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For Release ori D e l i v e r y F r i d a y , March 2 6 , 1971 1 1 : 3 0 a . m . (San J u a n ) ; 1 0 : 3 0 a . m . (EST) BANK CREDIT CARDS The Record o f I n n o v a t i o n and Growth A Paper By Andrew F. Brimmer Member Board o f Governors o f the F e d e r a l Reserve System Presented At the Annual Seminar of the Puerto Rican Bankers A s s o c i a t i o n Caribe H i l t o n Hotel San Juan, Puerto Rico March 2 6 , 1971 BANK CREDIT CARDS The Record o f I n n o v a t i o n and Growth By Andrew F . Brimmer* The f i n a n c i a l i n n o v a t i o n r e p r e s e n t e d by the bank c r e d i t card is s t i l l fostering s i g n i f i c a n t changes i n commercial bank l e n d i n g p r a c t i c e s — a l t h o u g h the s u b j e c t i s much l e s s a t o p i c o f heated p u b l i c debate than i t was a few years ago. R e f l e c t i n g the growing c o m p e t i t i o n generated by the spreading use o f bank c r e d i t c a r d s , except a few o f the l a r g e s t banks i n the c o u n t r y have found i t all advan- tageous to o f f e r the s e r v i c e i n some form. S i m u l t a n e o u s l y - - and a l s o r e f l e c t i n g the same f a c t o r s — banks i n c r e a s i n g l y a r e b e i n g l i n k e d in a n a t i o n - w i d e network through p a r t i c i p a t i o n i n one o f the n a t i o n a l c r e d i t card systems. The c r e d i t card has been thoroughly accepted by a s u b s t a n t i a l p a r t o f the p u b l i c as an a p p r o p r i a t e i n s t r u m e n t o f bank l e n d i n g . On the o t h e r hand, the bank c r e d i t card s t i l l has not overcome completely the u n f o r t u n a t e l e g a c y i n h e r i t e d from a few y e a r s ago when a number o f banks made s e r i o u s e r r o r s (and s u f f e r e d s i z a b l e l o s s e s ) i n the initial * Member, Board o f Governors o f the F e d e r a l Reserve System. I am i n d e b t e d t o a number o f persons f o r a s s i s t a n c e i n the preparation of t h i s paper. M r . John Stone and Mrs. Katharyne R e i l o f the B o a r d ' s s t a f f helped w i t h the s t a t i s t i c a l a n a l y s i s o f c r e d i t card trends. M r , Tynan Smith p r o v i d e d i n f o r m a t i o n on bank c r e d i t card owners h i p and consumer awareness o f c r e d i t c o s t s . M r . Brenton C. L e a v i t t , w i t h the a s s i s t a n c e o f o f f i c e r s i n charge o f bank s u p e r v i s i o n a t F e d e r a l Reserve Banks, was r e s p o n s i b l e f o r the i n f o r m a l canvass o f l a r g e commercial banks t o assess t h e i r response to r e c e n t l e g i s l a t i v e and r e g u l a t o r y a c t i o n s a f f e c t i n g bank c r e d i t c a r d s . -2- d i s t r i b u t i o n of cards. firmly established, Nevertheless, this t y p e o f c r e d i t has become and i t w i l l u n d o u b t e d l y p l a y an e x p a n d i n g r o l e in bank l e n d i n g t o consumers i n t h e y e a r s ahead. For these reasons, i t m i g h t be h e l p f u l t o pause f r o m t i m e to t i m e t o c h a r t c r e d i t c a r d t r e n d s and t o assess t h e i r economic significance. Moreover, and i n view of the r e c e n t l y adopted Federal l e g i s l a t i v e regulatory restrictions a f f e c t i n g bank c r e d i t cards, the present a p p e a r s t o be a good t i m e t o a p p r a i s e t h e b a n k s 1 r e s p o n s e t o t h e For t h e l a t t e r purpose, t h e F e d e r a l Reserve Banks were asked t o make a n i n f o r m a l canvass i n t h e i r r e s p e c t i v e d i s t r i c t s o f member b a n k s 1 r e a c t i o n s . The r e s u l t s i n the c l o s i n g s e c t i o n o f these t o g e t an indication o f t h a t canvass a r e summarized remarks. From an a n a l y s i s of r e c e n t trends i n bank c r e d i t card s e v e r a l conclusions stand o u t : changes. - I n the l a s t y e a r , the r a t e o f growth o f c r e d i t o u t s t a n d i n g under bank c r e d i t cards slowed appreciably. T h i s slower pace p a r t l y r e f l e c t e d the moderation i n economic a c t i v i t y i n 1970 and the slower expansion of consumer c r e d i t i n general. However, i t a l s o r e f l e c t s m a t u r i n g of the bank c r e d i t card network. - Loss r a t e s under bank c r e d i t cards rose somewhat i n 1970. O v e r a l l loss r a t e s appear t o be c o n s i d e r a b l y h i g h e r than on consumer loans g e n e r a l l y , b u t the s i g n i f i a n c e of the d i f f e r e n c e i s d i m i n i s h e d when the s t a r t - u p costs f o r banks newly e n t e r i n g the business a r e taken i n t o account. Y e t , i n the long r u n , the g r e a t l y reduced p e r s o n a l c o n t a c t i n v o l v e d i n bank card l e n d i n g suggests t h a t the r e l a t i v e l y h i g h e r losses a s s o c i a t e d w i t h the l a t t e r might lending, -3- be expected to p e r s i s t . Although bank c r e d i t card outstandings have been growing r a p i d l y d u r i n g the l a s t s e v e r a l y e a r s , they s t i l l accounted f o r o n l y 7 per cent of t o t a l i n s t a l m e n t c r e d i t - - and f o r about 6 per cent of a l l consumer c r e d i t - - a t commercial banks a t the end of 1970. - Bank c r e d i t card business continues t o be h e a v i l y concentrated among member banks o f the F e d e r a l Reserve System. Among t h e s e , n a t i o n a l banks a r e s t i l l dominant. However, S t a t e member banks a r e a l s o r e l a t i v e l y much more i m p o r t a n t than insured nonmember banks. The l a r g e s t banks remain p r i n c i p a l s u p p l i e r s o f consumer c r e d i t v i a bank cards, but t h e i r share i s d e c l i n i n g a p p r e c i a b l y . The geography of bank c r e d i t cards has changed n o t i c e a b l y i n the l a s t year or so. While the Far West continues t o have the l a r g e s t amount, o f such c r e d i t o u t s t a n d i n g , growth has been p a r t i c u l a r l y r a p i d i n the Northeast and i n p a r t s o f the MidWest. Banks p r o v i d i n g funds v i a c r e d i t cards are p r i m a r i l y i n s t i t u t i o n s i n metropolitan areas. However, the a v a i l a b i l i t y of bank c r e d i t card s e r v i c e i s much wider - - because o f the network o f agency banks. - N a t i o n a l bank c r e d i t card systems have become even more f i r m l y e s t a b l i s h e d . Over the l a s t y e a r or so, c r e d i t o u t s t a n d i n g under the two major systems expanded somewhat more r a p i d l y than t o t a l bank card c r e d i t . - The ownership of bank c r e d i t cards c o n t i n u e s t o expand r a p i d l y , but the growth i s m a i n l y among f a m i l i e s w i t h h i g h e r incomes and h i g h e r l e v e l s o f education. I n the l a s t year oar so, awareness o f c r e d i t costs has increased s u b s t a n t i a l l y among bank c r e d i t card h o l d e r s . A major p a r t o f the g a i n undoubtedly can be a t t r i b u t e d to the e f f e c t s of the t r u t h - i n - l e n d i n g l e g i s l a t i o n which became e f f e c t i v e i n mid-1969. - To an i n c r e a s i n g e x t e n t , bank c r e d i t cards a r e being used as a s u b s t i t u t e f o r o t h e r types o f -4- revolving credit. Between 1967 and 1970, bank c r e d i t cards accounted f o r o n e - h a l f of t h e growth o f such c r e d i t — although bank cards accounted f o r o n l y 7 per cent o f the t o t a l outstanding a t the end o f 1967. The canvass of banks 1 responses t o r e c e n t l e g i s l a t i v e and r e g u l a t o r y r e s t r i c t i o n s a f f e c t i n g bank c r e d i t cards y i e l d e d several conclusions: - No i n s t a n c e s were r e p o r t e d i n which a commercial bank has issued an u n s o l i c i t e d c r e d i t card since t h e p r a c t i c e was banned i n l a t e October 1970. - Only a few banks a p p a r e n t l y have assessed c a r d h o l d e r s under the $50 l i m i t a t i o n on l i a b i l i t y f o r l o s t cards. I n s t e a d , as a g e n e r a l p o l i c y , commercial banks a r e r e p o r t e d to be absorbing the $50 l i a b i l i t y t o m i n i m i z e o p e r a t i n g costs or t o a v o i d an adverse public relations situation. - I n g e n e r a l , among the banks which a l r e a d y had c r e d i t cards o u t s t a n d i n g , the l e g i s l a t i v e and r e g u l a t o r y changes seem to have caused l i t t l e — i f any — m o d i f i c a t i o n i n l e n d i n g p r a c t i c e s o f commercial banks. We can now t u r n to the body o f t h e a n a l y s i s . Recent Growth Trends A t the end o f 1970, about $ 3 . 7 b i l l i o n of c r e d i t was o u t s t a n d i n g under bank c r e d i t c a r d s . fifths This was a g a i n o f j u s t over two- from the end of the previous y e a r . what the r e l a t i v e T h i s growth expanded some- importance of bank c r e d i t cards as a means o f bank l e n d i n g t o consumers, b u t t h e i r o v e r a l l impact remained f a i r l y modest. A t the end o f l a s t y e a r , bank c r e d i t c a r d outstandings represented -5- o n l y 7 per cent of t o t a l instalment c r e d i t and about 6 per o f a l l consumer c r e d i t a t commercial banks. cent A t the end o f 1967, the p r o p o r t i o n s were 2 , 5 per cent and 2 , 0 per cent^ r e s p e c t i v e l y . Some o f the p r i n c i p a l changes i n c r e d i t c a r d p l a n s o f F e d e r a l Reserve member banks d u r i n g the l a s t y e a r can be t r a c e d i n T a b l e attached. ^ 1, As o f December, 1970, 869 F e d e r a l Reserve member banks had c r e d i t c a r d p l a n s i n o p e r a t i o n . Of t h i s number, 689 were n a t i o n a l banks, and 180 were S t a t e member banks. A year e a r l i e r , 773 member banks had such p l a n s , o f which 618 were n a t i o n a l banks and 155 were S t a t e members. I n 1970, the number o f F e d e r a l Reserve member banks w i t h c r e d i t card p l a n s rose by 1 2 - 1 / 2 per c e n t ; f o r n a t i o n a l b a n k s , the r i s e was 1 1 - 1 / 2 per c e n t , and f o r S t a t e members i t was 16 per During 1970, a s m a l l i n c r e a s e ( l e s s t h a t 2 per c e n t ) i n the number o f u n e x p i r e d c r e d i t c a r d s . cent. occurred A decrease i n t h e number o f cards a t n a t i o n a l banks o f f s e t most o f the i n c r e a s e a t S t a t e member banks. (1)These s t a t i s t i c s were obtained from p r e l i m i n a r y t a b u l a t i o n s o f d a t a from the supplement t o t h e C a l l Report f o r December 3 1 , 1970. Data were c o l l e c t e d o n l y f o r F e d e r a l Reserve member banks, The F e d e r a l D e p o s i t Insurance C o r p o r a t i o n d i d n o t d i s t r i b u t e t h e supplement t o i n s u r e d non-member banks due t o l a c k o f t i m e . The p r e l i m i n a r y f i g u r e s a r e s u b j e c t t o minor m o d i f i c a t i o n when t h e f i n a l d a t a a r e a v a i l a b l e , s i n c e e d i t i n g d u r i n g r e g u l a r t a b u l a t i o n w i l l p r o b a b l y uncover random e r r o r s i n bank r e p o r t s , ( 2 ) T h e reason f o r the decrease i s n o t c l e a r . However, some i n d u s t r y observers b e l i e v e t h a t new F e d e r a l Government r e g u l a t i o n s r e s t r i c t i n g r e i s s u e of c r e d i t cards may have been a f a c t o r . (2) -6- Use o f c r e d i t cards increased f o r a l l member banks d u r i n g 1970. The number o f a c t i v e accounts (those w i t h o u t s t a n d i n g balances) rose by one-fifth, and r e p r e s e n t e d 35 per cent o f the t o t a l number o f cards a t t h e end o f 1970, compared w i t h 29 per c e n t a y e a r earlier. I n t h e a g g r e g a t e , F e d e r a l Reserve member banks had $ 3 . 4 b i l l i o n o u t s t a n d i n g under bank c r e d i t cards a t the end o f an i n c r e a s e o f $ 1 . 0 b i l l i o n , of 1969. or t w o - f i f t h s , 1970, over the l e v e l a t the end I n b o t h y e a r s , member banks accounted f o r about the same p r o p o r t i o n (92 p e r c e n t ) o f t o t a l bank card c r e d i t . Among member banks as a group, the average balance o u t s t a n d i n g rose by about $25 t o $207. The i n c r e a s e was p a r t i c u l a r l y s t r i k i n g a t S t a t e member banks, where i t amounted to $42 compared w i t h $20 a t n a t i o n a l banks. This g a i n n o t o n l y brought the average balance a t S t a t e member banks a b r e a s t o f the average a t n a t i o n a l banks b u t moved the former s l i g h t l y ahead of the l a t t e r . To some e x t e n t , t h i s development r e f l e c t s the a d o p t i o n o f c r e d i t cards by s e v e r a l l a r g e S t a t e member banks l a s t year as w e l l as the f u r t h e r m a t u r i n g o f plans launched the year b e f o r e . Losses a r i s i n g from consumer loans extended under bank cards rose somewhat i n 1970. For a l l member banks, n e t c h a r g e - o f f s as a p e r c e n t a g e o f y e a r - e n d outstandings climbed to 3 . 3 9 per c e n t , w i t h 2 . 3 8 per c e n t a t the close of 1969. continued than a t I n 1969, the loss r a t i o s were 2 . 4 9 per cent and 1 . 9 7 per c e n t , r e s p e c t i v e l y . compared Reported loss r a t i o s t o be s u b s t a n t i a l l y h i g h e r a t n a t i o n a l banks ( 3 . 7 2 per c e n t ) S t a t e members ( 2 . 1 7 per c e n t ) . credit The y e a r - t o - y e a r rise -7- i n the loss r a t i o s f o r F e d e r a l Reserve member banks ( i n percentage p o i n t s ) were; a l l members, 1 . 0 1 ; n a t i o n a l banks, 1 . 2 3 ; and S t a t e members, 0 . 2 0 . To some e x t e n t , the h i g h e r l o s s r a t i o s f o r national banks can be t r a c e d to d i f f e r e n c e s i n accounting procedures. National banks a r e r e q u i r e d to charge o f f t h e i r d e l i n q u e n t accounts a f t e r b i l l i n g s w i t h o u t r e c e i v i n g a payment. six I n c o n t r a s t , o n l y 18 per cent of the S t a t e member banks r e p o r t e d using the 90-day p e r i o d a t the end of 1970. (See Table 2 . ) after Most of them (over t h r e e - f i f t h s ) charged o f f delinquencies 120 to 180 days. I n assessing banks 1 loss experience w i t h c r e d i t c a r d s , a standard of comparison i s r e q u i r e d . For t h i s purpose, t h e i r w i t h o t h e r types of bank loans t o consumers can be used. experiences Figures c o l l e c t e d by the American Bankers A s s o c i a t i o n i n d i c a t e t h a t , i n recent y e a r s , n e t losses on banks 1 consumer i n s t a l m e n t c r e d i t have been i n the range of 0 . 2 5 — t o 0 . 5 0 per cent o f o u t s t a n d i n g s . For p e r s o n a l loans i n 1969, the loss r a t e s were i n the neighborhood o f 0 . 8 0 per c e n t . Thus, overall loss r a t e s on bank c r e d i t card loans appear t o be c o n s i d e r a b l y h i g h e r than on consumer loans g e n e r a l l y . However, the s i g n i f i c a n c e o f the d i f f e r e n c e i s d i m i n i s h e d when the s t a r t - u p costs f o r banks newly e n t e r i n g the business a r e t a k e n i n t o account. Beyond t h i s f a c t o r , the more impersonal n a t u r e o f bank card l e n d i n g ( i n v o l v i n g l i t t l e d i r e c t personal c o n t a c t f o r p a r t i c u l a r c r e d i t extensions once the card has been issued) suggests t h a t a somewhat h i g h e r loss r a t i o f o r bank c r e d i t might be expected to p e r s i s t 5 l e v e l as card although i t systems become more f i r m l y cards should d e c l i n e from the present established. - 8 - Bank c r e d i t credit c a r d p l a n s have c o n t i n u e d t o e c l i p s e check p l a n s as a mode o f c o m m e r c i a l b a n k l e n d i n g t o c o n s u m e r s . t h e end o f J u n e , available), 1970 ( t h e l a t e s t bank c r e d i t (72 p e r c e n t ) of date f o r w h i c h check c r e d i t cards accounted f o r almost the t o t a l plans, and c h e c k c r e d i t Almost three years e a r l i e r credit for just o u t s t a n d i n g u n d e r t h e two t y p e s over o n e - f o u r t h (28 p e r ( S e p t e m b e r 1 9 6 7 ) , more t h a n is c a l c u l a t e d i n terms o f This p a t t e r n i s It plans. Consumers may w e l l credit. operations i n order plus find credit In addition, of c r e d i t card Dec. June Dec. June 67-Dec. 68-June 68-Dec. 69-June 68 69 69 70 cards growth types whether from June-to J u n e . v t o be more c o n v e n i e n t greater return, have l e d t o f o r c e f u l J than check t h e b a n k s 1 needs f o r h i g h v o l u m e i n c r e d i t card transaction, merchandizing plans. (3)The r e s p e c t i v e Period c l e a r whether t o h o l d down t h e c o s t o f h a n d l i n g e a c h the p o t e n t i a l l y falling is also clear changes a r e measured f r o m D e c e m b e r - t o - D e c e m b e r o r of two-fifths t h e number o f banks o f f e r i n g t h e two o f p l a n s o r by t h e amount o f o u t s t a n d i n g s . are cent). M o r e o v e r , b a n k s w i t h c h e c k c r e d i t p l a n s have b e e n year-by-year. data three-fourths (43 p e r c e n t ) were o u t s t a n d i n g u n d e r c h e c k - r e l a t e d behind r e l a t i v e l y At growth rates in over-lapping Bank C r e d i t Cards Number Amount o f Banks Outstanding (Percentage 31 58 68 79 137 101 94 79 12 m o n t h p e r i o d s Check C r e d i t P l a n s Number Amount Outstanding o f Banks Growth) 33 53 26 54 35 16 19 12 were: -9- However, t h e e x p a n s i o n o f bank c r e d i t what l a s t y e a r . To some e x t e n t , credit A t l e a s t two f a c t o r s have a b e a r i n g on t h i s the slower growth r e f l e c t e d card network, covered. c a r d s a l s o slowed some- the m a t u r i n g of m o d e r a t i o n i n economic a c t i v i t y in t h e bank s i n c e most a r e a s o f t h e c o u n t r y have now been B u t t h e s l o w e r pace a l s o can be t r a c e d p a r t i a l l y consumer c r e d i t development. to the i n 1970 and t h e s l o w e r e x p a n s i o n o f general. S t r u c t u r e o f C r e d i t Card B a n k i n g As i n d i c a t e d a b o v e , F e d e r a l Reserve member banks have a l l o f t h e l o a n s o u t s t a n d i n g u n d e r bank c r e d i t cards. 1970, t h e y h e l d $ 2 , 7 6 5 m i l l i o n o f such c r e d i t , representing cent o f the t o t a l o f $3,048 m i l l i o n then o u t s t a n d i n g . The r e m a i n d e r ($283 m i l l i o n ) credit As o f June 30, 91 per (See T a b l e 4.) was h e l d by i n s u r e d nonmember b a n k s . By t h e end o f l a s t y e a r , member bank l o a n s o f t h i s $3.4 b i l l i o n , virtually t y p e had r i s e n and t h e t o t a l was e s t i m a t e d a t $ 3 . 7 b i l l i o n . Thus, c a r d l o a n s o u t s t a n d i n g a t nonmember banks were i n t h e o f $300 m i l l i o n a t t h e end o f 1970. to neighborhood However, t h e d i s t r i b u t i o n between t h e two g r o u p s o f i n s t i t u t i o n s was e s s e n t i a l l y unchanged. N a t i o n a l banks c o n s t i t u t e d a b o u t o n e - h a l f o f a l l banks w i t h c r e d i t c a r d r e c e i v a b l e s as o f June 30, 1970, b u t t h e y h e l d n e a r l y quarters of t o t a l outstandings. over the l a s t t h r e e y e a r s ; a t t h e end o f September, 1967, banks were t h r e e - f i f t h s and t h e y a c c o u n t e d f o r B o t h o f t h e s e s h a r e s have o f a l l banks o f f e r i n g such four-fifths of the t o t a l three- declined national credit, receivables. -10- This r e l a t i v e d e c l i n e i n n a t i o n a l banks 1 share o f the bank c a r d business was caused by the e n t r y o f a number o f l a r g e State- c h a r t e r e d banks and the r a p i d expansion o f t h e i r a c t i v i t y i n the last few y e a r s . A t the end o f June l a s t y e a r , 170 S t a t e member banks r e p o r t e d having c r e d i t card p l a n s , and loans o u t s t a n d i n g amounted to $559 m i l l i o n . Thus, S t a t e member banks r e p r e s e n t e d 1 2 - 1 / 2 per cent o f the number of banks o f f e r i n g such p l a n s , and they accounted f o r j u s t over 18 per cent o f the t o t a l c r e d i t o u t s t a n d i n g . D u r i n g the previous t h r e e y e a r s , t h e i r share of the c r e d i t card business rose s l i g h t l y . The 510 non- member banks w i t h c r e d i t card plans i n mid-1970 c o n s t i t u t e d n e a r l y two- f i f t h s o f a l l banks o f f e r i n g such p l a n s , b u t they h e l d o n l y 9 per cent o f the t o t a l receivables. As a group, the average n a t i o n a l bank and the average member bank a r e much larger than the nonmember c o u n t e r p a r t s . State This same d i s p a r i t y i n s i z e i s e v i d e n t i n the case o f c r e d i t card volume. For example, a t the end o f June, 1970, the average amount o f loans bank o u t s t a n d i n g under c r e d i t card plans was $ 2 , 2 4 9 thousand f o r commercial banks o f f e r i n g such p l a n s . per all For n a t i o n a l and S t a t e member banks combined, t h e average was $ 3 , 2 7 2 thousand, and f o r nonmember banks i t was $555 thousand. Thus, c r e d i t card outstandings a t the average n a t i o n a l o r S t a t e member bank were n e a r l y s i x times the l e v e l a t t y p i c a l nonmember bank engaged i n the b u s i n e s s . the -11- Wheri banks o f f e r i n g c r e d i t cards a r e c l a s s i f i e d by alone, the e x t e n t t o w h i c h such loans a r e s t i l l largest institutions s i z e o f banks i s i s made even more c l e a r . shown i n T a b l e 5. concentrated i n A t the end o f J u n e , i n September, h e l d n e a r l y t w o - t h i r d s o f the t o t a l . 1967, the The d i s t r i b u t i o n by i n the $1 b i l l i o n and over d e p o s i t c l a s s h e l d j u s t over of card c r e d i t outstanding; size this The d e c l i n e 1970, banks two-fifths c l a s s o f banks i n the relative importance o f the v e r y l a r g e banks r e s u l t e d from expanded c r e d i t activity o f the s m a l l e r banks. consumer c r e d i t I t d i d not represent s h i f t s in card total holdings. Geography o f C r e d i t Card Banking As mentioned above, the geography o f c r e d i t changed n o t i c e a b l y i n the l a s t year o r so. continues W h i l e the F a r West t o have the l a r g e s t amount o f such c r e d i t growth has been p a r t i c u l a r l y c a r d b a n k i n g has outstanding, r a p i d i n the N o r t h e a s t and i n p a r t s of the Mid-West. As shown i n T a b l e 6, the T w e l f t h F e d e r a l Reserve d i s t r i c t which l e d other areas i n expansion of card a c t i v i t y c o n t i n u e d to r e p o r t the l a r g e s t c r e d i t c a r d h o l d i n g s i n the e a r l y 1960 f s i n June, However, as banks i n o t h e r areas have been c a t c h i n g up, the t o t a l d e c l i n e d s h a r p l y . 1967. its 1970. share of For i n s t a n c e , banks i n the F a r West a c c o u n t e d f o r j u s t under o n e - h a l f o f t o t a l c r e d i t September, — card receivables in By the end o f 1968, the p r o p o r t i o n had d e c r e a s e d to -12- two-fifths, and b y m i d - 1 9 7 0 , than o n e - q u a r t e r . i t had f a l l e n f u r t h e r Simultaneously, to s l i g h t l y gains i n other p a r t s of the were s u b s t a n t i a l i n b o t h a b s o l u t e and r e l a t i v e terms. the n a t i o n - - e s p e c i a l l y country But w i t h i n l a s t y e a r o r s o , c a r d h o l d i n g s have been g r o w i n g most r a p i d l y Eastern part of less in the the i n New E n g l a n d -<- and i n p a r t of the Mid-West. Banks p r o v i d i n g funds v i a c r e d i t c a r d s a r e institutions in large metropolitan areas. However, primarily the availability o f bank c r e d i t c a r d s e r v i c e i s much w i d e r - - because o f t h e w o r k o f agency b a n k s . relating to banking, For t h e purpose o f c o l l e c t i n g statistics 230 S t a n d a r d M e t r o p o l i t a n S t a t i s t i c a l A r e a s a r e used i n t h e 50 S t a t e s . holding credit (SMSA's) Of t h e s e 230 SMSA's, 188 i n c l u d e d banks c a r d r e c e i v a b l e s a t the end o f J u n e , 1 9 7 0 . 557 banks w i t h c r e d i t c a r d o u t s t a n d i n g s fell In addition, o u t s i d e t h e s e SMSA's, t h e y h e l d o n l y 5 p e r c e n t o f t h e t o t a l bank c a r d c r e d i t . ever, net- Again, t h e n e t w o r k o f bank c r e d i t c a r d c o v e r a g e i s much w i d e r but how- than even t h e s e f i g u r e s w o u l d s u g g e s t because o f t h e r e m a i n i n g SMSA's, as w e l l as o t h e r a r e a s n o t i n c l u d e d i n SMSA's, t h a t were s e r v e d by a g e n t banks n o t h o l d i n g c r e d i t c a r d receivables. E x p a n s i o n o f N a t i o n a l C r e d i t Card Systems Nationwide credit firmly established. t h e two m a j o r systems c a r d systems have become even more Over t h e l a s t y e a r o r s o , c r e d i t o u t s t a n d i n g s (Bank A m e r i c a r d and I n t e r b a n k ) under expanded somewhat -13- more r a p i d l y banks t h a n t o t a l bank c a r d c r e d i t . The number o f ( w h i l e r i s i n g l e s s r a p i d l y t h a n t h e amount o f also registered a sizable participating outstandings) increase. A t t h e end o f 1970, as shown i n T a b l e 7 , t h e r e were banks p a r t i c i p a t i n g i n t h e two systems. 16 p e r c e n t ) were c a r d - i s s u i n g banks on t h e i r own b o o k s ) ; Of t h i s number, (that is, 1,427 c a r r y i n g the (or receivables t h e r e m a i n i n g 7 , 6 8 4 banks a c t e d as a g e n t s f o r i s s u i n g i n s t i t u t i o n s and u s u a l l y d i d n o t h o l d o u t s t a n d i n g s selves. 9,111 I n t h e y e a r and a h a l f e n d i n g l a s t December, them- the t o t a l o f banks i n t h e n a t i o n - w i d e bank c a r d systems r o s e by n e a r l y number 50 p e r The g r e a t e s t g r o w t h was c o n c e n t r a t e d i n t h e c a r d - i s s u i n g banks - i n c r e a s e d by 108 p e r c e n t , compared w i t h 4 1 p e r c e n t f o r agency A t t h e end o f l a s t y e a r , 1969. the expansion i n the p r o p o r t i o n of card i s s u i n g - b a n k b t h e r i s e i n t h e number o f agency b a n k s . t h i s happens, t h a t many o f the credit t h e number o f banks separately- M o r e o v e r , n e w l y e n t e r i n g s m a l l banks i n c o m m u n i t i e s w o u l d be u n a b l e t o s i g n up many m e r c h a n t s . is The m e r c h a n t may w i t h p l a n s w o u l d r i s e more r a p i d l y t h a n t h e number o f i d e n t i f i e d merchants. behind the lag m e r c h a n t - c a n d i d a t e s had a l r e a d y been r e c r u i t e d i n t o one b a n k c a r d p l a n a t t h e t i m e a new p l a n was i n t r o d u c e d . of - - and even b e h i n d The r e a s o n f o r n o t r e a d i l y e x p l a i n e d , b u t i t may r e f l e c t t h e f a c t 900 i n t h e number p a r t i c i p a t i n g merchants over t h i s p e r i o d lagged c o n s i d e r a b l y If which 1,137 t h o u s a n d m e r c h a n t s were The g r o w t h o f o n e - q u a r t e r j o i n t h e second p l a n as w e l l . cent. banks. members o f t h e n a t i o n a l bank c r e d i t c a r d s y s t e m s , compared w i t h thousand i n June, card small -14- The number of cardholder accounts recorded w i t h banks the n a t i o n a l card systems climbed by 10 per cent between June, and December, 1970 — from 4 3 . 4 m i l l i o n to 4 7 . 6 m i l l i o n . same p e r i o d , balances) t h e number of a c t i v e accounts (those w i t h 1969, Over the outstanding r o s e from 8 . 6 m i l l i o n to 1 5 . 3 m i l l i o n — a g a i n of four-fifths. in nearly Moreover, a c t i v e cards as a p r o p o r t i o n o f the number o f cards o u t s t a n d i n g a l s o rose sharply - - from o n e - f i f t h t o one-third, a p r o p o r t i o n about i n l i n e w i t h t h a t f o r F e d e r a l Reserve member banks mentioned above. much f a s t e r The f a c t t h a t the number o f a c t i v e accounts rose t h a n the number o f cards o u t s t a n d i n g suggests t h a t many new bank c a r d h o l d e r s f i n d the card a convenient means o f making payments. The average amount of c r e d i t o u t s t a n d i n g per a c t i v e account rose by over o n e - q u a r t e r - t o the end o f l a s t y e a r . from $182 t o $232 - - The l a t t e r customer from mid-1969 figure is substantially larger than t h e average f o r a l l commercial banks which were members of the F e d e r a l Reserve System. The t o t a l amount o f c r e d i t o u t s t a n d i n g a t banks i n the n a t i o n a l card systems rose from $ 1 . 6 b i l l i o n to $ 3 . 6 b i l l i o n i n the 1 - 1 / 2 y e a r s ending i n December, 1970. T h i s growth was somewhat than t h a t r e g i s t e r e d by t o t a l bank card r e c e i v a b l e s cent v s . 118 per c e n t ) . faster (a g a i n o f 127 per As a consequence, the share o f the n a t i o n a l systems i n t h e t o t a l rose from 92 per cent t o 96 per c e n t . The r a p i d development of the n a t i o n - w i d e bank c r e d i t card systems and the continued expansion o f the network o f agency banks — -15- a t the same time t h a t the number of c a r d - i s s u i n g banks i s a l s o growing r a p i d l y — a l l suggest t h a t the p u b l i c a t l a r g e f i n d s the bank c r e d i t card an a p p e a l i n g f e a t u r e o f bank l e n d i n g techniques. The outlook i s f o r a f u r t h e r widening - - and deepening — o f the n a t i o n - w i d e systems i n coming y e a r s . Ownership o f Bank C r e d i t Cards The growing use of bank c r e d i t cards by consumers is shown g r a p h i c a l l y i n the r e s u l t s o f the Surveys o f Consumer Awareness o f C r e d i t Costs conducted by the F e d e r a l Reserve Board i n mid-1969 and i n the F a l l o f 1970. The e a r l i e r Survey found t h a t j u s t over o n e - q u a r t e r o f a l l respondents had a bank c a r d . Survey, s l i g h t l y more than a y e a r l a t e r , above 30 per c e n t . (See T a b l e In last fall's t h e p r o p o r t i o n had r i s e n to 8.) Ownership o f bank c r e d i t cards i n c r e a s e d among respondents a t a l l education l e v e l s . However, the growth continued to be con- c e n t r a t e d among f a m i l i e s w i t h b e t t e r - t h a n - a v e r a g e e d u c a t i o n . I n 1969, o n l y 17 per cent o f f a m i l i e s whose head had n o t graduated from h i g h school had bank c r e d i t c a r d s , and t h i s p r o p o r t i o n d i d n o t grow by the second Survey. On the o t h e r hand, among h i g h school g r a d u a t e s , the p r o p o r t i o n w i t h bank cards i n c r e a s e d between the Surveys from 27 per cent t o 30 per c e n t . For those w i t h some c o l l e g e e d u c a t i o n , the r i s e was from 36 per cent t o 44 per c e n t . Ownership o f bank c r e d i t cards a l s o i n c r e a s e d between the Surveys i n a l l income b r a c k e t s — except the lowest ( t h a t i s among -16- those f a m i l i e s w i t h incomes o f l e s s than $ 5 , 0 0 0 per y e a r ) . I n 1969, card ownership ranged from 13 per cent f o r respondents w i t h incomes of l e s s than $ 5 , 0 0 0 t o 38 per cent f o r those w i t h incomes o f and o v e r . F i f t e e n months l a t e r , $10,000 the p r o p o r t i o n o f bank card h o l d e r s had i n c r e a s e d f o r the upper income f a m i l i e s , b u t i t had dropped s l i g h t l y f o r those i n the lowest income group. I n the l a s t y e a r or so, awareness of c r e d i t costs has i n c r e a s e d s u b s t a n t i a l l y among bank c r e d i t card h o l d e r s . This conclusion i s a l s o supported by the r e s u l t s o f the Surveys o f Consumer Awareness o f C r e d i t Costs. (See Table 9 . ) I n the Surveys, respondents owning bank c r e d i t cards were asked to i n d i c a t e the approximate annual r a t e o f i n t e r e s t t h a t was a p p l i c a b l e to balances under the card arrangement. From the f i r s t outstanding to the second Survey, the p r o p o r t i o n o f respondents answering " d o n ' t know11 dropped n o t i c e a b l y from over o n e - h a l f t o about o n e - q u a r t e r o f a l l those responding t o the question. T h i s same p a t t e r n i s e v i d e n t when respondents a r e classified by e i t h e r e d u c a t i o n or income. Moreover, the responses g i v e n i n the second Survey were much c l o s e r t o the a c t u a l i n t e r e s t r a t e s w r i t t e n i n t o t y p i c a l bank c r e d i t card p l a n s . For example, i n 1969, about o n e - t h i r d o f those answering the q u e s t i o n p l a c e d the annual r a t e i n the range o f 9 - 1 8 per c e n t ; i n 1970, about t w o - t h i r d s of the respondents i n d i c a t e d range. A l s o , as expected, the h i g h e r the l e v e l of income or e d u c a t i o n , the g r e a t e r appeared to be the awareness o f c r e d i t costs by owners o f bank c r e d i t this cards. exhibited -- -17- Although i t would be d i f f i c u l t t o demonstrate, one might conclude t h a t a major p a r t o f the i n c r e a s e d awareness o f c r e d i t should be a t t r i b u t e d t o the e f f e c t s o f the t r u t h - i n - l e n d i n g which became e f f e c t i v e i n m i d - 1 9 6 9 . instructive costs legislation I t would be both i n t e r e s t i n g and t o t e s t the v a l i d i t y of t h i s impression i n and f u t u r e Surveys. Changing P a t t e r n o f C r e d i t Card Use To a c o n s i d e r a b l e e x t e n t , bank c r e d i t cards a r e b e i n g used as s u b s t i t u t e s f o r o t h e r types o f r e v o l v i n g c r e d i t . This tendency i s suggested s t r o n g l y by the t r e n d s i n s e v e r a l types o f r e v o l v i n g p l a n s over the l a s t t h r e e y e a r s . I n T a b l e 10, the amounts o u t s t a n d i n g a r e shown s e p a r a t e l y f o r bank c r e d i t c a r d s , o i l company department s t o r e r e v o l v i n g c r e d i t , and e n t e r t a i n m e n t c a r d s . ^ credit cards,^ r e t a i l charge a c c o u n t s , and t r a v e l Changes i n these l e v e l s between 1967 and 1970 a r e shown i n Table 11. A t the end o f l a s t December, the t o t a l o f such r e v o l v i n g o u t s t a n d i n g amounted to $ 1 7 . 3 b i l l i o n , December, 1967. respectively, period, Of these t o t a l s , $ 3 . 7 b i l l i o n and $ 0 . 8 r e p r e s e n t e d bank card r e c e i v a b l e s . in billion, D u r i n g the three-year bank cards accounted f o r o n e - h a l f o f the growth o f such c r e d i t a l t h o u g h they c o n s t i t u t e d o n l y a t the end o f 1967. 7 per cent of the t o t a l outstanding T h i s expansion r a i s e d the share o f bank cards t o one-fifth. (4)Consumer p o r t i o n o n l y . compared w i t h $ 1 1 . 5 b i l l i o n credit -- -18- A t the end o f 1967, the volume o f bank c r e d i t card r e c e i v a b l e s was about equal to t h a t f o r o i l company cards — but substantially below the o u t s t a n d i n g s a t department s t o r e s and i n r e t a i l accounts. charge By the end o f 1970, the amount under bank c r e d i t cards was double t h e amount f o r o i l companies 1 c a r d s , and the banks had closed a s i z a b l e p a r t o f the gap by which they lagged department and o t h e r r e t a i l outlets. I n terms o f r e l a t i v e s h a r e s , o n l y banks and o i l improved t h e i r p o s i t i o n s over the t h r e e - y e a r p e r i o d . categories of revolving c r e d i t declined r e l a t i v e l y . companies All other Among those c a t e g o r i e s w i t h s u b s t a n t i a l amounts o f c r e d i t o u t s t a n d i n g , proportionate stores the largest l o s s was e x p e r i e n c e d by r e t a i l charge accounts — whose share dropped from o n e - h a l f t o t w o - f i f t h s . The share o f department s t o r e s decreased from 30 per c e n t t o 27 per c e n t . The l a t t e r outlets a p p a r e n t l y were a b l e t o m a i n t a i n t h e i r p o s i t i o n somewhat b e t t e r than o t h e r r e t a i l s t o r e s because these t y p i c a l l y v e r y l a r g e u n i t s have g e n e r a l l y a b s t a i n e d from j o i n i n g bank c r e d i t card p l a n s . Moreover, many o f them o p e r a t e t h e i r own c r e d i t systems which may sometimes be q u i t e p r o f i t a b l e — as w e l l as p r o v i d i n g them w i t h a r e a d i l y a v a i l a b l e a d v e r t i s i n g medium through t h e m a i l i n g o f monthly s t a t e m e n t s . A number o f o i l companies have r e c e n t l y s h i f t e d t h e i r p l a n s t o a d e f e r r e d payment b a s i s . Some o f them have a l s o t h e i r cards w i t h a v a r i e t y o f o t h e r u s e s , i n c l u d i n g t r a v e l (such as m o t e l s ) , merchandi&e i t e m s , and i n s u r a n c e . Both o f moves have made o i l company cards a s t r o n g e r c o m p e t i t i v e credit linked facilities these factor. -19- On the o t h e r hand, the t r a d i t i o n a l t r a v e l and e n t e r t a i n m e n t cards have shown no a b s o l u t e growth i n the l a s t few y e a r s receivables o u t s t a n d i n g ) , ^ considerably. (measured by and t h e i r r e l a t i v e p o s i t i o n has weakened A g a i n , a good p a r t o f t h e i r d e c l i n e can be t r a c e d t h e impact o f c o m p e t i t i o n from bank c r e d i t to cards. Another p e r s p e c t i v e on the growing c o m p e t i t i v e n e s s o f bank c r e d i t cards i s p r o v i d e d by the Surveys o f Consumer Awareness o f Costs mentioned above. I n these Surveys, data were a l s o Credit collected on the e x t e n t t o which consumers had charge purchase arrangements w i t h department s t o r e s , g a s o l i n e companies or o t h e r r e t a i l stores. The r e s u l t s a r e shown i n Table 12. These f i g u r e s show a small — but p e r s i s t e n t — decrease t h e frequency o f such r e v o l v i n g c r e d i t the two Surveys. in arrangements r e p o r t e d between The p a t t e r n holds f o r a l l c l a s s e s o f respondents — whether they a r e grouped by e d u c a t i o n , income, or age o f f a m i l y head. I n t r y i n g t o e x p l a i n t h i s s t r i k i n g development, one should t a k e n o t e o f t h e d i f f e r e n t economic environment a t the time o f t h e two S u r v e y s . Because o f t h e h i g h e r l e v e l s o f unemployment p r e v a i l i n g i n t h e F a l l of 1970 compared w i t h t h e s i t u a t i o n i n the Summer o f 1 9 6 9 , one m i g h t e x p e c t a s m a l l e r p r o p o r t i o n o f respondents t o r e p o r t r e v o l v i n g arrangements. On the o t h e r hand, as shown above, a l a r g e r credit proportion o f the same respondents r e p o r t e d owning a bank c r e d i t c a r d a t the t i m e o f the second Survey t h a n a t the time o f the e a r l i e r canvass. When ( 5 ) A c t u a l l y , t h e r e was a small growth o f 15 p e r c e n t which does n o t show i n T a b l e 11 because o f rounding. -20- t h e two p i e c e s o f e v i d e n c e a r e v i e w e d t o g e t h e r — and reinforced b y t h e i n f o r m a t i o n on r e c e i v a b l e s o u t s t a n d i n g u n d e r t h e d i f f e r e n t of c r e d i t plans - increasingly it seems c l e a r t h a t bank c r e d i t c a r d s a r e f o r o t h e r forms o f consumer c r e d i t types substituting arrangements. Bank Response t o Recent L e g i s l a t i v e and R e g u l a t o r y Changes I n t h e p r e p a r a t i o n o f t h e s e r e m a r k s , an e f f o r t was made t o appraise t h e way banks have a d j u s t e d t o r e c e n t l e g i s l a t i v e and changes a f f e c t i n g bank c r e d i t cards. I t may be r e c a l l e d t h a t regulatory the Consumer C r e d i t P r o t e c t i o n A c t was amended on O c t o b e r 2 6 , 1970, and t h e F e d e r a l R e s e r v e Board made i m p l e m e n t i n g changes i n i t s R e g u l a t i o n Z (Truth-in-Lending) e f f e c t i v e J a n u a r y 25 o f t h i s year. Among o t h e r changes, t h e l e g i s l a t i o n p r o h i b i t e d t h e o f u n s o l i c i t e d c r e d i t c a r d s a f t e r O c t o b e r 2 6 , 1970, and i t liability of credit limited c a r d h o l d e r s f o r u n a u t h o r i z e d use o f t h e i r c a r d s a maximum o f $50 b e g i n n i n g J a n u a r y 2 5 , 1971. issuance This l i a b i l i t y - The c a r d has been "accepted 1 1 ( r e q u e s t e d , u s e d , the to e x i s t s when: etc.). - The c a r d h o l d e r has been n o t i f i e d o f h i s p o t e n t i a l l i a b i l i t y ( w h i c h t h e i s s u e r may s e t a t no more t h a n $50). - The u n a u t h o r i z e d use o c c u r s b e f o r e t h e i s s u e r has been n o t i f i e d o f l o s s o r t h e f t . - The c a r d h o l d e r has been s u p p l i e d w i t h a p r e a d d r e s s e d , stamped f o r m t o f a c i l i t a t e notification. - No l i a b i l i t y e x i s t s f o r u n a u t h o r i z e d use o f a c r e d i t c a r d i s s u e d a f t e r J a n u a r y 2 4 , 1971, and a f t e r J a n u a r y 2 4 , 1972, f o r a l l c a r d s no m a t t e r when i s s u e d , u n l e s s t h e i s s u e r has i n c l u d e d on t h e c a r d some means o f u s e r i d e n t i f i c a t i o n such as a signature or f i n g e r p r i n t . -21- To o b t a i n an a p p r e c i a t i o n f o r the response o f commercial banks to these changes, the F e d e r a l Reserve Banks were asked t o make an i n f o r m a l canvass of member banks i n t h e i r r e s p e c t i v e d i s t r i c t s . guide the i n q u i r y , To the o f f i c e r s i n charge of bank s u p e r v i s i o n i n each Reserve Bank were asked s e v e r a l questions: - Have any i n s t a n c e s come to your a t t e n t i o n where banks have issued c r e d i t cards on an u n s o l i c i t e d b a s i s a f t e r October 26, 1970? - Do you know o f any instances where a bank has a t t e m p t e d to assess the $50 l i a b i l i t y l i m i t a g a i n s t a c r e d i t card user? - Do you know whether banks a r e d i s r e g a r d i n g the $50 l i a b i l i t y o f persons f o r u n a u t h o r i z e d use and absorbing the t o t a l loss i n the e v e n t o f u n a u t h o r i z e d use? I n posing the q u e s t i o n s , was not r e q u i r e d . Rather, i t was s t r e s s e d t h a t a f o r m a l survey the F e d e r a l Reserve Banks were r e q u e s t e d to g i v e t h e i r assessment o f the banks 1 responses t o the and r e g u l a t o r y changes a f f e c t i n g bank c r e d i t c a r d s . legislative I t was n o t e d , however, t h a t the Reserve Banks might f e e l i t d e s i r a b l e t o contact a few banks i n t h e i r d i s t r i c t — e s p e c i a l l y the l a r g e i n s t i t u t i o n s a s i z a b l e amount of c r e d i t card r e c e i v a b l e s - - i n o r d e r t o answer with the questions. I n making the i n f o r m a l canvass, each Reserve Bank a few banks a c t i v e i n the c r e d i t card business - - did the number r a n g i n g from one or two i n one d i s t r i c t w i t h only a h a n d f u l o f such banks contact to -22- as many as seven i n a d i s t r i c t where banks p l a c e a heavy emphasis on c r e d i t c a r d s . I n the a g g r e g a t e , between 40 and 50 banks w i t h a s i z a b l e share o f the t o t a l c r e d i t card loans o u t s t a n d i n g to consumers were c o n t a c t e d by Reserve Banks. The r e s u l t s of the i n f o r m a l canvass i n each F e d e r a l Reserve district can be summarized b r i e f l y : Boston D i s t r i c t No i n s t a n c e s o f u n s o l i c i t e d , mass m a i l i n g s were n o t e d . All cards i s s u e d since October 26, 1970, have been i n response to a r e q u e s t f o r an a p p l i c a t i o n , renewal or s u b s t i t u t i o n f o r an e x i s t i n g c a r d . Among t h e few banks c o n t a c t e d , none were u s i n g the $50 l i m i t on l i a b i l i t y t o cardholders f o r u n a u t h o r i z e d use o f c a r d s . I n s t e a d a l l banks were absorbing the t o t a l loss because o f p u b l i c r e l a t i o n s and o t h e r c o m p e t i t i v e reasons. When s o l i c i t e d cards a r e s u b s t i t u t i o n s ) , they a r e indicated that, in their stop u n f a v o r a b l e r e s u l t s m a i l e d ( i n the case o f renewals or always sent by r e g i s t e r e d m a i l . Banks o p i n i o n , l e g i s l a t i o n was needed t o of u n s o l i c i t e d m a i l i n g s . New York D i s t r i c t No u n s o l i c i t e d m a i l i n g s were r e p o r t e d . Among t h e few banks surveyed, no i n s t a n c e s were found where a bank has a t t e m p t e d to assess the $50 l i a b i l i t y l i m i t f o r u n a u t h o r i z e d use o f c a r d s . Banks g e n e r a l l y a r e absorbing t o t a l l o s s e s i n e v e n t of such use. Only one bank among those contacted i s sending a p r e - p r i n t e d n o t i f i c a t i o n form t o customers as r e q u i r e d by t h e amendment t o R e g u l a t i o n Z i f t h e customer l i a b i l i t y p r o v i s i o n i s t o be a p p l i e d . Recent l e g i s l a t i v e and r e g u l a t o r y changes have n o t caused any r a d i c a l m o d i f i c a t i o n s i n the o p e r a t i n g p o l i c i e s o f the l a r g e banks w i t h s i g n i f i c a n t amounts o f c r e d i t c a r d r e c e i v a b l e s . -23- Philadelphia District No u n s o l i c i t e d m a i l i n g s were r e p o r t e d . None of the banks have attempted to assess the $50 f o r u n a u t h o r i z e d use o f c a r d s . liability Most banks surveyed a r e d i s r e g a r d i n g t h e l i a b i l i t y o p t i o n and a r e absorbing t o t a l losses a r i s i n g from u n a u t h o r i z e d card use. Cleveland District No u n s o l i c i t e d cards have been i s s u e d . By October 2 6 , 1970, p r a c t i c a l l y a l l of the l a r g e banks had c r e d i t card programs w e l l under way and had no plans f o r another mass s o l i c i t a t i o n . I n most i n s t a n c e s , banks had s u f f i c i e n t work w i t h a c t i v e accounts and had more or l e s s abandoned f o l l o w - u p programs f o r cardholders not u s i n g t h e i r c a r d s . Smaller banks g e n e r a l l y f o l l o w the p r a c t i c e s o f the l a r g e i n s t i t u t i o n s . Among the few banks c o n t a c t e d , none were assessing the $50 l i a b i l i t y limit. C r e d i t card volume was s a i d to p r e v e n t a t t e m p t s to make such an assessment i n i s o l a t e d cases of u n a u t h o r i z e d use. However, the banks would do so i n case of an obvious abuse. At l e a s t one bank was prepared to a d v e r t i s e the f a c t t h a t i t was absorbing the l o s s . A f t e r o b t a i n i n g a f f i d a v i t from c a r d h o l d e r , e f f o r t s would be c o n c e n t r a t e d on l o c a t i n g and p r o s e c u t i n g offenders. Bank u s i n g a p i c t u r e f o r i d e n t i f i c a t i o n had no e x p e r i e n c e w i t h the p r a c t i c e . Others had l i t t l e e x p e r i e n c e . Richmond D i s t r i c t No banks a r e i s s u i n g u n s o l i c i t e d c r e d i t cards. S e v e r a l banks were surveyed, and none have assessed a customer f o r u n a u t h o r i z e d use under the $50 l i a b i l i t y l i m i t a t i o n . Banks a r e d i s r e g a r d i n g the $50 l i a b i l i t y p r o v i s i o n and a r e absorbing t o t a l loss. I n the f u t u r e , s e v e r a l banks may a t t e m p t t o make an assessment o f l i a b i l i t y i f circumstances w a r r a n t i t . For p u b l i c r e l a t i o n s and o t h e r reasons, t h i s has not been done as y e t . -24- I t appears to be the consensus among banks t h a t a t t e m p t i n g t o assess the loss w i l l probably not be w o r t h the cost i n the long r u n . Atlanta District There has been no f u r t h e r issuance of u n s o l i c i t e d c r e d i t cards. I n a few i n s t a n c e s , where a bank could prove c o l l u s i o n — the $50 l i a b i l i t y l i m i t has been assessed a g a i n s t a c r e d i t card u s e r . Most banks w i t h d e p o s i t s i n excess o f $50 m i l l i o n a r e d i s r e g a r d i n g the $50 l i a b i l i t y . I f the c a r d h o l d e r appears t o have a c t e d i n good f a i t h , loss i s absorbed by c a r d - i s s u i n g bank. Banks w i t h d e p o s i t s under $50 m i l l i o n u s u a l l y a r e o p e r a t i n g c r e d i t card plans as an agent f o r a l a r g e r card i s s u e r and g e n e r a l l y have no assessment a u t h o r i t y over the card u s e r . Chicago D i s t r i c t No r e p o r t s of u n s o l i c i t e d m a i l i n g s were r e c e i v e d . I n a few cases, the $50 l i a b i l i t y l i m i t was assessed by banks a g a i n s t "uncooperative 1 1 cardholders who w a i t e d too l o n g t o r e p o r t t h e l o s s o f the cards. S t . Louis District No u n s o l i c i t e d m a i l i n g s were r e p o r t e d . No banks have assessed the $50 l i a b i l i t y l i m i t f o r improper use o f a c a r d . Each bank c o n t a c t e d i s d i s r e g a r d i n g the l i a b i l i t y p r o v i s i o n and i s absorbing the t o t a l l o s s i n the event o f u n a u t h o r i z e d u s e . Banks a r e a l e r t to p o s s i b l e f r a u d i n connection w i t h r e p o r t e d l o s s or u n a u t h o r i z e d use of c a r d s . Minneapolis District There have been no r e p o r t s o f u n s o l i c i t e d m a i l i n g s . -25- One or two banks were c o n t a c t e d . No banks have the $50 l i a b i l i t y provision. Banks a r e d i s r e g a r d i n g the $50 l i a b i l i t y o f card owners and a r e absorbing the whole l o s s . Kansas C i t y District There was no r e p o r t o f u n s o l i c i t e d c r e d i t cards b e i n g i s s u e d . The questions were reviewed w i t h f i v e of the l a r g e s t banks i n the d i s t r i c t . No i n s t a n c e s were r e p o r t e d o f banks having a t t e m p t e d to assess the $50 l i a b i l i t y a g a i n s t card u s e r s . Banks a r e d i s r e g a r d i n g the $50 l i a b i l i t y o p t i o n and a r e absorbing the t o t a l loss i n the event of u n a u t h o r i z e d use of a c r e d i t c a r d . Dallas District No issuance of u n s o l i c i t e d cards were reported. There has been no i n s t a n c e where a bank has a t t e m p t e d to assess the $50 l i a b i l i t y a g a i n s t a c a r d h o l d e r . Even b e f o r e the October 2 6 , 1970, l e g i s l a t i o n , i t was unusual f o r banks t o press c a r d h o l d e r s under the c o n t r a c t u a l p r o v i s i o n r e g a r d i n g l i a b i l i t y f o r u n a u t h o r i z e d use. Banks appear to be d i s r e g a r d i n g the p r o v i s i o n f o r $50 l i a b i l i t y and a r e absorbing t o t a l loss - - except t h a t p a r t which i s r e c o v e r a b l e from the wrongdoer. Again, t h i s generally continues the p o l i c y which e x i s t e d p r i o r to October, 1970. I n g e n e r a l , l i t t l e has been done t o f o r m u l a t e a p o l i c y f o r o p e r a t i n g under the $50 r u l e o f the October 26 l e g i s l a t i o n . T y p i c a l l y , the l e g i s l a t i o n has not r e s u l t e d i n any change i n banks 1 o p e r a t i o n s w i t h r e s p e c t t o u n a u t h o r i z e d use o f c r e d i t cards. San F r a n c i s c o District No u n s o l i c i t e d m a i l i n g s were r e p o r t e d . No e f f o r t s a r e b e i n g made t o assess the $50 l i a b i l i t y l i m i t . As a g e n e r a l p o l i c y , the seven l a r g e s t banks i n the d i s t r i c t t h a t were c o n t a c t e d a r e a b s o r b i n g the t o t a l loss from u n a u t h o r i z e d card u s e . -26- I n conclusion, the above r e s u l t s o f the i n f o r m a l inquiry as t o banks 1 responses t o t h e r e c e n t s t a t u t o r y and r e g u l a t o r y changes p r o v i d e the f o l l o w i n g p i c t u r e : No i n s t a n c e s were r e p o r t e d i n which a commercial bank has issued an u n s o l i c i t e d c r e d i t card s i n c e the p r a c t i c e was banned i n l a t e October 1970, Only a few banks a p p a r e n t l y have assessed c a r d h o l d e r s under the $50 l i m i t a t i o n on l i a b i l i t y l o s t cards. I n s t e a d , as a g e n e r a l p o l i c y , r e p o r t e d t o be absorbing the $50 l i a b i l i t y commercial banks a r e to m i n i m i z e operating costs or t o a v o i d an adverse p u b l i c r e l a t i o n s s i t u a t i o n . In general, among the banks which a l r e a d y had c r e d i t cards o u t s t a n d i n g , l a t i v e and r e g u l a t o r y changes seem t o have caused l i t t l e m o d i f i c a t i o n i n l e n d i n g p r a c t i c e s of commercial banks. for the legis- — i f any — Table 1 . C r e d i t Card Plans o f F e d e r a l Reserve Member Banks A l l Member Banks Dec. 3 1 , Dec. 3 1 , 1969 1970 Number o f banks w i t h plans Number o f u n e x p i r e d cards (000) Net C h a r g e - o f f s d u r i n g year ($000) 773 869 618 689 46,157 46,965 37,328 36,872 8,829 10,093 13,362 2,429,559 182 16,441 3,399,561 207 10,526 1,959,465 186 13,030 2,689,160 206 2,836 470,094 166 3,411 710,401 208 57,939 115,549 48,694 100,104 9,245 15,445 2.38 3.39 2.49 3.72 1.97 2.17 29 35 28 35 32 34 S p e c i a l supplement t o December 3 1 , 1970 Report o f C a l l . Data not c o l l e c t e d from non-member banks. 153 180 end-of-year Accounts w i t h balances o u t s t a n d i n g as a per cent o f t o t a l number o f c r e d i t cards Source: S t a t e Member Banks Dec. 3 1 , Dec. 3 1 , 1969 1970 credit Accounts w i t h o u t s t a n d i n g b a l a n c e s : Number ( 0 0 0 ) Amount ($000) Average Balance ( $ ) C h a r g e - o f f s as % o f outstandings N a t i o n a l Banks Dec. 3 1 , Dec. 31, 1969 1970 Figures preliminary. Table 2. C r e d i t Card Plans: Days d e l i n q u e n t at charge-off C h a r g e - o f f P r a c t i c e s o f S t a t e Member Banks Number o f banks reporting Percentage of t o t a l 90 32 18 120 40 22 121-150 27 15 151-180 45 25 181-210 8 4 211-365 2 1 26 180 15 100 Not specified Source: Supplement to December 3 1 , 1970 Report o f Figures preliminary. Call. Table 3. C r e d i t Card and Check C r e d i t P l a n s : C o m m e r c i a l Banks (Amounts i n m i l l i o n s o f d o l l a r s ) C r e d i t card plans September 3 0 , December 3 0 , June 3 0 , 19681/ 19691/ December 3 1 , June 30, 19671/ 19682/ December 31, June 30, 1967-i/ 19691/ 19701/ Check c r e d i t Number having plans plans Amount outstanding Number having plans Amount outstanding 197 633 599 483 390 828 732 522 416 953 840 646 510 1,312 975 798 699 1,705 1,061 993 1,207 2,639 1,128 1,081 1,355 3,048 1,186 1,180 1 / F e d e r a l Reserve s t u d y , Bank C r e d i t ^ C a r d and C h e c k - C r e d i t P l a n s , J u l y 2 / F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n , R e p o r t o f C a l l , J u n e , 1930. 1968. Table 4 . C r e d i t Card Plans by Class of Bank (Amounts i n m i l l i o n s of A l l banks Number having plans 1967-/ September 30, December 30, June 30, 1968-/ December 31, June 30, 1968^ 1969^ / December 31, June 3 0 , 1967-^ 1969^ 1970^ Amount outstanding dollars) N a t i o n a l banks Number having plans Amount outstanding Nonmember banks Number Amount having outstandplans ing 197 633 119 496 34 100 44 37 390 828 187 636 50 145 153 47 416 953 219 731 64 170 133 52 510 1,312 272 1,019 65 210 173 83 699 1,705 359 1,317 93 275 247 113 1,207 2,639 618 1,960 155 470 434 209 1,355 3,048 675 2,206 170 559 510 283 1/ F e d e r a l Reserve Study, Bank C r e d i t - C a r d and C h e c k - C r e d i t P l a n s , J u l y 2/ F e d e r a l Deposit Insurance C o r p o r a t i o n , Report of C a l l . S t a t e member banks Number Amount having outstandplans ing 1968. Table Credit Card Flans by Size of Bank 5. (Amountsin millions of dollars) Size of Bank (Total deposits, in millions of dollars) September 30, 1967 - 1 Amount Outstanding Number December 31, 1968 l 1 Amount Number Outstanding December 31. 1969 & Amount Outstanding Number June 30, 1970 & Amount Number Outstanding 2 2/ 29 1.2 56 1.2 86 2.9 5-10 25 1.1 58 2.6 157 7.7 176 9.7 10-25 34 7.8 123 15.7 331 42.2 376 59.1 25-50 27 5.6 80 22.0 227 75.3 246 113.3 50-100 26 17.8 67 48.5 153 134.2 170 170.7 100-500 52 104.5 109 267.5 209 709.2 226 854.1 500-1,000 13 91.2 19 152.7 41 460.8 43 565.5 1,000 and over 18 404.9 25 801.3 33 1,208.1 32 1,273.0 197 $633.0 510 $1,311.5 1,207 $2,638.7 1,355 $3,048.3 Under 5 A l l size groups 1/ 2/ 3/ Federal Reserve Study, Bank Credit-Card and Check-Credit Plans, July 1968. Less than $50,000. Federal Deposit Insurance Corporation, Report of Call. Table Bank C r e d i t Card Plans by Federal Reserve D i s t r i c t A l l Commercial Banks (Amounts i n m i l l i o n s of d o l l a r s ) 6. Sept. 30, 1967^ / Dec. 31, 1967- / No. Amount No. Amount Federal w i t h outstand- w i t h outstanding Reserve D i s t r i c t plans plans ing June 30, 1 9 6 8 ^ No. Amount w i t h outstandplans ing Dec. 31, 1968-^ No. Amount w i t h outstandplans ing June 30, 1 9 6 9 ^ Dec. 31, 1 9 6 9 ^ June 30, 1 9 7 0 ^ No. Amount No. No. Amount Amount w i t h outstand- w i t h outstand- w i t h outstandplans plans ing plans ing ing Boston New York Philadelphia 14 16 6 21.8 64.8 12.3 16 23 10 27.9 109.5 11.2 20 27 12 36.9 120.4 14.0 21 20 9 57.5 155.3 25.4 29 35 9 74.3 270.5 22.3 155 60 12 133.4 438.1 26.4 163 76 26 186.9 521.9 41.0 Cleveland Richmond Atlanta 6 5 20 26.9 28.2 30.6 14 13 43 31.2 38.9 40.0 26 15 39 36.1 47.4 48.9 48 28 53 63.7 92.7 99.5 71 70 111 83.1 160.2 163.2 186 75 243 176.1 319.0 301.4 222 75 267 233.9 362.2 362.8 Chicago S t . Louis Minneapolis 35 10 5 126.2 12.3 .1 86 36 25 153.2 22.2 1.8 92 39 24 153.0 26.2 1.4 107 57 11 181.6 52.8 1.0 124 62 8 189.6 66.5 3.7 152 69 11 246.6 91.6 7.3 168 74 15 267.6 99.9 8.6 Kansas C i t y Dallas San Francisco 6 7 67 6.4 8.1 295.3 19 22 83 10.2 12.4 369.9 15 21 86 12.3 21.0 435.3 19 22 115 32.5 18.9 530.6 32 26 122 58.1 36.6 576.9 75 37 132 123.8 81.5 693.5 90 43 136 141.3 106.2 716.0 AJ.1 d i s t r i c t s 197 633.0 390 828.4 416 952 .9 510 1311.5 699 1705.0 1207 2638. 7 1355 3048.3 1/ 2/ Federal Reserve Study, Bank C r e d i t - C a r d and Check-Credit Plans, J u l y 1968. Federal Deposit Insurance Corporation, Report o f C a l l . Table 7. N a t i o n a l C r e d i t Card S y s t e m s * June 30, Number o f c a r d - i s s u i n g Number o f a c t i v e Amount o f o u t s t a n d i n g 5,450 7,684 41 900,000 1,137,000 26 mil. 8.6 m i l . 20 accounts A v e r a g e amount o u t s t a n d i n g a c t i v e account $1,560 m i l . per * B a n k A m e r i c a r d and I n t e r b a n k 43.4 accounts credit Percentage increase 108 accounts Per c e n t o f t o t a l 1970 1,427 Number o f agency banks Number o f c a r d h o l d e r Dec. 3 1 , 685 banks Number o f m e r c h a n t members 1969 System. $182 mil. 10 15.3 m i l . 78 47.6 32 $3,550 $232 mil. 127 27 Ownership of Bank Credit Cards June 1969 and September 1970 Table 8 . Selected Household Characteristics T o t a l responses* Number of households i n subsample 1969 1970 Number having bank c r e d i t card 1969 1970 Number not having bank c r e d i t card 1969 1970 Percentage having bank c r e d i t card 1969 1970 Percentage not having bank c r e d i t card 1969 1970 5,137 3,033 1,324 918 3,813 2,110 25.8 30.3 74.2 69.7 2,053 1,548 1,494 1,045 978 988 355 422 540 187 293 435 1,698 1,126 954 858 685 553 17.3 27.3 36.1 17.9 30.0 44.0 82. 7 72.7 63.9 82.1 70.0 56.0 1,259 1,180 856 1,623 616 631 506 1,182 165 252 246 610 78 142 154 523 1,094 928 610 1,013 538 489 352 659 13.1 21.4 28.7 37.6 12.7 22.5 30.4 44.2 86.9 78.6 71.3 62.4 87.3 77.5 69.6 55.8 1,382 1,540 2,198 914 992 1,117 328 458 535 275 319 321 1,054 1,082 1,663 639 671 793 23.7 29.7 24.3 30.1 32.2 28.7 76.3 70.3 75.7 69.9 67.6 71.0 Education l e v e l : Some high school or less High school graduates Some college 1 / Income l e v e l : Less than $5,000 $5,000-7,999 $8,000-9,999 $10,000 and over Age l e v e l : Under 35 35-49 50 or older Source: * Note: 1/ Federal Reserve Board Survey of Consumer Awareness of Credit Costs. The sum of the education, income, or age classes does not agree w i t h the t o t a l since not a l l respondents indicated education, income, or age l e v e l . Includes college graduates and those having higher education. Consumer Awareness of Bank C r e d i t Card Costs Table 9 . Total 1/ Some High School or Less 1969 1970 EDUCATION Graduated High School 1969 1970 Some C o l l e g e 1969 1970 1969 1970 Number r e p o r t i n g ownership o f a bank c r e d i t card 2 / 1,324 918 355 187 422 293 540 435 Number answering r a t e question 1,226 651 314 95 387 212 519 344 interest Percentage Rate D i s t r i b u t i o n o f Those Answering I n t e r e s t Rate Question I n t e r e s t Rate (Per c e n t ) 8 or l e s s 11.5 5.9 11.5 8.4 11.9 7.0 12.7 4.3 9-18 32.1 66.2 20.1 41.1 25.8 55.7 42.8 79.7 1.1 0.9 1.6 2.1 1.3 1.0 0.8 0.6 D o n ' t know 55.3 27.0 66.8 48.4 61.0 36.3 43.7 15.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Over 18 1/ 2/ 3/ 3/ Sum o f the number of households r e p o r t i n g by e d u c a t i o n does not equal t o t a l since not a l l respondents education l e v e l . As o f June 1969 f o r 1969 Survey and September 1970 f o r 1970 Survey. Rounded to n e a r e s t whole percentage. indicated Table 9 . (Cont'd,) Consumer Awareness of Bank C r e d i t Card Costs INCOME Under $ 5 , 0 0 0 1969 1970 $5,000$7,999 1969 1970 $8,000 $9,999 1969 1970 $10,000 and over 1969 1970 Number r e p o r t i n g ownership o f a bank c r e d i t card 1 / 162 78 252 142 246 154 597 523 Number answering r a t e question 141 32 227 96 228 113 568 404 interest Percentage Rate D i s t r i b u t i o n o f Those Answering I n t e r e s t Rate Question I n t e r e s t Rate (Per Cent) 8 or less 9-18 Over 18 D o n ' t know Total 1/ 21 2/ 9.2 9.4 11.1 11.5 10.5 5.3 12.0 4.2 13.5 62.5 28.5 54.2 31.1 59.3 40.1 71.5 0.7 0.0 1.3 1.0 1.3 0.9 1.2 1.0 76.6 28.1 59.1 33.3 57.1 34.5 46.7 23.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 As o f June 1969 f o r 1969 Survey and September 1970 f o r 1970 Survey. Rounded to n e a r e s t whole p e r c e n t a g e . Table Revolving C r e d i t Plans (Amount outstanding - i n b i l l i o n s of 10. Type of credit dollars) June 30, 1968 Dec. 31, 1968 June 30, 1969 Dec. 31, 1969 June 30, 1970 0.8 1.0 1.3 1.7 2.6 3.0 1.0 1.1 1.2 1.3 1.5 1.6 1.8 3.5 3.6 3.7 3.8 4.2 4.0 4.6 5.9 5.3 6.5 5.6 6.7 5.8 6.9 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0-2 11.5 11.3 13.0 12.7 15.3 14.7 17.3 Dec. 31, 1967 Dec. 31, 1970 1/ Bank c r e d i t cards 2/ O i l companies — Department s t o r e r e v o l v i n g credit R e t a i l charge accounts (e) 3.7 2/ T r a v e l and e n t e r t a i n m e n t 3/ A l l other All types cards (e) P a r t i a l l y estimated. 1/ Excludes check c r e d i t p l a n s . 2 / Consumer p o r t i o n o n l y . 3/ I n c l u d i n g l a r g e independent c r e d i t card firms and r e v o l v i n g c r e d i t accounts of nondepartment stores® SOURCE: Consumer C r e d i t and Finances Section Board of Governors of the F e d e r a l Reserve System T a b l e 11. Type o f Growth o f R e v o l v i n g C r e d i t P l a n s , December 31, 1967 - December 3 1 , (Amount O u t s t a n d i n g i n b i l l i o n s o f d o l l a r s ) Credit Bank C r e d i t Oil Amount O u t s t a n d i n g Dec. 3 1 , Dec. 31, 1967 1970 Cards Companies Department s t o r e r e v o l v i n g credit R e t a i l charge accounts T r a v e l and e n t e r t a i n m e n t c a r d s A l l others All (e) (1) (2) (3) (2) N (3) types Calculated from Table 4. Growth: Amount 1967-•1970 Share o f Per Cent Growth 0.8 3.7<e> 7.0 21.4 2.9 362.5 50.0 1.0 1.8 8.7 10.4 0.8 80.0 13.8 3.5 4.6 30.4 26.6 1.1 31.4 19.0 5.9 6.9 51.3 39.9 1.0 16.9 17.2 0.1 0.1 0.9 0.6 0.2 0.2 1.7 1.1 11.5 17.3 100.0 100.0 5.8 50.4 100.0 P a r t i a l l y estimated. E x c l u d e s check c r e d i t p l a n s . Consumer p o r t i o n o n l y . I n c l u d i n g l a r g e i n d e p e n d e n t c r e d i t c a r d f i r m s and c r e d i t accounts o f nondepartment s t o r e s . Source: Percentage D i s t r i b u t i o n of Outstandings Dec. 31, Dec. 31, 1970 1967 1970 revolving Table 1 2 . Selected Household Characteristics T o t a l responses* Charge Purchase Arrangements w i t h Department Stores, Gasoline Companies or Other R e t a i l Stores June 1969 and September 1970 Number of households i n subsample 1969 1970 Number having charge accounts 1969 1970 Number not having charge accounts 1969 1970 Percentage having charge accounts 1969 1970 Percentage not having charge accounts 1969 1970 5,144 3,044 3,259 1,875 1,885 1,169 63.4 61.6 36.6 38.4 2,057 1,550 1,496 1,049 982 996 987 1,041 1,217 449 634 788 1,070 509 279 600 348 208 48.0 67.2 81.4 42.8 64.6 79.1 52.0 32.8 18.6 57.2 35.4 20.9 1,261 1,184 857 1,624 616 636 508 1,192 510 722 578 1,332 207 339 339 953 751 462 279 292 409 297 169 239 40.4 61.0 67.4 82.0 33.6 53.3 66.7 79.9 59.6 39.0 32.6 18.0 66.4 46.7 33.3 20.1 1,383 1,542 2,203. 920 995 1,119 925 1,090 1,239 593 668 611 458 452 964 327 327 508 66.9 70.7 56.2 64.5 67.1 54.6 33.1 29.3 43.8 35.5 32.9 45.4 Education l e v e l : Some high school or less High school graduates Some college 1/ Income l e v e l : Less than $5,000 $5,000-7,999 $8,000-9,999 $10,000 and over Age l e v e l : Under 35 35-49 50 or older Source: * Note: 1/ Federal Reserve Board Survey of Consumer Awareness of Credit Costs. The sua of the education, income or age classes does not agree w i t h the t o t a l since not a l l respondents indicated education, income or age l e v e l . Includes college graduates and those having higher education.
@FedFRASER