credit remains
a lower-risk system than credit cards, al
though the differential between the two plans
may be narrowing. The point to be emphasized
is that well-run credit cards do not expose
banks to unreasonable losses and can be a
sound operation for a bank.

1 .1 8

Table 8
D E LIN Q U EN C Y R A TES ON C O N SU M ER
LO AN S A T CO M M ER C IAL BANKS
SEP TEM BER 30, 1967

N ote.— Where a span o f years is indicated, it covers 2 fu ll years—
for example, 1956-57 means 1956 and 1957.

(In per cent)

cards, district by district, and better than
those for regular instalment loans on a national
basis.
In summary, the losses sustained in creditcard operations are greatest in the early years
of a plan when a bank is gaining operational
experience and culling bad risks from its acTable

National Rates by Type of Loan
Type o f loan

Rate

1 .9 9
.9 7
1 .4 5
1 .4 8
2 .1 9
1 .2 4

LO SS RATIO S ON BANK C R ED IT-C A R D
AND C H E C K -C R E D IT PLANS
By Size of Bank

Credit-Card and Check-Credit Rates by
Federal Reserve District

Federal Reserve district

C redit-card plans

Philadelphia..............................

2 .1 8
1 .5 9
3 .3 8

1 .5 2
1 .2 8
0 .7 5

3 .5 7
2 .1 8
2 .3 2

0 .3 1
0 .3 2
1 .4 8

3 .6 9
3 .8 1
2 .5 4

0 .6 4
0 .8 2

San Francisco...........................

3 .1 7
1 .4 2
1 .5 6

1 .8 8
1.0 1
0 .7 1

Average, all districts------

1 .9 9

.9 7

(In per cent)

Size o f bank
(total deposits,
in millions
o f dollars)

Credit-card
plans

Check-credit
plans

M in n e ap olis..............................
5 10 ..........................................................
1 0 - 2 5 .......................................................
25 5 0 ........................................................
5 0 - 1 0 0 .....................................................
1 0 0 - 5 0 0 ..................................................
5 0 0 - 1 ,0 0 0 ..............................................

.3 6
.4 7
.4 3
.9 6
.9 2
1 .6 4
2 .4 2

.1 3
.4 2
.2 6
.21
.1 8
.2 6
.2 4

Average, all size g ro u p s ..........

1 .9 7

.2 3

Kansas C it y ..............................

Check-credit plans

1.00

N o t e .— Instalment data are from A m erican Bankers A ssociation
and relate to A ugust 1967. Rates are for accounts delinquent 3 0 -8 9
days.

EFFECTS
ON BANKING
STRUCTURE

operations so important that small banks with
such plans are likely to be driven out of that
business by the entrance of a large bank-credit-

As of early 1968 fewer than 10 per cent of
the nation’s banks were offering credit cards
and check-credit plans, and the volume of out
standings under such plans was relatively small
compared with total consumer credit outstand
ing. From this it would appear that the effects
of such plans on banking structure have been
minor.

card plan?
6. What alternatives, if any, does a small
bank have in meeting the competition of a
large credit-card operation?
C. Geographical Considerations
7. Are banks that offer credit-card plans
able to expand their effective market area at
the expense of banks without such plans?
8. Are credit-card interchange or affilia
tion systems so important to the efficient opera
tion of the credit card per se that interbank
links will be required for survival of the in
dividual plan?
9. Is the credit-card interchange or affili
ation system a “natural monopoly” or “oli
gopoly” (such that only one or, at most, a
handful of these systems in the nation could
operate with high efficiency), thus giving rise
to substantial market power by existing systems
over banks that are, as yet, unaffiliated?

However, experience with these plans has
been too short to indicate whether banks’ use
of these devices has resulted in persistent or
substantial detriment to their competitors. The
latent competitive power of these innovations
is considerable, and the recent growth and
acceptance of these plans— particularly in the
last few years— raise several important ques
tions regarding their potential impact on the
banking structure. The focus of these questions
is on the credit card itself.
A. Timing Considerations
1. Is the credit card per se a “natural
monopoly” so that adoption of a plan by one
bank pre-empts the credit-card field within that
market territory?
2. Does an early start in a credit-card
plan provide such an initial advantage that
competitors entering the field can never catch
up?
3. How much more difficult is entry of a
new bank into a given market territory if an
existing bank in that market has a credit-card
operation?

Definitive answers to these questions cannot
yet be provided, not even with respect to plans
that have been in operation for some time.
Even more important is the fact that these
plans are evolving rapidly; future developments
and modifications in the types of plans offered
as well as in consumer demands and attitudes
toward these new payments devices will, in the
final analysis, play the decisive role. However,
evidence developed by the Task Group can
provide some partial answers regarding the
banking-structure implications of credit-card
plans as they now operate.

B. Size Considerations
4. Can small banks, as well as large banks,
successfully undertake credit-card operations?
5. Are economies of scale in credit-card

TIMING CONSIDERATIONS:
EFFECT OF CREDIT CARDS
ON SUBSEQUENT ENTRY
Some concern has been expressed that early
entry into the credit-card field will give such
advantages to the pioneer bank as to constitute
a barrier to banks that try to enter later. The
presumption is that the pioneer bank may sign
up such a high percentage of local customers
for its plan that the remaining market would
be insufficient to support a competitive plan
in the same locality. In particular, it is some
times feared that the minimum size of creditcard operation required for profitability would
preclude more than one credit card in any
market, and thus create a “natural monopoly.”
In the credit-card field, as in other lines of
endeavor, there are both advantages and dis
advantages to a head start. A pioneer bears
more risk than those who follow and who are
thus able not only to learn from the pioneer’s
mistakes but also to adopt later technology in
their initial organization. In compensation for
this extra risk, the pioneer stands to reap the
temporary monopoly benefits that accompany
progressive steps in economic development.
This is not to say, however, that there are
either permanent advantages or dominant
“natural monopolistic” elements in bank credit
cards. In fact, neither of these is reflected in
the credit-card experience to date.
1. As detailed in the following section,
some profitable credit-card operations are very
small indeed, and all or nearly all banking
markets embrace many times the actual mini
mum number of merchants and cardholders.
2. In practice, both merchants and card
holders rather frequently affiliate with more
than one credit-card plan where available, and
any attempt by a bank to sign up one or the
other or both on an exclusive basis would be
subject to antitrust inquiry. (See Chapter 5.)
One investigation of multiple bank-card hold
ings revealed that about one-third of the card
holders carried more than one bank credit card
Furthermore, the multiple card insignia on
merchants’ doors or windows in areas covered

by more than one plan testify to the lack of
pre-emptive power over the merchants by the
pioneer bank. Indeed, much of the difficulty of
selling merchants on the idea of honoring a
bank credit card has already been borne by
the banks that have entered the local creditcard field at an earlier date. Under present fluid
conditions, a new credit-card operation is not
frozen out by previously established plans.
3. Franchise arrangements are not exclusive;
they have been extended to more than one bank
competing in the same market area.
4. Interchange associations, which could as
sist a bank in meeting credit-card competition
in its local market area, are open-end, and
banks continue to join well-established asso
ciations.
5. Empirically, there are no known cases
in which any credit-card plan has completely
driven out all other credit cards. In this field,
banks are in competition with nonbank cards, as
well as with other bank cards, and despite some
banks’ alleged goal of substituting a single
general-purpose card for many single-purpose
cards, there is no evidence that the average
number of credit cards carried by consumers
has been reduced. Although a new card may be
somewhat less useful than the previous card
received, there appear to be no absolute limits
on the number of cards achieving acceptability.
6. The recent comparative rush of banks
into credit cards, even in areas previously serv
iced by such plans, does not seem to indicate
any extraordinary barriers to entry.
The early offering of a credit card not only
fails to prevent later entry of competitive credit
cards but also fails to assure the pioneer of
continued dominance of the field. Experience
over the last decade and a half has shown that
newcomers with sufficient resources and
imagination are able to catch up with, and even
surpass in credit-card activity, banks already
in the business. This has not necessarily been
at the expense of the pioneer, however. In
many localities the entrance of a new credit
card has expanded the total market for these
services to the advantage of both the older and
the newer plans.

than $25 million that operate their own creditcard plans. The characteristics of these plans
were similar to the typical credit-card operation
at large banks. The plans at these small banks
ranged in size from 230 holders of credit cards
and 60 merchants to 40,000 holders of credit
cards and 850 merchants. Consequently, there
were large differences in the types of equip
ment used and in the initial costs. The time re
quired to recover the initial investment at these

SIZE CONSIDERATIONS:
EFFECTS OF CREDIT CARDS
ON SMALL BANKS
Ability of Small Banks to Operate
Profitable Credit-Card Systems
With or Without Competition from
Larger Bank Plans
Another of the major concerns about the
growth of credit cards is that the competitive
position of smaller banks will be adversely
affected. It is sometimes assumed that creditcard plans are limited largely to the bigger
banks because of heavy start-up costs and the
consequent need to generate a large volume of
business. If this were true and if credit cards
were to become an important device for attract
ing new business, then the smaller banks, being
unable to enter this field, would be at a com
petitive disadvantage, possibly a very serious
one. The actual situation, however, does not
confirm this fear.
Evidence from the Task Group’s survey in
dicates that, although the proportion of banks
that are offering credit-card services is larger
for large banks than for small ones, a significant
number of small banks are participating in this
field. Of the 197 banks reporting such plans in
the September 1967 survey, nearly one-third
had deposits of less than $25 million, and onefourth had deposits of between $25 million
and $100 million. Two banks with deposits of
less than $5 million were operating credit-card
plans in 1967, as were 25 other banks with
deposits of less than $10 million. The distribu
tion of credit-card plans by size of bank is
shown in Table 9.
The experience of the 1950’s clearly demon
strates that success in the credit-card field is
not necessarily a function of bank size. The exit
of some large banks from this type of banking
service has been well publicized, whereas the
success of a number of small bank plans has
gone virtually unnoticed. A dozen small banks
have been operating credit-card plans for more

small banks ranged from less than 1 year to
about 5 years. For the most part these bankers
were very enthusiastic about their operations
and considered their plans profitable.

Table

NUM BER OF BANKS OFFER IN G C R E D ITCARD AND/OR C H E C K -C R E D IT PLANS,
SEP TEM BER 30,1967
By Type of Plan Offered and Size of Bank

Type o f plan
offered

Size o f bank (total deposits,
in millions o f dollars)
T otal
U nder 25

2 5 -1 0 0

100 or m ore

O nly credit cards..........

130

Only check credit.........

155

199

178

532

B oth ty p e s........................

A ll ty p e s.......................

216

252

261

729

Without doubt the success of the plans of
some small banks has been related to the lack
of direct competition from other banks. As the
competitive environment changes, smaller
banks considering entry into this field might
be hampered in offering their own credit-card
plans in competition with plans already oper
ating in their markets. Similarly, the entry of
competitive plans might adversely affect small
bank credit-card operations that are currently
successful. Nevertheless, experience has demon
strated that plans of relatively small banks can
thrive in the shadow of competition from large
banks. The advantages of large-scale operations
with credit cards— such as the support of sizable
advertising campaigns and machine processing
— have not yet proved essential to credit-card
profitability.

than a decade.
Members of the Task Group interviewed the
officials of several banks with deposits of less

Substitutes for Independent Credit
Cards
One reason for concern about the impact of
large banks’ credit-card operations is the im
plied assumption that the small bank has no
defense open to it except to start its own in
dependent operation. But to assume this is to
ignore the widening range of partial substitutes
actually available to a small bank— or even to
a large bank for that matter— such as (1) be
coming an agent or an associate of some prin
cipal bank operating a plan, (2) taking a
franchise, or (3) joining an association of
credit-card banks. Not all of these alternatives
existed 2 years ago, and further variations may
evolve in the future.
Considerable savings in time and money are
possible through various potential affiliations.
However, the profitability of these affiliations
is also variable, as is the degree of “substitu
tion” that such shared plans would provide as
alternatives to a fully independent operation.
The most common of these solutions for a
smaller bank is to enter into one of the various
agency arrangements open in most parts of the
country. As a result of the ease of acquiring
agency status and the advantages such status
provides, more banks are agents than are prin
cipals in any kind of bank revolving-credit plan.
According to the October 1967 Report of Con
dition, more than 1,000 banks were participat
ing in agency-type plans. Most of them were
smaller banks. Approximately three-fourths had
less than $25 million in total deposits.
In some cases, small banks competing with
large banks have taken advantage of the poten
tialities of agency status to sign up as agents of
two competing card systems. This gives them
the advantage, in signing up merchants, of
offering two types of card plans for a single
account.
Intermediate advantages— some relating to
costs— are to be found in an associate status
or in becoming a licensee of a large credit-card
bank. The advantages and disadvantages of
these various affiliations were described in
Chapter 3. Suffice it to say that the options
available to small banks desirous of participat

ing in the credit-card movement are broad in
deed (though not all are available in any par
ticular area), and increasing numbers of banks
are taking advantage of the opportunities that
are available.
In any consideration of the “substitutes”
that are available for an independently run
credit-card plan, check-credit plans should not
be neglected, although they too cannot pre
cisely replace the credit card. A number of
large and sophisticated banks that have weighed
the two types of revolving-credit programs have
preferred check credit. More than two-thirds
of the largest banks with revolving-credit plans
offer check credit exclusively, and nearly threequarters of the small banks. The fact that nearly
a tenth of all the banks that offer revolving
credit have chosen to operate the two types of
plans simultaneously confirms the lack of com
plete substitutability of one type of plan for
another, even among the small banks.
Nevertheless, most banks moving into check
credit have done so at least in part so as to be
able to offer their customers what they believed
was a less costly but adequate substitute for a
credit card. Not only can the cost involved in
various check-credit plans be much lower than
for full credit-card plans, but also, with checkcredit plans, banks can be more selective with
respect to risks and can avoid considerable
bookkeeping and data-processing responsibili
ties. Consequently, check-credit plans may be
well suited to smaller banks seeking a reason
ably competitive device for extending revolving
credit to their customers. Another alternative is
affiliation with a nonbank credit-card plan.

GEOGRAPHIC CONSIDERATIONS:
IMPACT ON MARKET AREAS
A bank may effectively expand the market
area it serves by embarking on a credit-card
program and administering the program to that
end. The probable effect would be: (1) Stimu
lation of banking-by-mail, including the grant
ing of personal loans by this means; (2) expan
sion of the number of correspondent relation
ships (and the normal accompanying banking

plan can be profitable to the local bank, as the
growth in resulting bank services more than
offsets the loss of local credit to the principal
bank in the city. This possibility of profit, as
well as the defensive aspect, helps major city
banks in their efforts to extend their corre
spondent networks. Some large banks have
used their credit-card plans to attract new
correspondents; banks becoming agents also
have to open correspondent accounts. More
over, the scope of existing correspondent rela
tionships is sometimes enlarged by the addition
of credit-card services. An alternative selected
by some local banks that are unable or unwill
ing to offer a card plan of their own is to offer
the plan of a larger correspondent.

business) by offering other banks some appeal
ing form of participation in the credit-card
plan; and (3) utilization of participating banks’
affiliation with the credit-card plan to enlarge
both deposit and lending relationships with
holders of credit cards and merchants in the
participating banks’ territories.
The prospects of banking-by-mail are in
creased when a bank is willing to arrange small
personal loans by this procedure. Moreover,
the advent of the credit card and its stream
lined credit-granting facilities has greatly in
creased the potential for granting credit by
mail. If credit cards and similarly operated
plans become commonly used, a bank located
some distance away may become almost as
convenient as a nearby bank for obtaining per
sonal credit. Once a local customer has ob
tained a prearranged credit line, he can pay
by check or some other means. Such a poten
tial for broadening a bank’s service area with
out enlisting the help of other banks is greatest
for a city bank (in a nonbranching State) de
siring to operate in the suburbs.

The traditional competitive aspects of cor
respondent banking are not changed by the
advent of the credit card, but the specific pat
tern of correspondent relationships may be. A
bank that is aggressive in pushing its creditcard plan in remote areas stands to gain normal
correspondent business as well as credit-card
business from such affiliates. At the same time,
of course, it must exercise care against the loss
of other correspondents who think that their
business is threatened by the new credit-card
arrangements with competitors.

The help of a local suburban bank, however,
would make the city bank’s job of soliciting
both cardholders and merchants in the suburbs
much easier and more effective. The principal
credit-card banks that arrange to have sub
urban agencies usually find that participating
and agent banks do earn the shares of the
business allocated to them. Without the co
operation of local suburban banks— indeed,
against their likely opposition— the develop
ment of banking-by-mail from suburbia to the
central city would probably be advanced little,
if at all, by the city bank’s introduction of the
credit card.

Credit-card affiliation and interchange,
limited as they are to a small segment of a
bank’s operations, provide only partial substi
tutes for de novo branching and merger. Where
these traditional methods of geographical ex
pansion are feasible, the existence of a creditcard service augments the total potential gain
from the new office just as any other new service
would. The feasibility of getting approval for a
new branch or for a merger depends on non
economic factors as well, and the possibility of
interchange or other credit-card affiliation may
relieve some of the pressure for geographic ex
pansion by these older and more sweeping
methods.

Unless the suburban bank provides some
kind of a plan, some of the local business will
tend to move elsewhere. The widening sign-up
campaigns of the city credit-card bank will
make some incursions, or if the local suburban
bank chooses to affiliate as an agent or par
ticipant (card-issuing) bank, at least some
service that was previously infeasible will be
generated from a distance.
Agent or participant status in a credit-card

Interchange and affiliation systems— re
gional, national, and international— grew
rapidly in 1966 and 1967 and can be expected
to grow further as credit-card plans develop
more generally in the banking industry. Despite

certain systemwide advantages with regard to
overhead expenses, affiliation with an inter
change system is not essential to the success of
a credit-card plan as such. Outside the issuing
bank’s immediate market territory, “travel and
entertainment” features of a bank credit-card
widely accepted through interchange arrange
ments are significant only for a very limited
number of holders of credit cards. Otherwise,
the volume of remote interchange business is
likely to remain relatively small for some years
to come.
Thus, aside from changes in the payments
mechanism— a separate consideration treated
in Chapter 8— there would appear to be no
“natural monopoly” in the credit-card inter
change system, per se. If present trends con
tinue, even the further development of national
interchange systems is not likely to result in the
exclusion of a small credit-card bank from
membership, let alone preclude its survival as
an independent credit-card operator. Nor, for
the most part, under existing law, would the
limited number of credit-card plans that are
likely to be operated in any given banking
market be noticeably more restrictive than the
present arrangements with respect to other
banking services. With these new services being
brought into local banking markets, such mar
kets are more likely to feel a thrust of com
petition rather than of restraint in the immedi
ate future.

■

Evidence suggests that credit-card and re
lated plans have not, as yet, had any significant
impact on banking structure and competition.
The future promises more changes, but prob
ably not drastic ones.
The early introduction of a credit-card plan
has not served as a barrier to later entry of

other banks into the same market. Indeed, in
some respects, entry is made easier by banks
that have gone before. Credit-card operations,
as such, do not reflect the characteristics of a
“natural monopoly.”
Despite the assumption that smaller banks
have only limited ability to offer independent
credit-card plans in direct competition with
those of larger banks because of high initial
costs, many small banks do operate their own
credit-card programs. Moreover, effective alter
natives are or will continue to be open to many,
if not all, small banks that are interested in
providing their customers with revolving credit.
Check credit, nonbank plans, and correspond
ent or agency-type arrangements accounted
for a majority of the plans being offered in
early 1968. Even if these plans are not perfect
substitutes for the retail-type credit card, they
are similar to such cards in several respects,
and when coupled with the locational advan
tages offered by the small bank in its own
market area, they may be fairly effective sub
stitutes.
Small banks may be able to compete by offer
ing another bank’s plan as an agent. As a gen
eral rule the larger plans do offer agency status,
and this option is open to small banks. The
advantages to the issuing and receiving banks
would suggest that future growth of credit cards
will continue to emphasize the use of agent
banks.
It is still too early to assess the full impact
of the development of bank credit cards on the
banking structure. The important objective of
the bank supervisory authorities in this area is
to see that the avenues of competition are kept
open in order to maximize the benefits of this
new banking service to the public. It is espe
cially important that such new services do not
become a vehicle for reducing competition.

BANK SUPERVISION
AND
LEGAL ASPECTS

problems nor major and unexpected increases
in demand for credit have appeared. In the case
of credit cards, the utilization ratio of author
ized lines has been quite low; in September
1967 it averaged 12 per cent for all credit-card
banks (Table 10). Since the credit-card pro
gram generates but a small part of a bank’s
over-all loan portfolio, the problem of excess
credit demands has not arisen, nor is it likely
to in the near future. (For check-credit plans,
the utilization ratio is higher, 42 per cent of
lines, but the total of authorized lines is smaller
and is more easily controlled.) As for fraud
losses, it appears that the issuance and subse
quent control of credit cards has, by and large,
been handled in an intelligent manner. Write
offs have not been excessive— 1.97 per cent for
the first half of 1967 relative to outstandings as
of September 30. (For check-credit plans, the
equivalent figure was 0.23 per cent, thereby con
firming the lower degree of control problems
inherent in those plans.)
In looking at the problem of examining
banks entering or engaged in credit-card pro
grams, supervisors are most interested in assur
ing that banks set up and implement (1) rea
sonable controls over the issuance of cards, (2)
reasonable credit limits for customers, and (3)
firm collection policies to minimize credit losses
through fraud and delinquency. Banks also will
need to observe applicable legal restrictions and
standards of fair practice. Start-up costs should
be carefully estimated and controlled. In addi
tion the bank should make a projection of
operating earnings prior to a decision to enter
this field. In particular, banks must take special
precautions against fraud, which is potentially
greater than in other operations.
Developments in the credit-card field have

BANK SUPERVISION
The recent upsurge of banking interest in
credit-card programs and the rapid growth in
the number of banks entering this field, either
as direct or franchised issuers of credit cards
or as agents for a larger bank, without doubt
created a need for additional supervisory pro
cedures and controls. Check-credit plans, on
the other hand, did not require special attention
since they are not radically different from other
kinds of consumer lending already regulated by
existing methods.
In April 1967 the Comptroller of the Cur
rency expanded his reports of examination to
include information on credit-card and checkcredit plans. Similar information was requested
by the Federal Reserve System in its examina
tion reports beginning with October 1967 and
by the Federal Deposit Insurance Corporation
beginning with March 1968. This information
has been helpful in determining the scope and
procedures of the plans used by banks.
One reason for these steps is that bank credit
cards were recognized as presenting a poten
tially serious problem in credit control. Once
the cards have been issued, the cardholder has
virtually automatic access to credit purchases at
a large number of businesses and, under many
plans, to cash advances at the bank. In prin
ciple, a bank is exposed to potentially large and
sudden demands for credit. Attention must be
given to assessing the potential credit demands
arising from a bank’s credit-card program and
its ability to meet these demands. In addition,
a bank entering this field faces start-up costs of
unusual magnitude and possibly heavy losses
from fraud.
Fortunately, neither serious credit-control

Table 10
IM P O R TA N CE O F C R ED IT-C A R D AN D C H E C K -C R E D IT PLANS IN T O T A L C O N SU M ER LOAN
P O R TFO LIO S O F BANKS OFFER IN G SUCH PLANS, SEP TEM BER 30, 1967
By Federal Reserve District

Banks with credit-card plans

Credit-card plans

Federal
Reserve
district

T otal con
sumer loan
portfolio
(millions
o f dollars)

Banks with check-credit plans

Check-credit plans

A m ou nts (millions
o f dollars)

Total
lines

Outstand
ing

T otal con
A m ou n ts outstanding sumer loan
portfolio
as percentage o f —
(millions
o f dollars)
T otal
C onsum er
lines
loan
p ortfolio

A m ou n ts (millions
o f dollars)

T otal
lines

Outstand
ing

A m ou n ts outstanding
as percentage o f —

C onsum er
loan
portfolio

Total
lines

B o sto n ..................................
N e w Y o r k ..........................
Philadelphia.......................

3 8 1 .9
1 ,3 1 6 .4
1 8 4 .6

23 0 .1
5 4 3 .2
7 8 .1

2 1 .8
6 4 .8
1 2 .3

5 .7 1
4 .9 2
6 .6 6

9 .4 7
1 1 .9 3
1 5 .71

8 6 6 .4
3 ,0 4 2 .1
1 ,2 2 0 .3

1 1 0 .8
2 6 4 .4
1 1 1 .2

5 7 .3
9 8 .0
6 0 .6

6 .6 1
3 .2 2
4 .9 7

5 1 .7 3
3 7 .0 7
5 4 .4 7

C leve lan d ............................
R ich m on d ...........................
A tla n ta .................................

4 3 1 .3
4 0 6 .0
3 1 2 .6

2 8 3 .7
2 1 9 .6
2 1 4 .4

2 6 .9
2 8 .2
3 0 .6

6 .2 4
6 .9 5
9 .7 9

9 .4 8
1 2 .8 5
1 4 .2 7

9 8 3 .3
8 5 2 .0
7 9 5 .8

6 7 .2
5 7 .1
5 4 .3

3 2 .0
1 7 .2
2 2 .2

3 .2 5
2 .0 2
2 .7 9

4 7 .6 5
3 0 .0 8
4 0 .8 4

C h ic a g o ................................
St. L o u is ..............................
M inneapolis.......................

1 ,0 4 8 .6
2 0 2 .5
7 .9

1 ,3 5 8 .9
10 0.5
2 .4

1 2 6 .5
1 2 .3
.1

1 2 .0 4
6 .0 7
1 .2 7

9 .2 9
1 2 .2 6
3 .6 1

1 ,9 3 0 .4
6 2 1 .3
3 5 8 .6

1 0 2 .8
2 6 .4
15.1

5 3 .4
1 1 .5
5 .6

2 .7 7
1 .8 5
1 .5 6

5 1 .9 7
4 3 .6 8
3 6 .9 7

K ansas C ity .......................
D a lla s ...................................
San Fran cisco ..................

5 8 .4
5 9 .3
3 ,6 9 4 .1

7 4 .4
7 8 .5
1 ,9 2 9 .0

6 .4
8 .1
2 9 5 .3

1 0 .9 6
1 3 .6 6
7 .9 9

8 .6 6
1 0 .2 9
15 .31

3 8 3 .8
35 6 .1
3 ,0 0 5 .4

2 6 .1
1 4 .0
2 9 1 .4

9 .4
4 .5
11 1 .5

2 .4 5
1 .2 6
3 .7 1

3 6 .0 3
3 2 .3 4
3 8 .2 7

A ll districts...................

8 ,1 0 3 .5

5 ,1 1 2 . 7

6 3 3 .0

7 .8 1

1 2 .3 8

1 4 ,4 1 5 .5

1 ,1 4 0 .7

4 8 3 .2

3 .3 5

4 2 .3 6

o t e .—

Sin ce a n u m b e r o f b a n k s h a v e b o t h c r e d it -c a r d a n d c h e c k -c r e d it p la n s, th ere is s o m e d o u b le c o u n tin g in th ese fig u res.

mailing of cards and a minimum of confusion.
Although the inevitable element of abuse has
been present, fraud and credit losses to date
have not been excessive. Even in the Chicago
District, where the mass distribution of cards
by several large banks resulted in heavy credit
and fraud losses and adverse publicity on a
national scale, it was reported that start-up costs
and losses in the credit-card field sustained by
banks in that District have been fairly large in
dollar amount but that the effect on the net
earnings of those large banks has been small.
Although probably not yet on a profitable basis,
the banks now seem to have the operation under
control and have already sustained the major
costs.
In the New York area, a remarkably small
aggregated loss has been absorbed by the banks
issuing cards, and few problems are expected
to arise there as long as normal lending prac
tices are followed.
Over-all, the supervisory procedures appear
to be adequate to control development in the
credit-card area without additional legislation.

been watched closely by supervisory authori
ties. On the whole, bank procedures are not
subject to significant criticism by supervisors at
this time.
A diversified group of banks has been active
in operating credit-card plans for a number of
years and with a good deal of success. These
successful plans have been the basis for much
of the nationwide expansion of credit cards.
Among these, many smaller banks have found
that the credit-card program is both desirable
and profitable. On the other hand, some banks
have not been successful with such plans and
they have discontinued the plans without en
countering any serious consequences for their
capital.
Vice presidents in charge of examinations at
the 12 Reserve Banks were asked to comment
on their experience with bank credit-card plans
in their districts: In California, improved massmailing techniques were evident in the launch
ing of the “Master Charge” card. Some 80 banks
under a program developed by four major banks
launched their plan in July 1967 with a mass-

The capability of management, not legislation,
will be the principal determining factor in the
success of credit-card plans, as is true of any
lending program. Banks not yet in the field
have been able to appraise the problems aris
ing from mass issuance and/or inadequate con
trols and should now have a better idea of
start-up costs and of sound control procedures
than banks entering the field a year or so ago.
Examiners also have become better oriented to
proper supervisory controls. A comparison of
recent examination reports with initial reports
made in 1967 indicates a more comprehensive
degree of supervision is now being exercised.

means to accomplish the most fundamental of
banking functions— that is, the financing of
commercial transactions.
Like letters of credit, bank credit-card trans
actions are essentially three-party transactions
involving two independent contracts, one be
tween the bank customer and the bank and the
other between the merchant and the bank. The
bank customer has agreed to pay the bank with
out regard to any dispute between him and the
merchant. Similarly, the bank has agreed to pay
the merchant upon compliance with specified
conditions, although the bank may be unable
to obtain reimbursement from its customer. As
stated in Davenport, “Bank Credit Cards and
the Uniform Commercial Code:” 1

LEGAL ASPECTS
The legal problems that may arise in connec
tion with the issuance and use of bank creditcard and check-credit plans are numerous.
Therefore, banks proposing to establish and
operate, or to participate in, any such plan
would be well advised to consult counsel in
order that possible legal difficulties may be
taken fully into account. By so doing they may
avoid costly adjustments or serious obstacles
to the successful operation of the plan.
Various legal questions are discussed briefly
below under three general headings. The first
concerns itself with the basic corporation au
thority of banks to operate such plans; the
second relates to supervisory authority over
bank credit cards and check-credit plans; the
third involves restrictions or limitations to
which such plans may be subject, depending on
the circumstance and the jurisdiction. (Mate
rial cited in the footnotes to this part of the
report is set forth on page 46.

Both situations have the common denominator
of a loan of credit or reputation by a bank to a
customer who is a buyer of goods or services from
a merchant, who accepts the bank’s credit in sub
stitution of the buyer’s.

The similarities to accounts-receivable
financing are also instructive. Simply stated, the
credit card is merely another device by which
a merchant may arrange with a bank to assign
customers’ credit accounts in order to obtain
immediate payment. In such situations, how
ever, the customer’s relationship with the bank
normally does not antedate the arrangement
between merchant and bank. The merchant’s
risks in extending credit to the customer are
not of necessity eliminated by such arrange
ments, whereas such risks are more or less non
existent in cases where credit cards are em
ployed.
Whether a particular bank has the basic legal
authority to operate a credit-card or checkcredit plan depends, of course, on the appli
cable law, Federal or State. In so far as national
banks are concerned, the Comptroller of the
Currency has expressed the position that na
tional banks may have bank credit-card or
check-credit plans.2
As to State banks that are members of the
Federal Reserve System, there is no provision
of Federal banking law making reference to
bank credit cards or check-credit plans, and it
seems clear that the authority of State member
banks to operate such plans is not barred by

Authority to Operate Credit-Card
or Check-Credit Plans
At the outset it would seem appropriate to
observe that credit-card activity by banks can
be analogized, although imperfectly, to two
well-established banking practices, both of
which clearly fall within the powers possessed
by banks to make loans, receive deposits, and
discount notes: (1) letters of credit and (2)
accounts-receivable financing. Moreover, the
offering of credit-card services by banks is a

expected by the Board to pursue the same
sound lending policies and practices as are
applicable to other forms of credit extension.
In extreme cases, the appropriate Federal
bank supervisory agency would have as a
corrective device the “cease-and-desist” orders
issued under the Financial Institutions Super
visory Act of 1966 Gto restrain “unsafe or un
sound practices.” Thus, if bank examination
reveals deficiencies in procedures relating to
credit cards— inadequate checking of credit
worthiness of holders of credit cards, ineffective
collection, failure to reclaim delinquent cards,
and so forth— the examiner would call the situ
ation to the attention of the bank’s manager
and request correction. In serious situations, the
Board (or other appropriate Federal super
visory agency) has authority to institute ad
ministrative proceedings looking toward an
order requiring the bank to cease and desist
the particular practice. A temporary order,
effective immediately upon service, could be
issued to the bank if the practice is likely to
cause insolvency, for example, or otherwise
to seriously prejudice the interests of the de
positors. In other situations, the order could
be issued only after completion of formal pro
ceedings including a hearing under the Ad
ministrative Procedure Act.7 Under the Finan
cial Institutions Supervisory Act the Federal
bank supervisory agencies also may issue orders
to restrain violations of law.

the Federal banking statutes. The Federal Re
serve A c t3 provides that, except where incon
sistent therewith, State member banks shall re
tain their full charter and statutory rights under
State law. Thus, a determination as to whether
a credit-card or check-credit plan of a State
member bank is within its corporate authority
would be governed by the laws of the State in
which the bank operates, together with any
interpretations thereof by the appropriate gov
ernmental authorities.
Some State laws grant power to banks in
general terms to operate bank credit-card and
check-credit plans; others do so in more specific
terms. Recently, several States seem to have
adopted the latter approach. Legislative and
administrative sanction is perhaps to be implied
in the various States where criminal statutes
have been enacted to deal with credit-card mis
use, for example, and in cases where the estab
lishment of bank credit-card systems has
received the approval of State banking authori
ties. Dicta by the U.S. Supreme Court in United
States v. Philadelphia National Bank 4 included
among principal banking products: “various
types of credit, for example: unsecured per
sonal and business loans, mortgage loans, loans
secured by securities or accounts receivable,
automobile installment and consumer goods in
stallment loans, tuition financing, bank credit
cards, revolving credit funds.”
The Task Group is unaware of any instances
in which a bank credit-card or check-credit
plan has been challenged by a bank supervisory
agency, either Federal or State, or by litigation
in the courts as being ultra vires or beyond the
basic corporate authority of any bank. This, to
gether with the fact that such plans were intro
duced in the early 1950’s, suggests that the
power of banks to engage in this kind of credit
operation has been generally conceded.5

Section 9 of the Federal Reserve Act author
izes the Board, after a hearing, to terminate
a State bank’s membership in the System for
failure to comply with the provisions of the Act
or the regulations of the Board issued pursuant
thereto, including such conditions of member
ship as the Board may prescribe pursuant to
the Act. In its Regulation H— Membership of
State Banking Institutions in the Federal Re
serve System 8 the Board prescribes two
—
standard conditions for membership in the
Federal Reserve System for State banks. One
condition is that the bank shall maintain ade
quate capital and surplus. The other condition
requires that each State member bank shall
conduct its business with due regard to the

Supervisory Authority
The credit-granting function of banks, how
ever implemented, is always subject to super
visory considerations. Thus, in extending funds
to borrowers through the use of credit-card or
similar media, State member banks would be

strictions or limitations that may affect the
operation of such a plan.

safety of its deposits. It also provides that, ex
cept with the permission of the Board, the bank
shall not permit or cause any changes to be
made in the general character of its business or
in the scope of its corporate powers. These pro
visions probably would not be regarded by the
Board as affecting the operation of a bank
credit-card or check-credit plan unless the case
were exceptional. Such a case might arise, for
example, if the service grew to such an extent
as to become more than a reasonable incident
to the bank’s normal operations (in which case
the Board’s permission would have to be sought
under its standard condition of membership),
or if the bank should offer the service in a
manner inconsistent with safety and soundness
(in which event there would be a violation of
the standard condition of membership).
Existing law does not authorize the Board to
prescribe regulations governing the terms and
other features of credit cards or similar credit
media, as opposed to the case-by-case approach
involved in bank examination, cease-and-desist
proceedings, or any proceedings for forfeiture
of membership, as discussed above. The Board,
of course, has specific, limited regulatory au
thority with respect to the disclosure and ad
vertising of credit costs under the recently en
acted Federal truth-in-lending law, as is noted
later.

Usury Laws
State usury statutes are examples of such
restrictions that may affect the operation of
bank credit-card or check-credit plans. The
service or finance charges to the holder of a
credit card under such plans range from Z of
A
1 per cent to IV2 per cent per month. Al
though the effective annual rate of finance
charge will vary— depending on such matters
as the “grace” period, other relevant provisions
of a particular plan, and the customer’s rate of
repayment— these monthly rates would be
equivalent to nominal annual rates of 9 to 18
per cent. Some check-credit plans have fixed
charges or fees depending, for example, on the
number of checks used by the customer.
Whether the finance or service charges or fees
under a particular credit-card or check-credit
plan are subject to State usury or other appli
cable laws placing ceilings on charges for credit
by banks would depend, of course, on the law
of the particular State.
That problems might arise in this connection
is indicated, for example, by the situation that
arose in Oregon in 1967. The State Attorney
General challenged two banks on the grounds
that their finance charges of IV2 per cent per
month under their credit-card plans exceeded
the maximum permissible per annum rate al
lowed on bank loans under Oregon law. The
two Oregon national banks concerned con
formed to the State Attorney General’s opinion.9
Some States have amended their statutes so
that credit-card, check-credit, or similar plans
are not restricted by their general usury or
other rate-ceiling statutes. This has occurred
recently, for example, in Ohio, Virginia, and a
few other States.1 In some other States the
0
so-called “contract” rate in the usury statutes
or provisions of related statutes permit a max
imum rate deemed by banks to be adequate for
credit-card and similar plans.

The determination of questions of consumer
liability relative to bank credit cards is a matter
for the courts in the light of any relevant statute
and is not within the Board’s jurisdiction. Prac
tices obviously inequitable with respect to hold
ers of credit cards might be the subject of
supervisory criticism, however, as are unsafe or
unsound practices otherwise in the establish
ment, implementation, or operation of the
credit-card plan.

Various Legal Restrictions and
Limitations
Aside from the matter of the basic corporate
authority of a bank to establish a credit-card
or check-credit plan and the supervisory con
siderations just discussed, questions may arise
concerning compliance with various legal re

Antitrust Laws
Some credit-card systems may raise ques
tions as to whether their effect may be sub

stantially to lessen competition, unduly to
restrain trade, or to constitute monopolistic
activities within the meaning of the Federal
antitrust laws. However, credit-card or checkcredit plans, as such, are not necessarily to be
criticized from an antitrust standpoint. Never
theless, some recent experiences of banks may
be instructive.
In 1965 a suit was instituted by the Depart
ment of Justice against the First National City
Bank, New York, to enjoin as a violation of
Section 7 of the Clayton Act the acquisition by
that bank of Carte Blanche Credit Corpora
tion on the grounds that such a transaction
would eliminate potential competition between
the bank and Hilton Credit Corporation in
the field of general-purpose credit cards.1
1
However, the subsequent arrangement for sale
by the bank of Carte Blanche assured dismis
sal of the Justice Department’s action.1
2
The Department of Justice also instituted a
suit under the Sherman Act against Bank of
Virginia, Richmond, Virginia, in which it was
charged that requirements that merchants par
ticipating in the bank’s credit-card plan not
participate in any other regional credit-card
service was illegal. The elimination of the re
quirement was a subject of a consent decree
entered in the case last year.1
3
The interest of the Department of Justice
was indicated also by a report in the American
Banker for March 21, 1967, which showed that
the Department had given informal clearance to
the operation of a common credit-card plan
of several banks in California through a non
stock, nonprofit organization then known as
California (now Western States) Bankcard As
sociation.
These cases, as well as other situations,1 in
4
dicate that banks ought not to ignore the anti
trust implications of their credit-card and
check-credit practices. Banks that have set up
joint plans or licensing plans have been care
ful, for example, to offer membership or fran
chises to other banks on a nonexclusive basis.
Truth in Lending
Bank credit-card, check-credit, and similar
plans may be subject to laws concerning dis

closure of credit terms that have been enacted
by some States. As a form of open-end or re
volving credit, such plans are covered under
the Federal Truth in Lending Act, Title I of
the Consumer Credit Protection Act, approved
May 29, 1968.1 The promulgation under the
5
Act of the substantive regulations (to become
effective July 1, 1969) is the responsibility of
the Board of Governors. The 1968 Act specifi
cally includes among its enforcement pro
visions the Financial Institutions Supervisory
Act of 1966.
Bank Service Corporation Act
The Bank Service Corporation Act, the ad
ministration of which is divided among the
Board of Governors, the Comptroller of the
Currency, and the Federal Deposit Insurance
Corporation, depending upon whether the
banks involved are State member, national, or
nonmember insured, was enacted to authorize
the investment by member banks in “bank
service corporations” organized to provide
“bank services” for banks.1 The legislative
6
history makes it clear that under the Act banks
— particularly smaller banks— would be able
“to make use of modern automated equipment
by means of stock ownership in a jointly owned
service corporation.” 1
7
Credit-card plans that necessitate data proc
essing and also involve sponsorship by more
than one bank can raise questions under the
Act if the arrangement or organizations provid
ing the “bank services” involve stock owner
ship by banks. This, however, may be unlikely
since such arrangements or organizations may
be set up without the need for stock-type
ownership, as for example the Western States
Bankcard Association.
The situation most frequently encountered
under the Act probably will arise in connection
with Section 5, which conditions the perform
ance of “bank services”— whether by a “bank
service corporation” or other organization or
entity— for Federally supervised banks upon
the furnishing of assurances that the perform
ance thereof will be the subject of regulation
and examination by the appropriate Federal
supervisory agency. This is confirmed by the

fore, unable to give notice of the theft to the
issuer, notwithstanding a provision in the con
tract between the issuer and the cardowner, as
allowed by New York statute, that the card
owner would pay for all purchases made by
anyone presenting the card until the issuer was
notified of the theft or loss of the card.2
2

recent interpretation of the Board of Governors
that Section 5 of the Act requires the filing of
assurances with it relating to regulation and
examination as specified in its Regulation S 1
8
by State member banks and the related service
organization through which the necessary in
formational, bookkeeping, statistical, and simi
lar functions under the banks’ credit-card plan
were to be performed.1
9

It would appear that more than 40 States
have statutes specifically making it a crime to
use credit cards improperly or to engage in
various disallowed activities with regard to
credit cards. Virginia, for example, is one of
the more recent States to enact comprehensive
legislation covering this matter.2 However,
3
even where there are no statutes specifically
dealing with the matter, the general criminal
law would, of course, be of some use in the
prosecution of any offenses that involve credit
cards.

Bank Holding Company Questions
Among other legal questions that might arise
in this connection is whether a registered bank
holding company might establish a subsidiary
to operate or assist in the operation of a creditcard plan, consonant with the provisions of the
Bank Holding Company Act of 1956.2 The
0
answer depends, of course, on the circum
stances of the specific case— such as whether
the operation is for the holding company’s own
subsidiary banks or for those banks and also
nonsubsidiary banks, and in each case on how
the operations are to be performed.

Under recent court decisions, credit-card
fraud cases involving the use of the mail
present no difficulties in prosecutions under
the Federal Mail Fraud statute.2 On the other
4
hand, the National Stolen Property A ct2 has
5
proven to be of dubious efficacy in dealing
with credit-card cases. In Beam v. United
States,26 the most recent reported decision in
volving that statute, the Court concluded that—

Lost or Stolen Credit Cards:
Civil and Criminal Remedies
Among the many potential questions con
cerning the use and operation of credit cards
and similar plans that can be authoritatively
answered only by the courts is the question of
liability in the case of the unauthorized use of
credit cards. The problem of lost or stolen
cards (the receipt of which may have been un
solicited) is especially complicated in the light
of provisions of some card plans that endeavor
to specify the rules of liability between the
issuing bank and the customer. The law in this
relatively new field is still in a formative state.2
1
There appear to be no reported court cases
involving bank cards.
Some States may enact statutes bearing on
the matter. Reference might be made particu
larly to the recent decision of a New York
court that the owner of a credit card was not
liable in a suit by the card issuer to recover
for substantial purchases made over a 30-day
period by one who stole the card where the
card owner was unaware of the theft and, there

. . . It may well be that theft of credit cards and
their transportation and fraudulent use in inter
state commerce requires a prohibition. If so, it is
a proper subject for Congressional consideration.

Out-of-State Activities
Problems can arise in situations where banks
located in one State make their credit-card
services available to customers located in other
States. Nonetheless, banks have historically
made loans to customers in other States, and
thus State banking laws probably will not stand
in the way of credit-card transactions of this
sort. In these cases it is of primary importance
that the site of the transaction is the home
State, the place where the loan originates and
where payments are made. In cases where a
bank in one State makes its credit-card service
available in another State by franchising local

banks to provide these services, local banking
laws should be examined to determine whether
correspondent relationships of this sort are

permissible. The practice is presently widespread and apparently acceptable in most
States.

LEGAL CITATIONS FOR CHAPTER 5
1 1 Val. U.L. Rev. 218 (1967).
2 Comptroller’s Manual, paragraphs 7015, 7376, and 7378.
3 Section 9; 12 U.S.C. 330.
4 374 U.S. 321 (1 9 6 3 ), note on page 326. See also Jerry B. South, “Credit
Cards: A Primer,” 23 Bus. Law. 327 (January 1968).
5 Davenport, op. cit. 218, 238.
8 12 U.S.C. 1818.
7 5 U.S.C. 554.
8 1 2 C F R 208.7.
9 Oregon A .G .O . # 6 5 2 0 , Mar. 9, 1967; American Banker, Mar. 14,
1967, p. 1; Economic Review, Federal Reserve Bank of Cleveland, April
1967, pp. 27-35.
1 Page’s Ohio Revised Code, Anno., 1967 Curr. Serv., Title II, Section
0
1107.26(B) and Section 1107.27, effective Jan. 1, 1968; and Code of Vir
ginia, Section 6.1-361, effective June 28, 1968. See also New York Banking
Law Section 108 and Personal Property Law Section 413; and Act of
May 30, 1968, to amend Section 8-233, Code of South Carolina (1962).
1 United States v. First National City Bank, et al., U.S. Dist. Ct., South
1
ern District of New York, Civ. No. 65-3963, filed Dec. 30, 1965.
1 American Banker, Feb. 20, 1968.
2
1 United States v. Bank of Virginia, Civ. No. 4959; 5 C CH Trade Reg
3
ulation Rep. paragraph 45,066 (case 1916).
1 New York Times, Mar. 21, 1967; American Banker, Feb. 26, 1968.
1
1 Public Law 90-321.
5
1 12 U.S.C. 1865.
8
1 S. Rept. No. 2105, Sept. 18, 1962, p. 1.
7
1 12 CFR 219.
8
1 Federal Reserve Bulletin, November 1967, p. 1912.
9
2 12 U.S.C. 1 8 4 3 ( c ) ( 1 ) ( C ) , 1 8 4 3 (c ) (8 ) .
0
2 For example, see Washington and Lee Law Review, vol. 23, “The
1
Liability of the Cardholder For Unauthorized Purchases,” pp. 125-32
(1 9 6 6 ); 16 DePaul Law Review, “Credit Cards— A Survey of the Bank
Card Revolution and Applicability of the Uniform Commercial Code,”
pp. 389 et seq. (1 9 6 7 ); 19 Vanderbilt Law Review, “ Private Legislation
and the Duty To Read— Business Run by IBM Machine, the Law of
Contracts and Credit Cards,” pp. 1051 et seq. (1 9 6 6 ); and the Yale Law
Journal, June 1968, pp. 1418-31, “Credit Cards: Distributing Fraud Losses.”
2 Allied Stores of New York. Inc., etc. v. Funderburke, 211 N .Y . Supp.
2
2d 8 (1 9 6 7 ).
2 Va. Code, 18.1-119.4 et seq., approved Apr. 4, 1968.
3
2 12 U.S. 1341. See, for example, Adams v. United States, 312 F. 2d 137
4
(Fifth Circuit, 1963), and Kloian v. United States, 349 F. 2d 291 (Fifth
Circuit, 1 9 6 5 ); cert. den. 384 U.S. 913 (1 9 6 6 ).
2 18 U.S.C. 2314.
5
2 364 F. 2d 756 (Sixth Circuit, 1966).
8

IMPLICATIONS
FOR THE
CONSUMER-CREDIT
AND RETAIL MARKETS
ber 1967 are presented in Table 11. The small
volumes of these new programs relative to bank
lending activity are evident from the data pre
sented— ranging from 3.8 per cent of all com
mercial bank consumer instalment credit to
three-tenths of 1 per cent of total loans (ad
justed) and investments of all banks. Credit
cards and check-credit plans together ac
counted for only 1.3 per cent of total consumer
credit outstanding. If one considers only “plas
tic credit,” the category in which other types of
credit cards and certain revolving credits are
included as indicated in Table 12, amounts out
standing on bank credit cards accounted for

CREDIT-MARKET SETTING
Bank credit cards and check-credit plans be
long to two families of credit. First, they are
part of the larger family of general bank credit.
Of this family two major divisions are the ones
most directly affected by developments in the
area of bank credit-card and check-credit plans.
These are the traditional varieties of loans (1)
to consumers and (2) to retail merchants. Less
directly, these new credit devices relate to all
the other financial activities of the banks in the
sense that expansion of consumer credit in a
given context of monetary policy will be at the
expense of other borrowers. (The wider implica
tions of credit cards for banks are addressed
elsewhere, particularly in Chapters 3, 4, and 8.)
Second, bank credit cards and check-credit
plans are a part of the larger family of general
consumer financing. While their nearest kin are
some of the other forms of consumer credit
cards, they also are basically a form of general
instalment credit, along with some of the lend
ing instrumentalities of retailers, sales finance
companies, consumer finance companies, and
credit unions, among others. Like credit cards
and check-credit plans, some of the other im
portant categories of bank lending are part of
consumer financing— in particular, the tradi
tional forms of bank instalment lending. Be
yond these instalment lending groups, of
course, are the noninstalment forms, the
single-payment loans, service credit, and charge
accounts. It is the impact of credit cards on
this extended family of consumer credit gener
ally that is the subject of this chapter.
The magnitudes of bank credit-card and
check-credit outstandings and those of selected
other categories of credit at the end of Decem

Table

C R E D IT O U TS TA N D IN G ON BANK C R E D ITCARD AND C H E C K -C R E D IT PLANS C O M
PARED W ITH O TH ER S E L E C TE D FORM S
OF CR ED IT, D ECEM BER 31, 1967

Relation to credit
outstanding
(in per cent)
Credit
outstanding
(in billions
o f dollars)

Item

Bank Bank creditcard and
creditcard
checkplans
credit
plans

Com m ercial b a n k s:
.8
1 .3

1 0 0 .0
6 1 .5

1 6 2 .5
1 0 0 .0

2 3 6 .0
4 1 .1
3 4 .0

.4
1 .9
2 .4

.6
3 .2
3 .8

2 8 7 .5

4 2 4 .1

1 2 .0
2 1 .7
7 7 .9
9 9 .2

Credit-card and c h e ck -c red it.. .

6 .7
3 .7
1 .0
.8

1 0 .8
6 .0
1 .7
1 .3

C om m ercial banks:

A ll consum er instalment credit.
A ll banks:
T otal

loans

(adjusted)

and

M iscellaneous to ta ls:

1 For com ponents, see Table 12.

only 6.7 per cent of the total. Check credit is
properly excluded here. And even if the com
parison is limited to the consumer loan port
folios of banks that offer one or the other type
of plan, credit cards account for only 7.8 per
cent, while check-credit outstanding accounts
for about 3.5 per cent. (Such data for these
plans, by Federal Reserve district, are presented
in Table 10 on page 40.) No public policy con
sideration relative to credit cards and checkcredit plans can properly neglect the other ninetenths or so of the industry to which these plans
belong.

Table

“ P LA S TIC C R E D IT” O U TS TA N D IN G ,
D ECEM B ER 31, 1967

T yp e o f credit

Billions
of
dollars

Bank credit ca rd s1 .................................................

Since 1950 total consumer credit holdings
by financial institutions have grown more rap
idly than holdings by retailers and also more
rapidly than total instalment credit, per se. Of
equal interest, perhaps, are the growth patterns
exhibited by commercial banks’ holdings of
consumer credit relative to those of other finan
cial institutions. Between 1945 and 1955, com
mercial bank holdings of consumer paper rose
less rapidly than did the consumer loans of
nonbank financial institutions, and the bank
share in the financial institutions’ total dropped
from 56 per cent in 1945 to 48 per cent in
1955, as can be seen in Table 13. Over the
following decade, however, encompassing the
first big wave of check credit and the second
wave of bank credit-card plans, bank consumer
lending rose slightly faster than did nonbank
consumer lending; the downslide in the bank’s
share was thereby reversed. By 1965 banks
had increased their share of consumer paper
held by all financial institutions to more than
half, and the banks’ share has continued up
ward since that date. In 1967, despite the poor
showing of all financial institutions relative to
nonfinancial holders of consumer paper, com
mercial banks outpaced both groups.

O il com p an ies2 ........................................................

1 .0

Departm ent store revolving credit................

3 .5

Retail charge accounts.........................................

6 .5

Travel and entertainment cards 2 ...................

.1
.1

A ll types........................................................

1 2 .0

1 Excludes check-credit plans.
2 C onsum er portion only.
3 Including large independent credit-card firms
revolving-credit accounts at nondepartm ent stores.

and

Consumer credit as a whole has grown
rapidly in the postwar period independently
of bank credit-card and check-credit plans. It
nearly quadrupled between 1945 and 1950,
before the first wave of bank credit cards had
been launched. Consumer credit had doubled
again by the time the second credit-card wave
occurred in the late 1950’s. Between 1960 and
1965 such credit outstanding increased by more
than $30 billion, and in 1966 and 1967 it
rose by nearly another $12 billion to produce
a total of $99.2 billion at the end of 1967.
An important reason for this growth in con
sumer credit is the increasing affluence of the
American family, which has made it possible
for the family to allocate a larger share of its

expanding income to goods and services that
are beyond the category of basic necessities
and that lend themselves to credit financing.
In recognition of this development, both finan
cial institutions and retailers have adopted new
and more flexible credit plans— largely of the
revolving type, of which credit cards and
check credit are merely recent additional
varieties. Important outgrowths of these more
general innovations have been (1) the exten
sion of instalment credit to the financing of
soft goods and services, (2) the substitution
of credit financing for cash in many small pur
chases, and (3) the partial supplanting of some
conventional forms of credit, particularly
charge-account credit at retail stores. Retail
outlets still hold more than a fifth of all con
sumer indebtedness, but this is a sharply dimin
ished share from earlier years. In 1960, retailers
held a quarter of total consumer credit; in 1950,
over a third; and in 1945, well over a half.

Table 13
P O TE N TIA L M AR KETS FOR C R ED IT CAR DS:
Distribution of Consumer Credit by Financial and Nonfinancial Holders,
December 31 of Selected Years

1945

T yp e o f institution
and type o f credit

A m ou nt
out
standing

1955

A m ou n t
out
standing

1965

Percent
age
change,
1 9 4 5 -5 5

Am ount
ou t
standing

1966

Percent
age
change,
1 9 5 5 -6 5

Am ount
out
standing

1967

Percent
age
change,
1 9 6 5 -6 6

Am ount
ou t
standing

Percent
age
change,
1 9 6 6 -6 7

6 8 ,2 7 3
8 ,2 6 7

4 .1
5 .4

Financial institutions
1 ,7 7 6
746

2 4 ,3 9 8
3 ,0 0 2

1 273 7
3 0 2 .4

6 0 ,2 7 3
7 ,6 8 2

1 4 7 .0
1 5 5 ,9

6 5 ,5 6 5
7 .8 4 4

8 8
2 .1

2 ,5 2 2

2 7 ,4 0 0

98 6 4

6 7 ,9 5 5

1 4 8 .0

7 3 ,4 0 9

8 .0

7 6 ,5 4 0

4 .3

1 ,4 1 9

1 3 ,2 3 6

8 3 2 .7

3 5 ,7 6 0

1 7 0 .2

3 8 ,8 6 9

8 .7

4 1 ,0 5 6

5 .6

5 6 .3

4 8 .3

686
1 ,6 1 2
845

4 ,5 0 8
4 ,7 9 5
2 ,1 2 7

5 5 7 .1
1 4 7 .5
1 5 1 .7

8 ,2 9 2
6 ,7 4 6
4 ,8 9 1

8 3 ,9
4 0 .7
1 2 9 .9

9 ,0 9 1
7 ,1 4 4
5 ,1 4 2

9 .6
5 .9
5 .1

9 ,6 7 3
7 ,5 9 5
5 ,4 2 0

6 .4
6 .3
5 4

3 ,1 4 3

Single-payment lo a n s. . .

11 430

2 6 3 .6

1 9 ,9 2 9

7 4 .4

2 1 ,3 7 7

6 .8

2 2 ,6 8 8

6 .1

9 4 ,7 8 6

7 .9

9 9 ,2 2 8

4 .7

C om m ercial b an k s:
Percentage o f
financial insti
tutions to ta l.........

5 2 .6

5 3 .6

5 2 .9

Retail outlets

Total:
Percentage o f total
consum er credit.

5 5 .5

2 9 .4

T otal consum er c r e d it.. . .

5 ,6 6 5

3 8 ,8 3 0

5 8 5 .4

8 7 ,8 8 4

1 2 6 .3

2 ,4 6 2

2 8 ,9 0 6

1 ,0 7 4 .0

6 8 ,5 6 5

1 3 7 .2

7 4 ,6 5 6

8 .9

7 7 ,9 4 6

4 .4

3 ,2 0 3

9 ,9 2 4

2 0 9 .8

1 9 ,3 1 9

9 4 .6

2 0 ,1 3 0

4 .2

2 1 ,2 8 2

5 .7

2 2 .7

2 2 .9

2 2 .6

M em oranda:
Total instalment
Total noninstalment
consum er credit. . .

credit outstanding. They are also prominent
in the financing of appliances, television sets,
and other home goods; their holdings of such
credit represent more than a quarter of the
total of this kind of credit outstanding. Onethird of the personal loans and two-thirds of
all repair and modernization loans are in con
sumer portfolios of banks. Finally, commercial
banks hold more than 85 per cent of the volume
of single-payment loans to consumers. The
totals in these categories for various years since
1945 are shown in Table 14, which details the
commercial bank shares of selected categories
of consumer credit traditionally held by finan
cial institutions but also shared with other
lenders.
At first glance, it might appear that the $40
billion of consumer credit outstanding in exist
ing commercial bank lending operations is in
the process of being shifted to bank credit-card
and check-credit programs. Indeed, this might
be an eventuality if these plans were to evolve

The following sections of this chapter
analyze the likely future roles of credit-card
and check-credit plans in various markets for
consumer credit. The first discusses the markets
of the major financial institutions; the second
discusses the impact of credit cards and checkcredit plans on the retail firms themselves.

PROSPECTIVE DEVELOPMENTS
IN CONSUMER CREDIT HELD
BY FINANCIAL INSTITUTIONS
Commercial Banks
At the end of 1967 commercial banks held
$41 billion of consumer credit, or a little over
half of the total outstanding. These banks
not only provide credit through direct loans to
consumers and through purchases of instalment
paper but also make a substantial indirect con
tribution through loans to other credit grantors
— which is an addition to the above totals.
Banks hold nearly three-fifths of automobile

Table 14

not well adapted to use with big-ticket items,
which constitute a large part of the total.
Automobile credit accounts for 44 per cent
of total consumer credit extended by banks,
and the bank share of this business is growing
year by year. The bulk of this paper— some
three-fifths, or about $11.5 billion of it— is
purchased from automobile dealers, with en
cumbrance on the automobile and sometimes
with recourse to the dealer himself. The re
maining $6.5 billion represents auto loans made
directly by banks; as a rule these too encumber
the title. Such legalities would be difficult to
encompass in either a credit-card or a checkcredit operation. Of course, the procedures on
title could be waived if the borrower’s uncol
lateralized credit limits were large enough to
cover such a purchase, but this is the unusual
case. Unless and until the average line of credit
granted on credit cards can be expanded about
ten-fold— a remote possibility— there is prob
ably little prospect for credit-card growth in
the area of auto instalment credit.
A similar conclusion holds for repair and
home modernization loans. The bank share of
this business, though high, is a gradually de
clining one. The trend might be reversed if
these loans could be put on a credit-card basis,
but here too the size of the repair loan usually
exceeds the typical line of credit permitted by
bank credit cards.
In the “other consumer goods” category
many loans— such as for major appliances— are
also likely to be outside the usual credit-card
limits, but available statistics do not allow easy
identification of the amounts involved. Recently
some banks have begun to adapt their creditcard plans to cover larger-than-usual purchases,
either by setting up separate accounts for
specific purchases or by providing special terms
for those transactions.
On the other hand, it does seem likely that
small personal loans will be replaced to some
extent either by check credit or by cash ad
vances under credit-card plans. In fact, some
of the larger banks have shifted personal loans
of under $500 to the credit-card department.
Large loans though will continue to be made

CH AN G IN G IM P O R TA N CE OF C O M M ER C IAL
BANKS IN S E L E C TE D C A TE G O R IE S OF
C O N SU M ER C R ED IT TR A D ITIO N A LLY
HELD BY FINANCIAL IN S TITU TIO N S
(In billions o f dollars, unless otherwise indicated)

Com m ercial banks

Y ear

H o ld
ings
o f all
lenders

H o ld
ings

Percentage o f
all lenders

A u tom ob ile loans

H o ld
ings
o f all
lenders

H o ld
ings

Percentage o f
all lenders

Total instalment credit

1945 .
1950.
1955 .
1960.

0 .5
6 .1
1 3 .5
1 7 .7

0 .2
2 .5
5 .3
8 .1

4 5 .9
4 0 .7
3 9 .4
4 6 .0

2 .5
1 4 .7
2 8 .9
4 2 .8

0 .7
5 .8
1 0 .6
1 6 .7

3 0 .3
3 9 .4
3 6 .7
3 8 .9

1961 .
1962.
1963.
1964.
1965.
1966.
1967 .

1 7 .2
1 9 .5
2 2 .4
2 5 .2
2 8 .8
3 1 .0
3 1 .2

8 .3
9 .6
1 1 .5
1 3 .4
1 6 .0
1 7 .5
1 8 .0

4 7 .9
4 9 .3
5 1 .2
5 3 .3
5 5 .6
5 6 .6
5 7 .6

4 3 .5
4 8 .0
5 4 .2
6 0 .5
6 8 .6
7 4 .7
7 7 .9

1 7 .0
1 9 .0
2 2 .0
2 5 .1
2 9 .2
3 2 .2
3 4 .0

3 9 .1
3 9 .6
4 0 .7
4 1 .4
4 2 .5
4 3 .1
4 3 .6

Single-payment loans

Other consum er good s paper

1945 .
1950.
1955.
1960.

0 .8
4 .8
7 .6
1 1 .5

0 .1
1 .5
2 .0
2 .8

1 4 .0
3 0 .3
2 6 .7
2 3 .9

0 .7
1 .8
3 .0
4 .5

0 .7
1 .6
2 .6
3 .9

9 0 .3
8 6 .5
8 7 .8
8 6 .2

1961 .
1962.
1963.
1964.
1965.
1966.
1967.

1 1 .9
1 2 .6
1 3 .9
1 5 .6
1 7 .7
1 9 .8
2 1 .3

2 .8
2 .8
3 .2
3 .7
4 .3
5 .1
5 .8

2 3 .3
2 2 .4
2 3 .2
2 3 .5
2 4 .1
2 5 .7
2 7 .2

5 .1
5 .5
6 .1
7 .0
7 .7
7 .8
8 .3

4 .4
4 .7
5 .2
6 .0
6 .6
6 .7
7 .1

8 5 .9
8 6 .0
8 5 .1
8 5 .6
8 5 .7
8 5 .6
8 5 .4

Repair and modernization
loans

T otal consum er credit

1945 .
1950.
1955 .
1960.

0 .2
1 .0
1 .7
3 .1

0 .1
0 .8
1 .3
2 .2

6 0 .4
8 2 .1
7 9 .0
7 0 .1

3 .2
1 6 .5
3 1 .9
4 7 .3

1 .4
7 .4
1 3 .2
2 0 .6

4 4 .2
4 4 .6
4 1 .5
4 3 .4

1961 .
1962.
1963.
1964.
1965 .
1966.
1967.

3 .2
3 .2
3 .4
3 .5
3 .7
3 .8
3 .7

2 .2
2 .3
2 .4
2 .5
2 .5
2 .6
2 .5

6 8 .9
6 9 .7
6 9 .8
6 9 .6
6 9 .2
6 8 .4
6 7 .6

4 8 .7
5 3 .5
6 0 .3
6 7 .5
7 6 .2
8 2 .5
8 6 .2

2 1 .4
2 3 .7
2 7 .2
3 1 .0
3 5 .8
3 8 .9
4 1 .1

4 4 .0
4 4 .3
4 5 .2
4 6 .0
4 6 .9
4 7 .1
4 7 .6

Personal loans

1945.
1950.
1955.
1960.

1 .0
2 .8
6 .1
1 0 .5

0 .3
1 .0
1 .9
3 .6

3 0 .9
3 6 .9
3 1 .3
3 4 .1

1961 .
1962.
1963.
1964.
1965 .
1966.
1967.

1 1 .3
1 2 .6
1 4 .5
1 6 .2
1 8 .4
2 0 .1
2 1 .7

3 .8
4 .3
5 .0
5 .5
6 .3
7 .0
7 .7

3 3 .7
3 3 .9
3 4 .2
3 4 .2
3 4 .5
3 4 .6
3 5 .5

in such a way that the banking community would
adopt one or more of these forms and move all
its consumer credit into the new accounts. At
present, however, bank credit-card plans are

sales finance companies. Altogether, the imme
diate impact of credit-card and check-credit
plans on the business of sales finance companies
is likely to be spotty.

on a closed-end basis, for the bank will need
up-to-date information on the creditworthiness
of the borrower before lending any substantial
sum not backed by collateral.
A number of the bank loans now made to
consumers on a single-payment basis might be
handled by credit cards or check credit. Most
of this borrowing is for such short-term pur
poses as meeting premiums on life insurance
or tax deadlines.
In sum, it would appear that 25 to 30 per
cent of the consumer lending now performed
by commercial banks is amenable to early
transfer to credit-card and check-credit pro
grams. These potential shifts, taken together
with the financing already done by bank credit
cards and check credit, suggest strongly that
the programs are unlikely to fade as they did
in earlier periods and, indeed, are likely to ac
count for a growing portion of the total con
sumer credit portfolio at banks.

Credit Unions
Credit unions continue to improve their
position as suppliers of consumer credit in the
United States. In 1967 they were the only
holder group that increased its penetration in
every major type of instalment credit. In the
past decade, credit unions have almost doubled
their share of instalment credit and now ac
count for more than $9 billion, or about 12
per cent, of the total outstanding.
Although many of the loans that credit
unions make are of a size and nature that could
be handled by credit cards, little of this business
is likely to be shifted to credit cards.

Consumer Finance Companies
Consumer finance companies have most of
their assets in the form of personal loans, and
they continue to rank second only to com
mercial banks in their share of this market.
In recent years personal loans have constituted
between 85 and 90 per cent of the portfolios of
consumer finance companies. Over the past
decade these companies have accounted for
nearly one-tenth of all instalment credit.
Some of these holdings of personal loans
by consumer finance companies might be con
sidered potentially competitive with credit cards
and check-credit plans. To a substantial degree,
however, such small-loan credit tends to carry
a relatively higher risk than banks ordinarily
accommodate, and thus the potential for growth
of bank credit cards and check-credit plans in
this particular area is not great.

Sales Finance Companies
Sales finance companies hold more than onefifth of total instalment credit. In recent years
these companies have seen their share of the
auto business decline sharply, but they have
compensated to some extent by diversifying
into business loans and into the financing of
consumer spending for boats, mobile homes,
travel, and education. In 1967 the distribution
of the total instalment credit holdings of sales
finance companies was: automobile paper, $9.0
billion— more than 50 per cent of the whole;
other consumer goods paper, $5.0 billion, or
30 per cent; repair and modernization loans,
$0.1 billion— less than 1 per cent; and personal
loans, $2.8 billion, or about 17 per cent.
Prospective shifts of the auto and home im
provement financing done by sales finance com
panies are, of course, subject to the same limita
tions described earlier for commercial banks.
But in the case of personal loans and smallticket consumer goods credit, prospects do exist
for increased use of credit-card and check-credit
plans. Moreover, credit-card financing might
displace some of the accounts-receivable financ
ing currently being extended by subsidiaries of

Other Financial Institutions
Close to $2 billion of consumer credit is
held by other financial institutions— including
industrial loan companies, mutual savings
banks, and savings and loan associations,
among others. Although personal loans are a
significant part of the portfolios of this group,
many such loans have a particular institutional

appeal that would tend to insulate them from
credit cards or check credit. For instance, sav
ings and loan associations’ “loans to stock
holders against their share account in the asso
ciation” are more in the nature of the custom
ers’ use of their own credit balances rather than
the incurring of debt. Moreover, a very large
part of the total credit extended by these institu
tions consists of home repair and modernization
loans, most of which— for reasons already
stated— fall outside the scope of credit cards.

Outlook
Among financial institutions, the principal
area for possible substitution of bank credit
cards and check-credit plans might well be the
commercial banks themselves. For example,
outside of the banks there is almost $15 billio'n
of “other consumer goods paper,” a modest
portion of which represents financing of
smaller-ticket items that conceivably could
come within the scope of the credit card. This
would be true especially if the cardholder
found it advantageous to use the automatic re
volving-credit feature of the card in lieu of
entering into a separate closed-end contract for
each purchase. Moreover, for items of some
what larger value, check-credit plans are par
ticularly useful, having been designed to finance
infrequent but relatively large purchases.
However, when account is taken of the tend
encies of check-credit plans to limit severely
the number of customers to whom this privilege
is provided, when the differential credit risks
involved are considered, and when the special
“membership” appeals are given due considera
tion, the nonbank financial areas would seem
to provide limited potential for penetration by
bank credit-card and check-credit plans.

Service credit reflects in part consumer debt
outstanding to hospitals, doctors, dentists, and
other professional practitioners. Some of these
professional groups are already enlisted in
special financial plans established by com
mercial banks, but certain of them, in time,
might be folded into a comprehensive creditcard or check-credit plan. Another part of serv
ice credit consists of consumers’ public utility
bills, which are more readily approached through
the automatic prepayment plans with which a
number of banks are experimenting. Prepay
ment plans would not exclude the use of revolv
ing credit by the customer, and the overdraft
system, in particular, would seem to fit in with
such automatic payments. A third part of serv
ice credit represents indebtedness for an exten
sive assortment of personal services, including
dry cleaning, recreation, and education. For
reasons of convenience, many of these expendi
tures lend themselves to credit-card financing.
There are distinct possibilities that 30-day,
charge-accou'nt credit will be gradually sup
planted by more flexible revolving-credit plans.
The amount outstanding in this category at the
end of 1967 was $7.6 billion, with about 75 per
cent of it held either by retail establishments
other than department stores and mail-order
houses, or by the so-called T&E card firms. If
an extensive system of bank credit cards de
velops, a sizable proportion of this charge-ac
count debt could be handled by banks, although
some of it could simply shift to department store
or other credit cards already in existence.

CREDIT-CARD POTENTIAL
IN MARKETS NOW SERVED
BY RETAIL OUTLETS AND
SERVICE ESTABLISHMENTS

A different situation exists with respect to
the $9.7 billion of instalment credit held by
retail outlets. Some 55 per cent of such credit
is held by department stores and mail-order
houses, and since these businesses have been

Retailers originate the bulk of all instalment
contracts, but they typically sell most of these
contracts to banks and sales finance companies.

At present, retailers hold about 12 per cent of
all consumer instalment receivables, $9.7 bil
lion worth, of which $9.2 billion represents
“other consumer goods paper.” In addition,
they hold $5.4 billion of service credit and
$7.6 billion of charge-account credit, for a
total consumer lending volume of $22.7 billion.
Details of such credit outstanding at retail
outlets in recent years are given in Table 15.

Table 15
C O N SU M ER LENDING BY R ETA IL O U TL E T S
IN S E L E C TE D PO STW AR YEAR S
By Type of Loan
(A m ou n ts outstanding at year-end, in millions o f dollars)

N oninstalm ent loans

Charge accounts
Year

T otal
consumer
credit
T otal

Total

D e p t,
stores
and m ail
order
houses

Other
retail
outlets

Service
station
and other
retail
card
accts.

Service
credit

1945
1950
1955

3 ,1 4 3
7 ,8 4 5
1 1 ,4 3 0

2 ,4 5 7
4 ,9 4 7
6 ,9 2 2

1 ,6 1 2
3 ,3 6 7
4 ,7 9 5

290
650
862

1 ,3 2 2
2 ,6 4 1
3 ,7 1 7

76
21 6

845
1 ,5 8 0
2 ,1 2 7

1960
1961
1962
1963
1964

1 4 ,3 0 4
1 4 ,6 1 0
1 5 ,9 2 6
1 6 ,9 3 9
1 8 ,3 4 7

8 ,6 8 9
9 ,0 1 5
9 ,6 7 4
1 0 ,1 8 6
1 0 ,9 4 0

5 ,3 2 9
5 ,3 2 4
5 ,6 8 4
5 ,8 7 1
6 ,3 0 0

941
948
927
895
909

3 ,9 5 2
3 ,9 0 7
4 ,2 5 2
4 ,4 5 6
4 ,7 5 6

43 6
469
505
520
635

3 ,3 6 0
3 ,6 9 1
3 ,9 9 0
4 ,3 1 5
4 ,6 4 0

1965
1966
1967

1 9 ,9 2 9
2 1 ,3 7 7
2 2 ,6 8 8

1 1 ,6 3 7
1 2 ,2 8 6
1 3 ,0 1 5

6 ,7 4 6
7 ,1 4 4
7 ,5 9 5

968

5 ,0 5 5

723
87 4
1 ,0 5 4

4 ,8 9 1
5 ,1 4 2
5 ,4 2 0

6 ,2 7 0
6 ,5 4 1

Instalm ent loans

Other consum er goods paper

T otal

A u to
m obile
paper

Total

D e p t,
stores
and m ail
order
houses

Furni
ture
stores

A p p li
ance
stores

Other
outlets

1 9 4 5..................................
1 9 50...................................
1 9 5 5 ..................................

686
2 ,8 9 8
4 ,5 0 8

28
287
487

658
? ,611
4 ,021

131
746
1 ,5 1 1

24 0
827
1 ,0 4 4

17
267
365

270
771
1,1 0 1

1 9 6 0..................................
1 9 61..................................
1 9 62...................................
1 9 6 3 ..................................
1 9 6 4..................................

5 ,6 1 5
5 ,5 9 5
6 ,2 5 2
6 ,7 5 3
7 ,4 0 7

359
342
345
328
370

5
5
5
6
7

,25 6
,253
,907
,425
,037

2 ,4 1 4
2 ,4 2 1
3 ,0 1 3
3 ,4 2 7
3 ,9 2 2

1 ,1 0 7
1 ,0 5 8
1 ,0 7 3
1 ,0 8 6
1 ,1 5 2

333
293
29 4
287
286

1 ,4 0 2
1 ,4 8 1
1 ,5 2 7
1 ,6 2 5
1 ,6 7 7

1 9 6 5 ..................................
1 9 6 6 ...................................
1 9 6 7 ...................................

8 ,2 9 2
9 ,0 9 1
9 ,6 7 3

447
490
506

7 ,845
8 ,601
9 ,167

4 ,4 8 8
n .a.
n.a.

1 ,2 3 5
n.a.
n.a.

302
n.a.
n.a.

1 ,8 2 0
n.a.
n.a.

n.a. N o t available.

quite resistant to signing under bank plans, it is
not clear whether and how much of the busi
ness might shift to the bank plans.
In general, the greatest potential for bank
credit cards lies in those areas currently dom
inated by small to medium-sized businesses;
various studies have shown that these are the
kinds of businesses that most typically are
signed to bank credit-card plans. Perhaps this
is because these smaller retailers are most in
need of competitive devices for building sales
volume. For a small retailer, the ability to sell

goods on credit may well be the particular
device that will increase the drawing power of
his store. Over-all, as a result of these plans,
there may be some shift in the mix of buying on
retail credit in favor of the smaller merchant.
Even stores that already have credit facilities
may find it to their advantage to participate in
a credit-card plan. Such a credit facility allows
the retailer to reduce the amount of working
capital he requires for use in financing accounts
receivable and also tends to reduce or elimi
nate the retailer’s credit losses. It is difficult to

obtain good data on the cost of running a retail
credit operation, but students of the problem
have variously estimated that the cost to a
typical merchant of running his own credit
department ranges between 5 and 6 per cent
of sales, perhaps a little more. In addition, a
smaller retailer must be concerned with the
fact that he normally experiences a higher risk
in granting consumer credit since he cannot
spread his credit over a large number of
customers and may be confined to serving
customers in a small area. With credit-card
systems allowing the merchant to eliminate his
risk and providing for discounts in the 3 to 4
per cent range, some stores that now maintain
their own credit facilities are likely to re-evalu
ate the cost of this service.
Some low-margin retailers, such as super
markets, have been discouraged from signing
up with bank credit-card plans by the merchant
discount, which their slim mark-up cannot sus
tain and which the customary rules of creditcard operations prevent being passed on
directly to the consumers. Yet, in a few plans,
banks have signed supermarkets by allowing
them to charge a fee for credit-card purchases.
Admittedly, this practice is not widespread nor
would it seem to have much potential unless
there is a change in the current buying habits of
consumers.

While most major oil companies continue
to have their own cards— indeed, some have
begun to broaden their card coverage to travelrelated businesses— there has been some recent
tendency for these companies to accept bank
credit cards. There are two reasons for this.
First, many oil companies operate their cards
primarily as a merchandising device and not
to obtain revenue from revolving credit. Con
sequently, their attachment to their plans is
not so strong as that of the national retail
chains and department stores. Second, the de
gree of consumer loyalty is less; in spite of
their advertising, oil companies are selling
basically the same product. Should customers
get into the habit of carrying one general-pur
pose card, the oil companies could no longer
expect to limit credit customers to their own
card.

The large department stores offer a different
set of reasons for their unwillingness to join
bank credit-card plans. First, they indicate that
customer loyalty to the store might suffer. The
bond between a customer and a store is al
legedly strengthened by the store’s own credit
card. Second, some argue that they would lose
an important marketing tool if they did not
use their own card, for the customer’s monthly
statement serves as a means of reaching the
customer with promotional literature that can
be enclosed with the bill, and the list of credit
customers provides an accurate mailing list for
other direct mail advertising. A third reason
given is that the joining up with bank credit
cards eliminates credit flexibility. Currently,
a department store can tailor its credit plan to
serve the needs of the specific customers to

whom it appeals. It can accept lower credit
standards than banks can risk with their gen
eral-purpose cards, and it can offer a variety of
repayment plans to suit the requirements of
its customers. This ability to be flexible, it is
argued, would be lost by participation in a
bank credit plan. Finally, some companies
claim that their plans are efficiently operated
and are therefore a source of profits. These
attitudes might be altered to the extent that
customers insist on carrying a single generalpurpose card for all their credit transactions.

The introduction and growth of bank credit
cards and check-credit plans will have a
definite impact in the area of consumer credit.
By offering these services, the banking com
munity almost certainly will acquire a larger
proportion of the consumer credit business;
and this will be in addition to a share that has
been increasing steadily in recent years. This
does not imply, however, that other lenders will
be eliminated. First, some extensions of credit
will be for larger amounts than the card limits
can accommodate. Second, other institutions
may be situated or constituted in such a
fashion as to be able to accept different risk

revolving credit through bank plans to match
the plans of the larger retailers.
In the final analysis, of course, it is the con
sumer who stands to benefit most from the
heightened competition arising out of bank
cards. Not only will credit be made available
to him in more imaginative ways, but also the
cost of such credit will tend to lessen as com
petition increases.

levels and risk dispersions. Third, banks have
no inherent advantage over specialized institu
tions that can be expected to compete vigor
ously for their share of the consumer credit
market.
Some changes in the structure of retailing
may accompany the expansion of bank creditcard plans. Smaller retailers should be able to
improve their competitive position by offering

IMPLICATIONS
FOR THE
CONSUMER
per cent of the total— had incomes ranging
from $7,000 to $10,000. As might be expected,
only 3 per cent of active cardholders had in
comes of less than $4,000, and less than 2 per
cent had incomes of more than $25,000. Thus,
the holding of credit cards by high-income
families is roughly in proportion to their num
ber in the population while that of low-income
families is disproportionately low. Of all con
sumers, the middle-income group— where the
representation among cardholders is twice as
high as among all families— is most likely to be
affected by credit-card developments.

WHO USES CREDIT CARDS?
Consumer credit is a middle-income phe
nomenon. High-income people may use charge
accounts but rarely any other kind of consumer
credit. The lowest-income groups, as well, sel
dom use credit— whether from volition or be
cause of the unwillingness of lenders to advance
them money. They are even less likely to use
revolving-credit accounts, charge accounts, and
gasoline credit cards, even though these devices
provide free credit for short periods of time.
Perhaps the principal reason that low-income
people may not desire to use charge accounts
and gas credit cards is the increased financial
difficulty that seems to arise when one more
bill of unknown size comes in each month. As
for gasoline cards, it may also be noted that
lower-income families take fewer vacations and
fewer long trips than upper-income groups do.
Regardless of the reasons, the fact of dis
proportionately less use of credit by lowerincome groups is well substantiated. Studies
made by the Survey Research Center at the
University of Michigan show that it is only at
incomes above $7,500 that as many as a third
of the people use gasoline credit cards, and
above $10,000 that more than half do.
The characteristics of users of bank credit
cards have been investigated by Dr. Harlan
Patterson of Michigan State University in his
study of bank credit-card activity. The data
relate to the summer of 1961 and are based
on a relatively small sample, so they must be
qualified. But it is interesting to note that al
most a third of the cardholder respondents
in his survey reported incomes in the $5,000 to
$7,000 range. The second most important
group in the distribution— accounting for 27

ADVANTAGES
AND DISADVANTAGES
OF BANK CREDIT CARDS
FOR CONSUMERS
There has been much discussion— and much
disagreement— about the advantages of bank
credit-card plans insofar as the consumer is
concerned. What is it that motivates consumers
to use these plans as a substitute for other
forms of credit or even as a substitute for cash
purchases? Bank credit cards, of course, are
but the latest in a long line of cards and thus
the way has been paved for their acceptance
by the consumer. But beyond that, some of the
advantages more commonly advanced include:
1. The single application for credit con
veniently spares the customer the bother of
multiple form-filling when his card can be
used in a number of separate stores where
he might wish to make purchases.
2. One “all-purpose” card may conven
iently replace a multitude of special-purpose
credit cards in his wallet.
3. The single monthly statement received

by the customer enables him to see at a
glance all his card purchases for the month
and to simplify his budget process.
4. The cash-advance feature of a credit
card enables the customer to handle unex
pected contingencies without destroying his
budget and making an unwanted dip into
savings, and without excessive formalities.
5. Bank credit cards permit some econo
mizing on the amount of cash carried.
6. Payment of bills is simplified since
the cardholder needs to write only one check
to pay for many purchases. This may also
reduce service charges on his checking ac
count.
These advantages reflect the mechanics of
credit cards and therefore are basically de
scriptive of how the cards work. As such, they
do not require detailed analysis. The growth of
credit cards confirms the existence of these
convenience features, although the value of
each feature remains a matter to be determined
by the individual consumer.
On the other hand, several alleged dis
advantages of credit cards to consumers need
to be considered:
1. Cash customers have to bear the
added costs created by other customers’ use
of credit cards, as prices rise to cover higher
handling expenses, including the merchant
discount.
2. Credit cards lead consumers to buy
more than they would if they had to pay by
cash or check.
3. Credit cards lead consumers not only
into debt, but into overindebtedness as well,
with an attendant rise in consumer de
linquencies and even bankruptcies.

In the second place, for any kind of mer
chant, any increase in sales volume as a result
of the use of the card would broaden the dis
tribution of overhead expenses, thus tending
to reduce per-unit fixed costs.
In the third place, as long as the merchant
receives some margin of profit on the creditcard sale, after deducting the bank discount,
no upward price pressure arises directly from
the use of the card.

Does the Use of Credit Cards
Increase Merchants’ Costs, Raise
Prices, and Discriminate Against
the Cash Customer?

Of course, upward pressure on prices would
arise from any massive shift of cash customers
to the use of the credit card if there were no
offsetting increase in the volume of trans
actions. The evidence available to the Task
Group suggests, however, that even in the areas
of heaviest use, credit cards account for a

One objection to the use of bank credit cards
is that the process of handling credit-card trans
actions, including the discount levied by the
banks on the merchants’ sales tickets, consti

tutes an added cost that will have to be ab
sorbed through an increase in prices to all buy
ers, both cash and credit. From this some have
concluded that cash buyers will be paying part
of the additional costs involved in credit-card
purchases.
The Task Group concludes otherwise. Over
the next few years at least— and possibly over
the longer run as well— bank credit cards are
likely to have little or no direct effect on the
prices at the stores where they are used. (The
more general question of the effect of credit
cards on inflation is discussed in Chapter 8.)
In the first place, to the extent that bank
credit cards substitute for credit operations al
ready in existence, the merchant will usually
find the credit-card discount no more, and
ordinarily substantially less, than the costs he
now incurs in extending retail credit. He will
be relieved of the bookkeeping expense and the
losses involved in his own retail credit opera
tions and will have a reduction in his working
capital requirements. These advantages may
more than offset the discount imposed by bank
credit cards. Consequently, for such a retail
merchant, the substitution of a bank credit-card
plan for his own credit operation would not
necessarily result in any increase in operating
costs and would likely reduce them. In either
case, the acceptance of bank credit cards would
exert no upward pressure on costs.

minor share of the business of individual re
tail merchants, thus minimizing (1) the likeli
hood that such a shift would represent a signif
icant part of total sales, and (2) the likelihood
that the adverse impact on average profit mar
gins would be sufficiently discernible, especially
after allowances for expanded volume, to cause
an increase in prices. Indeed, what little evi
dence there is suggests that credit cards have
tended to reduce the costs to small merchants,
instead of increasing them, and there is no evi
dence that they have pressed merchants in gen
eral to raise prices.
Even the longer-run implications of credit
cards do not necessarily lead to a price-increasing effect. If use of credit cards should ex
pand to the virtual exclusion of cash and
checks, then any discount at all would consti
tute an increased cost to merchants. The rele
vant comparison, however, would then be not
with the present cash- and check-payment sys
tems but with whatever alternative system
might develop in the absence of credit cards.
Should the alternative system be one relying
heavily on credit, then the merchants would
not necessarily be worse off if they had to pay
the discounts against credit-card sales slips.

result from these operations, as the scanty
evidence suggests, then the cash customer too is
a beneficiary.

Do Bank Credit Cards Lead
Consumers to Buy More than
They Would if They Had to Pay
by Cash or Check?
It is true that, as a result of the use of creditcard plans, some individuals may find— to their
consternation and possible embarrassment—
that they are overspending. As credit cards
substitute for other means of payment, the tra
ditional signals warning the spender that he is
approaching a budget limit are no longer oper
able— that is, depletion of money from his
pocket or exhaustion of the balance on his
checkbook stub no longer sounds an alarm.
An occasional overdrawing is not necessarily
calamitous, however, and the person who finds
himself too often spending more than he had
counted on has only to adopt a tighter book
keeping system or cease using his credit card
in order to escape the problem altogether.
This type of financial oversight is not a
necessary result of the use of credit cards,
however. (It is quite possible in principle,
though perhaps rare in practice, to keep a
running tally of one’s sales slips and to keep
in view the total sum that one’s budget would
permit being spent in this way.) Nor is the
incidence of this problem known. The problem
would tend to arise only for those individuals
for whom credit-card use had become a cus
tomary and substantial substitute for cash and
check purchases— probably not yet a significant
proportion of those using cards, let alone of
those holding them.
The less convenient current accounting that
tends to accompany credit-card use can be a
nuisance, but it is not, in itself, a serious
problem either for the individual or for society.
As cardholders gain experience with this rel
atively new credit device, it is to be expected
that they will learn to manage it to suit their
needs just as they have learned to manage
other forms of consumer credit.

Perhaps the major point to be kept in mind
is that the current competitive situation in a
community will be the most important deter
minant of prices. Those stores that do offer
credit, whether through their own facilities
or through outside credit arrangements, will
want to have a price policy that is competitive
with other stores in the same market area.
Moreover, the recent trend has been for banks
to lower their discounts, and competitive pres
sures should keep this trend from being re
versed. With lower bank discounts, the possi
bility of higher prices is further reduced. All
in all, credit cards should have little influence
on retail prices and therefore on the cash
customer.
It is not price increases per se that reflect
discrimination against a cash customer, but
only those price increases resulting from creditcard operations. If downward price pressures

Do Bank Credit Cards Lead
Consumers into Debt, with
Serious Results for the Individual
and Society in General?
The existence of credit cards eases the move
ment into debt by making the acquisition
of debt (1) convenient (through automatic
lending when the bill is unpaid), (2) less pain
ful (through revolving credit), and (3) more
acceptable (through widespread use and gen
eral social approval of such plans).
Despite the fact that credit cards permit
(and may even encourage some) individuals
to overdraw their funds, these plans do not
necessarily lead one into formal debt— that is,
debt extended beyond the due date billed.
Many cardholders find it a convenience to use
the card when shopping and to remit upon be
ing billed without incurring any extended obli
gation. Many of the others who use the auto
matic credit privilege do not become debtors as
a result of credit-card use, of course, but trans
fer their former debt-incurrence habits from
credit operations at retail stores (or elsewhere)
to credit-card operations at banks.
Still others who incur their first consumer
debt through the use of one of these plans
would have incurred debt through more cus
tomary credit devices had credit cards not
been available. Indeed, in the aggregate, there
is no evidence of any mounting incidence of
consumer indebtedness since the recent burst
of credit-card and check-credit plans; the pro
portion of the population owing instalment
debt has remained fairly constant at around 50
per cent in recent years. Thus, information so
far available does not indicate any significant
amount of overdrawing in these accounts.
There is no special aspect of credit cards
that may make their users, individually, more
prone to overborrow. Indeed, the reverse is
true. Credit lines established by commercial
banks serve as a protection both for the bank
and for the cardholder, and it is in the interests
of both to avoid delinquency and bankruptcy.
The potential for increased borrowings by
large numbers of consumers under credit-card

plans is limited by the same practices that the
banks introduced to protect themselves against
excessive borrowing by individuals under pre
vious credit programs.
In general, cards are issued only to cus
tomers meeting specified standards, and these
are applied even to the original mass-issue. In
addition to the problem of fraud, where the
banks have instituted special procedures to
identify and pick up quickly the so-called “hot
cards,” credit controls are set to insure that
customers do not build up excessive indebted
ness. Generally, credit limits are set on the low
side— typically $300 to $400— until a record
justifying higher limits is established. Further
more, once a customer reaches his credit limit,
he can no longer use his card without the
bank’s permission. A credit card does not,
therefore, give unlimited access to credit.
However, credit cards do raise the over-borrow
ing potential by bringing credit within the easy
reach of more individuals, among whom a con
siderable number could find that even the mod
est beginning credit limits were excessive rela
tive to their means while others would tend to
abuse whatever credits were available.
The incidence of overborrowing on credit
cards has not yet become significant. The avail
able evidence on established card plans indi
cates delinquency and loss rates not far out of
line with experience in other kinds of con
sumer credit operations, and it supports the
conclusion that banks are exercising due care
and are not encouraging excessive borrowing.
Similarly, in the aggregate, the ratio of repay
ments on instalment indebtedness to disposable
personal income stopped rising— at least tem
porarily— in 1965. Thus, in the period when
the bank credit-card and check-credit plans
have shown their most rapid expansion, there
has been no marked change in the relative
indebtedness of consumers.
Overborrowing, to the extent that it does
occur, is indeed serious for the individuals in
volved. Credit-card programs require continual
vigilance to keep down abuse of all kinds.
Fortunately, it is in the interests of banks, in
administering their programs, to keep overbor
rowing to a minimum.

OTHER
IMPLICATIONS

time. This compares with $237.5 billion of
time deposits in all banks.

IMPLICATIONS
FOR MONETARY POLICY
AND INFLATION

Although a simultaneous attempt on the
part of all holders of credit cards to utilize
all their credit lines at once— an unlikely pos
sibility— could pose problems for the commer
cial banks and for borrowers in general, it
would not necessarily result in a problem of
massively larger expenditures in the economy
as a whole. During inflationary periods, mone
tary policy tends to reduce the availability of
reserves to commercial banks. With few ex
cess reserves available, commercial banks would
be faced with the necessity of reducing still
further their loans to other customers as creditcard customers expanded the use of their lines.
The real meaning of the lines of credit, there
fore, is the preferred position that holders of
credit cards might have in the credit-rationing
queue; the net addition to the spending stream
stemming from cardholders’ expenditures would
not even approach the gross volume of those
expenditures. When all sectors are considered,
total spending might not rise despite increased
lending to consumers via bank credit cards.

The potential for instantly available loans
through bank credit cards and overdraft plans
increases the liquidity of the public the moment
the cards are received or the overdraft arrange
ments are made. This tends to reduce the
demand for money itself. The use of credit cards
and overdraft plans converts that original spend
ing potential into actual expenditures and new
demand deposits.
Of course, credit cards and check-credit plans
are, in part, substitutes for different credit ar
rangements that would otherwise be made or
used. Moreover, the adjustments of the econ
omy— including, importantly, the banking sys
tem— to these developments may tend to offset
their initial effects to some degree. Nevertheless,
since the gross expansions are larger than any
offsetting factors, some net expansion of expen
ditures, credit outstanding, and the money sup
ply may be expected as a result of the advent of
these new banking instruments.
This does not mean that credit cards pose
an inflationary danger. Just as they tend to
be benign on the cost side, so has their impact
been modest in expanding aggregate demand.
To be sure, credit cards could facilitate un
expected increases in expenditures, but this
prospect is insignificant compared with the
potential activation of time deposits. The total
volume of credit-card lines authorized by
banks as of September 1967 was $5.1 billion
and only $0.6 billion of this was being utilized.
Thus, about $4.5 billion of potential credit
expansion was implicit in the total lines at that

Since banks are likely to find that the lines
of credit embodied in these plans cannot be
easily modified, the principal burden of ad
justment to monetary restriction is likely to
be borne by other parts of banks’ portfolios.
But consumer credit is a sector of the economy
that is not so sensitive as some to monetary
restrictions, and an inability or unwillingness
of consumer lenders— in this case banks— to
restrain their lending does not represent a major
change from the present situation.
There are, however, several factors limiting

the inflationary impact of bank lending via
credit cards. First, some of the credit extended
under bank credit-card plans will continue to
replace existing credit. For instance, many
merchants signing up under bank credit-card
plans are using the bank plans as a substitute
for their own existing credit extensions. In ad
dition to this kind of substitution, the cash ad
vances provided under both credit-card and
check-credit plans are frequently used in place
of small personal loans. And such displacement
should continue.
Second, as an individual increases the normal
percentage utilization of his credit line, the
latent potential expenditure from his credit
card will be drawn down. And if cardholders
use their credit lines to the maximum, the
additional credit can be injected only once for
a particular card. In order to keep his credit
expanding, a cardholder would have to con
tinue acquiring additional credit cards. But
this is not realistic nor possible. Many card
holders have treated this type of credit primar
ily as a convenience, rather than as a means
of increasing their total indebtedness. Even
where cardholders elect to buy on a revolvingcredit basis, they must still pay off in instal
ments— and such payments inhibit maintenance
of a sustained abnormal rate of consumption.
While the entrance of additional commercial
banks into the credit-card field will probably
contribute to the expansion in consumer credit,
the growth rate is not likely to exceed the pace
that has existed during much of the period since
World War II. The rate of growth of retail
charge accounts and revolving credit— the seg
ment that will be most influenced by bank
credit cards— has been quite modest, increas
ing from 1.8 per cent to 2 per cent of dispos
able personal income over the last 10 years.
These changes are primarily a reflection of
gradual shifts in the payments habits of con
sumers. The entry of banks into this field
should not be expected to generate any major
and sudden alteration in consumers’ habits.

Bank credit cards are not on the direct path
of development of an instant-payments mech
anism. Some features of the card operation—
such as customer identification, embodiment of
data for automatic transfer (through the im
printer to the sales slip), and displacement of
some of the customary means of payment— are
suggestive of a checkless society and may well
be utilized in the coming transition of the pay
ments mechanism. Flowever, other promising
features that might currently be found in some
credit-card systems— such as the suitable use
of computer files for credit referencing— are
incidental to such plans rather than inherent
elements, while various essential elements of the
money mechanism of the future are not part of
credit-card operations at all, but will evolve
from other sources, particularly communica
tion and computer technology.
Moreover, even such a likely contribution
as the use of the plastic card to activate the
transfer of information or to identify the cus
tomer may well be displaced by auditory or
visual techniques. Most important to an ap
preciation of the disparities of the two lines of
development is the fact that the credit-card
system generates more rather than less paper
for the clearing system to handle; in this re
spect, it is moving in a direction opposite from
that of instant payments.
Finally, credit cards are essentially credit
devices, with payments features incidental. In
contrast, an instant-payments mechanism will
undoubtedly bring various credit developments
along with it as it evolves, but conceptually
these are supplemental rather than inherent
features. It would be a mistake, therefore, to
confuse today’s credit-card reality with the instant^payments vision of tomorrow and to at
tribute to credit cards either the problem or
the promises of an instant-payments society.
Nevertheless, credit-card programs are likely
to contribute to the “less-check” society in
an important, though indirect, way— namely,
through reaction to the paper volume they tend

The potential consequences of bank credit
cards for inflation and monetary policy do not
appear to be very significant at the moment.

IMPLICATIONS
FOR THE CLEARING MECHANISM

at distances remote from the location of the
card-issuing bank, and as the use of the card
away from home grows, more pressure can
be expected to arise for clearance of sales
drafts through System facilities. Although out
side clearing arrangements are expected to
evolve along with this need, these developments
are of interest to the Federal Reserve.
At the same time, increased volume of creditcard paper would reinforce pressures on the
banking system for technological improvements
in their payments machinery. (To a lesser de
gree, check-credit plans may also generate more
paper for the banking system, since they en
courage the use of checks in lieu of cash.) The
result should be to encourage the development
of new means of handling paper or, better still,
replacing it. “On-line” communication links be
tween banks and stores are already being tested
on a limited basis for feasibility of transmitting
payments data electronically, rather than by
paper, but their general adoption is not yet eco
nomically feasible. Another element in “on
line” systems is the need for identification of
customers. This is also a requirement for creditcard plans, and the development of improved
methods of identification for use in credit-card
plans would also remove one barrier in the way
of adopting “on-line” systems.
In conclusion, the prospective growth of bank
credit cards and the accompanying technologi
cal advances make it desirable for the System
to keep abreast of developments in this area
and be prepared to exercise leadership to fulfill
the Federal Reserve System’s responsibilities in
the areas of credit and payments.

to generate. If this reaction develops, it will
require changes in consumer habits, merchant
practices, and the institutional arrangements
at commercial banks, as well as in the Federal
Reserve System.
Use of bank credit cards should tend to re
duce the number of checks cleared by the bank
ing system. (It is likely that, on the average for
the month, the settlement of transactions on
one credit-card account replaces more than one
check that would otherwise have been used for
merchant payment.) But if every sales draft
were counted as the equivalent of one check in
calculating the volume of paper that passes
through the payments mechanism, bank credit
cards have augmented the paper work burden
to the extent that a sales slip replaces cash in a
retail transaction.
With respect to Federal Reserve clearings,
the use by banks of the System’s clearing facili
ties for settlement of sales drafts between banks
would cause a net increase in such clearing
transactions too, as a result of the use of bank
credit cards. This possibility exists now that
American Bankers Association numbers can be
and have been allotted to credit-card organiza
tions. At the moment, the additional burden is
virtually nonexistent, and it is likely to remain
relatively small for some time, since most
credit-card purchases originate locally or
through outside clearing systems organized by
interchange plans and, therefore, would not be
cleared through the Federal Reserve System.
But in the more distant future, as more banks
adopt credit cards and enter interchange agree
ments permitting cardholders to use their cards

BIBLIOGRAPHY

PUBLISHED MATERIAL
“A .B .A . Will Issue Route Numbers to Bank Card Units,” American
Banker, June 28, 1967, p. 1.
Abouchar, Roger J., and Magnis, Nicholas E. “Bank Credit Cards— Im
plications for the Future,” Bankers Monthly (London), Jan. 15, 1967.
Agemian, Charles A . “ It Ain’t Necessarily So.” Speech delivered on Mar.
20, 1967, in Chicago, at the National Instalment Credit Conference of
the American Bankers Association. Reprinted in American Banker, May
21, 1967, p. 19.
American Bankers Association. Credit Card and Revolving Credit Survey.
New York: Instalment Credit Committee, American Bankers Associa
tion, 1967.
“Association for the National Interchange of Bank Credit Cards Under
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APPENDICES

Selected Credit-Card Plans of Small Banks

Mass Mailing of Unsolicited Credit Cards
and Issue by Application Only

Summary Description of Largest Bank Credit-Card
and Check-Credit Plans

Statistical Supplement

Reporting Forms Relating to Credit Cards and
Check Credit

APPENDIX

SELECTED CREDIT-CARD PLANS
OF SMALL BANKS

Table

A-1

CHARACTERISTICS OF SELECTED SMALL
BANKS OPERATING CREDIT-CARD PLANS

T h e grow ing use o f credit cards and ch eckcredit plans raises a num ber o f questions con
cerning their possible im pact on banking struc

Bank
identification

ture and com p etition . If their use continues to

Total
deposits i
December 1966
(In millions of dollars)

Population
of city1
(In thousands)

spread, banks unable or unwilling to undertake
A ...........................
B............................
C ...........................
D ...........................
E............................
F............................
G ...........................

such operations cou ld be at a com petitive dis
advantage.
B ecau se o f the heavy start-up and operating

20
10
20
150
10
30
5

600
10
15
60
250
50
30

costs o f a credit-card operation, the m ajor ques
tion concerning the im pact o f such plans on

1 Figures are approximate.

banking structure is whether sm all banks can
com p ete with larger ones. C losely related to this
question

whether

such

check-credit

plan,

provide

alternatives,

card plan. This no doubt reflects the lim ited size

association-card

o f the m arket areas served. P opulations o f the

low er-cost
or

effective

avenue

for

cities in which

sm all

the banks

are

located range

fro m about 1 0 ,0 0 0 to m ore than 6 0 0 ,0 0 0 .

banks to com p ete.
T h e experience o f the 1 9 5 0 ’s has show n that

1. Features of Credit Cards of
Small Banks

success in the credit-card field is not entirely
a function o f size. T h e success o f som e very
large banks in this field has been w ell pu bli

T h e specific features o f the plans o f this se

cized. N o t so well publicized has been the suc

lected group o f sm all banks are sim ilar to those

cess o f a nu m ber o f plans set u p b y sm all banks.

o f m ost credit-card operations. T h e sales slips

T h is appendix reports on the features o f a se

fro m participating m erchants are discounted at

The

rates o f from 3 to 6 per cent, depending on the

general characteristics o f the seven banks op er

volu m e o f m erchant business accepted. W h ile

ating these plans are show n in T a b le A - l . T h e

the average discount was not specifically asked

lected

group

o f these sm all-scale plans.

details o f plans are sum m arized in T a b le A - 2 .

for, interviews suggest that it w ou ld be close to

W ith two exceptions, the banks had total de

the top o f this range. T w o bankers reported

posits on D ec em b er 3 1 , 1 9 6 6 , o f less than $ 2 5

that, while they had sliding-scale arrangements

m illion.

for discounting m erchants’ sales tickets, even

The

years

started ranged from
each

case,

credit-card

the

which the plans

1953

surveyed

operations

1 9 6 2 . T h u s, in

banks

well

were

started

b efore

the

the largest participating business very seldom
w ou ld reach the necessary volu m e for a rebate.

their
latest

C u stom er charges and floor lim its were found

spurt o f activity in this field. W ith o u t exception,

to be approxim ately the sam e as for other plans.

the 7 banks were the only ones in their respec

Five o f the seven banks charge 1 per cent per

tive m arket areas that were offering a credit-

m onth on the unpaid balance, and tw o charge

A-2

Table

FEATURES OF SELECTED SMALL BANK CREDIT-CARD PLANS

Merchants
signed
(number)

Cards issued
(number)

Bank
Year
identifi plan
cation started
Initial

1960
1962
1959
1959
1959
1953
1954

A .........
B.........
C .........
D.........
E .........
F .........
G .........

Current
(9/67)

Current
ly
active
(9/67)

Initial

Cur
rent
(9/67)

10,000
1,080
8,000
15,000
2,000
3,600
1,500

40,000
230
12,000
25,000
4,500
5,000
6,000

20,000
60
6,000
10,000
1,500
3,300
3,000

300
14
100
104
120
120
175

850
1
1
145
440
200
300
256

Specific features of plan

Costs and profitability status of plan

Customer
Merchant
charge
Floor
discount (per cent
limit
(per cent) per month) (dollars)

Costs of
starting
(dollars)

Time needed
to recover
costs
(months)

Current
status

1.5
1.0
1.5
1.0
1.0
1.0
1.0

n.a.
1,000
50,000
80,249
n.a.
n.a.
n.a.

n.a.
Immediately
42
69
12
18
30

Not
profitable
Profitable
Profitable
Profitable
Profitable
Profitable
Profitable

3-6
n.a.
3-6
3-6
6
4-5
4-5

25
None
(>)
25
None
25
25

n.a. Not available.
1 Varies by type of merchant.

I V2 per cent. O n e o f those charging IV 2 per

account with

cent included credit life insurance. T h e m ost

latest 9 0 -d a y p erio d ; and still others, one that

co m m o n

was billed at least once during the year. It was

floor limit was

$25.

H ow ev er,

two

at least one billing during the

banks reported no floor lim its, and one estab

surprising to find that, despite these various

lished varying limits depending on the nature

definitions, the num ber o f active accounts was

o f the m erchant’s business. Several bankers also

generally around 4 5 to 5 0 per cent o f all out

m entioned entry charges and m onthly imprinter

standing cards.
A g a in despite various definitions, the n u m

charges.

ber o f m erchants currently participating in each

2. Customer and Merchant
Participation

plan is larger than when the respective plan
started. In m ost cases, the plans are operating

T h e credit-card operations included in the

with less than 4 0 0 m erchants. T h e largest plan,

survey ranged in size from 2 3 0 cardholders and

in terms o f cardholders and m erchants, has 8 5 0

participating m erchants.

participating

holders

and

850

m erchants
m erchants.

4 0 ,0 0 0

A lm o s t

card

One

all the

disappointing

aspect often

m entioned

was the inability to attract additional business

banks sent cards to their established custom ers

through participating m erchants. A lth o u g h m er

w hen their plan was started and then m ade use

chants were required to m aintain an account

o f other m ailing lists. W ith only one exception,

with the bank, very few b roke their relation

the num ber o f current holders o f credit cards
for the various plans is larger than when the

ships with other banks. In m an y cases, they

plans

m erely m aintained the required account there,

were

started.

A n o th e r

m easure o f the

growth o f m ost o f these plans is that the nu m

and they continued to bank , fo r the m ost part,

ber o f cards in active use at the tim e o f the

where they had previously.

survey was close to the total num ber initially

3. Costs and Profitability

issued. T h e num ber o f active cards is not the

Six o f the seven banks reported a profitable

only m easure o f success, how ever. O n e bank
reported

a successful operation with only 6 0

operation. T h e exception — the largest o f those

active cards.

surveyed in terms o f both cardholders and par

It becam e clear during the survey that bank

ticipating m erchants— reported that its credit-

ers define activity o f their credit cards in var

card operations were too sm all to justify being

ious w ays. Som e consider as an active account

put on a com puter but too large to be handled

one that has an outstanding balan ce; others, an

adequately by other m eans. Indications from

the other bankers suggested that even after sev

com e strong, local banks can and will offer the

eral years their plans w ere not highly profitable.

desired services. It was the opinion o f several

M o s t, how ever, were pleased and enthusiastic

o f these bankers that sm all ban ks, if consider
ing entrance into the field, should do so with

about their operations.
A n attem pt w as m ad e to determ ine h ow lon g
a period was required to recover costs. This

their ow n credit-card plan and not with a ch eckcredit plan or as an agent o f another bank.

period ranged fro m an im m ediate recovery to

T h e m ajor p roblem in the sm all co m m u n i

6 9 m onths. T h e sm allest plan started with an

ties, according to the observations o f several

outlay o f only $ 1 ,0 0 0 using a single card-file.

bankers, is the reluctance o f m erchants to par

Th is ban k reported an im m ediate recovery o f

ticipate in a bank plan. A n d if in the c o m m u

costs! T h e time required fo r recovering costs at

nity there is a large retail outlet with its ow n

the other banks, all o f which used billing or ac

credit card, a sm all bank w ould find it difficult

counting equipm ent,

to start a sm all-scale plan o f its own.

varied directly with

the

num ber o f cardholders.

A s indicated earlier, this part o f the survey
was lim ited, in that only seven banks were in

4. Observations and Evaluation

cluded. A t best, therefore, it provides only a
tentative appraisal o f the operations o f success

W h ile the seven sm all banks had generally
successful plans, bank officials were either re

ful credit-card

luctant or unable to discuss the problem s fa c

found that the success o f m an y o f these plans

ing sm all banks in this field tod ay and the alter

is attributable to the com p lete absence o f direct

natives available to them . A fe w com m en ts are

com petition fro m

worth m entioning, how ever.

features o f the various card plans were not sig
nificantly

A c c o rd in g to several bankers, the sm all bank

plans o f

different

sm all banks.

It was

other plans. A ls o , that the

from

w ell-kn ow n

m ajor

apparent

plans. H ow ev er, very little inform ation was o b

difficulty in operating a credit-card plan. M o st

tained about the costs o f starting and operating

o f these com m u n ities have a high affinity for

the surveyed plans. O n e conclusion that can be

in an isolated

com m u n ity faces no

keeping their dollars at h om e. Sm all banks in

inferred from the survey is that sm all banks in

such

isolated areas are probably not precluded from

localized

areas

are

shielded

som ew hat

from outside com p etition , but if pressures b e

offering their ow n credit-card plans.

APPENDIX

MASS MAILING OF UNSOLICITED
CREDIT CARDS AND ISSUE
BY APPLICATION ONLY

although the m ethod o f distribution had detri
m ental effects upon the earnings o f the banks
involved— and perhaps

on the

im age o f the

banking com m u n ity— the results were not so
Section 1 b elow describes the experience o f

serious

banks in C h icago with their m ass issue o f credit

has

som etim es

been

contended.

V iew in g the experience fro m hindsight, h ow

cards, and Section 2 describes the practices in

ever, the T a sk G ro u p feels that som e m odifica

stituted b y other banks that reflected lessons

tion in distribution and m arketing efforts w ou ld

learned in C h ica g o. Section 3 reports on the

have averted m any o f the unfavorable aspects

experience o f M a rin e M id lan d Trust C o m p a n y

o f the m ass issuance.

o f N e w Y o r k in its attem pt to obtain cardhold

W ith very few exceptions banks elsew here

ers by soliciting applications.

that have entered the credit-card field have also
sent out unsolicited cards. W h a t m ad e the situ

1. Chicago Experience with Mass
Mailing

ation different in C h ica g o was that five banks
entered the credit-card field at the sam e tim e.

Public officials, bankers, and the press have

Prior to these developm ents in C h ica g o, m ost

frequently m ade unfavorable com m ents on the

plans had been introduced and operated w ith

mass

out significant com petition in the sam e m arket.

m ailings

unsolicited

credit cards by

C h ica g o banks in late 1 9 6 6 . B ecause o f the c o n

E xperience with bank credit-card plans has

cern expressed b y such groups, the T a sk G ro u p

dem onstrated the need fo r volu m e if the service

felt that it was im portant to direct special atten

is to generate a profit. In attem pting to develop

tion to developm ents in the C h ica g o area. O f

volu m e, a bank m ust attract a w ide range o f

particular interest were the circum stances un

m erchants to m ake it worthw hile fo r individuals

derlying the issuance o f credit cards b y C h icago

to accept and use the ban k card. A t the sam e

banks, the steps taken to m od ify distribution

time the bank m ust attract a large enough group

policies once the difficulties b ecam e apparent,

o f cardholders to m ake it worthw hile for m er

and the effects o f the experience on the banks

chants to b ecom e associated with the plan. T h e

and the public.

conversion

o f m erchants’ accounts

receivable

co m m o n ly used b y banks starting plans in the

O n ce the decision to introduce credit cards
was m ade, the nature o f bank com petition in

m i d -1 9 5 0 ’s w ould not be sufficient to provide

the C h icago area and the unit-banking structure

the volu m e required. E vidence provided to the

o f the State provided the banks with forceful

T a sk G ro u p by a bank that had tested the re

arguments fo r using m ass issuance as a m ethod

sults o f m ailing cards on both a solicited and

o f distribution. H ow ev er, there were difficulties

an unsolicited basis indicates that bank depend

associated with such m ass issuance. T h e banks

ence upon application alone will not provide the

responded rapidly to these difficulties, and the

required volum e. E v en in retrospect, it appears

burden o f the unfavorable results fell o n them ,

that unsolicited m ailing w as the only logical

not on the general public. A s a result o f its in

course to pursue if a large m erchant- and card

vestigation, the T a sk G ro u p has conclu d ed that

h older-base were to be developed in C h icago.

ing restrictions, individual banks relied o n cor

T h e unit-banking structure in Illinois and the
highly com petitive nature o f ban kin g in C h icago

respondent

were im portant reasons fo r using unsolicited

geographical areas.

m ailings in that area and at the sam e tim e were

tom ers were sent by correspondent banks to the

the cause o f som e o f the difficulties associated

card-issuing banks, and credit cards were then

with the m ass m ailings

o f credit cards. T h e

distributed to those individuals. T h e card-issu

large unit banks in C h icago— operating, as they

ing banks did not always feel that cross-ch eck

do,

a n on -b ra n ch -b an k in g State— did

arrangem ents
Lists

penetrate

o f goo d

other

ban k

cus

not

ing o f nam es and addresses could be justified

have the m erchant or individual custom er con

on econ om ic grounds. A n d even where it was

tacts necessary to build a large m erchant- and

undertaken,

cardh old er-base. O n e o f the reasons fo r entry

differences in spelling o f nam es or in addresses.

duplication

crept

because

into the credit-card field had been to expand

In spite o f som e reports appearing in the

their retail m arket. Since credit cards, unlike

press, it is clear that the m ailing o f unsolicited

overdraft banking, do not require a prior cus

cards

tom er relation, the bank credit-card field p ro

m ailing o f such cards. M o s t o f the nam es were

C h icago

was

not

indiscriminate

vided entry into a m arket that in the opinion o f

obtained from the custom er rolls o f the bank

som e had been closed by the restrictions on

or its correspondent. Selection standards were

branching. In order to tap this m arket, u nso

based as a general rule on the size o f the ac

licited card mailings were considered essential.

count and on a satisfactory credit rating ex

In the C h icago area m an y individuals are not

perience. Som e nam es were obtained from lists

fam iliar with the services that banks provide.

purchased from credit bureaus. A ll such nam es

M a n y , in fact, consider currency exchanges and

were screened fo r negative inform ation.

savings and loan associations as their “ b an k s.”

T h e T a sk G ro u p is aware that an unfortunate

U n d er such circum stances the introduction o f

public relations problem did result fro m the use

the cards by the banks was considered to b e a

o f bank custom er lists. B esides duplication b e

departure from n orm al, and it produced som e

cause o f failure to cross-check nam es or b e

unfavorable reactions and com plaints that were

cause o f differences in the spelling o f nam es or

given wide audience by the press.

in addresses, som e cards were m ailed to chil

T h e problem s o f m ass m ailings were further

dren and others w ho should not have received

com p ou n d ed in C h icago b y the highly com p eti

them . H ow ev er, bank records d o not norm ally

tive environm ent am on g banks. Several banks

contain inform ation such as the age o f the ac

in that area were interested in expanding their

count holder, and the banks were aware that

portion o f the retail m arket and had been study

there w ould be som e errors o f this type. But

ing the

introducing credit-card

as a matter o f business ju dgm en t, the banks

plans. T h e first to issue cards was likely to cap

felt that the benefits to be gained in using these

ture a large share o f the m arket. B ut none o f

lists offset the risk involved.

possibility

the participants was w illing to concede the m ar

A lth o ug h a great deal has been m ad e o f the

ket to others. M a ss issuance o f cards b y each

“ blanketing” o f the C h icago area with credit

ban k was required in order to assure that its

cards, the evidence available does not appear to

com petitors w ould not com m a n d greater cus

indicate any substantial displeasure on the part

tom er loyalty

o f the public. F o r exam p le, the three largest

and higher earnings through

larger num ber o f cards.
O ne

result o f this com petitive

card-issuing banks in the C h icago area have
attem pted without success to trace rum ors o f

atm osphere

was that som e individuals received credit cards

excessive m ultiplicity o f cards. F o r periods in

from m ore than one bank. Th is was u n avoid

early 1 9 6 7 , for which records are available, the

able since by law the banks cou ld not arrange

banks reported that protests and returned cards

for an allocation o f custom ers to elim inate this

am ounted to only about tw o-tenths o f

duplication.

cent o f the cards m ailed.

Furtherm ore, because o f branch

1 per

F o r the m ost part, the difficulties associated

speeded up to provide early checks o n account

with the m ass m ailings affected the banks rather

status. T hree o f the m ajor banks called in all

than the public. Som e o f the published reports

cards and reissued cards only to th ose individ

apparently

uals w ho applied or w h o h ad b een using their

failed

distinguish

betw een

the

fraudulent use o f the cards and the problem s

cards properly. R egistered m ail was substituted

associated with granting credit to unqualified

for regular m ail, and security procedures for

b orrow ers. T h e m ajor p roblem for the banks

transmittal to post offices and fo r m ailing were

was fraud and not m isuse. T h e credit card is de

tightened. Arran gem ents with plastics m an u fac

signed for a m ass m arket, and the banks e x

turers were reviewed, and internal audit p ro ce

pected to reach potential borrow ers w ho had

dures fo r card im printing were tightened.
Figures on fraud losses in the C h ica g o area

not used b an k services b efore. T h ey also e x
pected

that the initial

experience

are still incom plete because recoveries continue.

those on c on

H aro ld T a y lo r has estim ated total losses at a

credit-card

w ould show larger losses than

sum er instalment loans. A s noted earlier, the

m inim um o f $ 6 m illio n .1 In form ation available

m ailings

random — and

to the T a sk G ro u p indicates that this estimate

were designed to reach those m ost likely and

is high. W h ile the losses were substantial, there

able to use a credit-card service. T h e experi

was no indication that the safety or soundness

were

selective— not

ence with credit m isuse was som ew hat greater

o f the banks was im paired in any w ay. T h e

than expected but still within a range accept

fraud loss represented less than o n e -h a lf o f 1

able to the banks.

per cent o f the total capital o f the banks in
volved. T h e losses were charged off as expenses

It was the fraud experience that was u n ex
pected. T h e dum ping o f m illions o f credit cards

as they occurred. T h ey were not large enough

in a m arket was too m uch o f a tem ptation. Se

to require the banks to item ize them
“ other

curity procedures were not carefully developed.

burdened

with

C hristm as

m ail

cases,

in the

earnings

o f the banks were three to fou r tim es larger
than the am ounts o f credit outstanding on their

cards in m ultifam ily housing units and apart
isolated

their

be noted that the reserves fo r b ad debt accounts

ers. C rim inal groups system atically picked up

sidered as not being excessive. F inally, it should

and

staffed by large num bers o f tem porary w ork

m ent h ouses.

Full text of Federal Reserve Bank of New York Circulars : Bank Credit-Card and Check-Credit Plans, A Federal Reserve System Report

FRASER