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Statement of
Andrew F # Brimmer
Member, Board of Governors of the Federal Reserve System
before the
Committee on Banking and Currency
House of Representatives
on
H.R. 12646
To Prohibit Federally Insured Banks from Making Unsolicited
Commitments to Extend Credit, and for Other Purposes

November 8, 1967

I appreciate this opportunity to explore with you some
of the questions raised by the entry of commercial banks into the
credit card field, and to comment on behalf of the Board of
Governors on H.R. 12646.

This bill would prohibit any insured

bank from issuing a credit card unless the person to whom the
card is issued has requested it and has entered into a written
agreement with the bank specifying a dollar limit on the amount
of credit that may be outstanding under the card.
The Board welcomes the interest this Committee is showing
in the problems associated with large-scale bank entry into the
credit card field.

We, too, have been concerned about certain

aspects of this development, and we have taken several steps to
keep ourselves better informed and to strengthen our bank
examination procedures.

At the same time, however, the Board

also believes that any decision as to whether legislation is
needed in this field should take into account not only the
necessity for assuring the safety and soundness of the banking
system, but also other considerations--such as the need to avoid
discouraging innovations in banking that will contribute to public
convenience.

We doubt that the problems involved in guarding

against unsafe or unsound practices in this area are so pressing
as to require immediate legislative solutions.

Time is available--

and we think it should be used--for a careful consideration of all
relevant issues.




-2-

Needed Scope for Bank Innovations
I shall focus on the specific provisions of this bill
at a later point.

But let me say at the outset that there is an

important difference between requiring that banks use care in
selecting people to whom they mail credit cards and that they
mail cards only to those who have asked for them*

It is probable

that the latter restriction would seriously hamper banks in
launching new credit card plans, giving those banks already in
the field a protected position and discouraging competition-~at
least for a time.
Moreover, we need to be careful not to discourage banks
from experimenting in developing improved ways to serve the public,
including consumers.

Certainly banks have been criticized in the

past, often with justification, for their failure to recognize
developing needs for credit and for lack of imagination in devising
ways to meet these needs.

In determining whether statutory

restrictions upon bank credit cards are needed, care should be
taken not to deny the public the advantages of continued innovation
in the provision of banking services.
Development and Scope cf Credit C ^ d s
Before proceeding further, it might be helpful if we
tried to place the development of bank credit cards in perspective.
Credit cards for consumer purchases have been with us for
over half a century.




Oil companies and large department stores

-3-

were the first to find this device a useful method for handling
consumer purchases on credit.

After World War II, we saw the

development of the national travel and entertainment cards such
as Diners Club, Carte Blanche and American Express.

A few

commercial banks entered this field in the 1950fs, but many of
them found the credit card business unprofitable—or less
profitable than anticipated—and discontinued their operations.
It was not until late 1966 that banks began to enter the field
in significant numbers.
As of April 27, 1967, 627 insured commercial banks
reported some outstanding credit under either credit card or
check credit plans and the total amount reported was $809 million.
We have just completed a tabulation of the comparable information
reported to the Comptroller of the Currency, the Federal Deposit
Insurance Corporation and the Federal Reserve in the October, 1967,
Call Report.

This latest tabulation shows that, on October 4,

848 insured commercial banks reported total outstanding credit
of $1,137 million under credit card and check credit plans.

In

addition to the banks reporting outstanding credit under credit
card plans, almost 700 banks reported participating through
agency arrangements under which they hold no outstanding credit.
Increases from April to October, both in number of banks
involved and in the amount of credit outstanding, were reported
for all sections of the country and for each of the three classes




4-

of banks.

The Chicago Federal Reserve District—with 173 banks

involved—led all others in the number of banks participating in
various credit card and check credit plans, with Atlanta, San
Francisco, and New York following somewhat further behind.
The 503 national banks again constituted about threefifths of the total number; State member banks (numbering 121
institutions) remained at one-seventh of the total, and the 224
insured nonmember banks amounted to a little over one-fourth of
the total.

The expansion in the number of banks involved reflected

the entrance into the field of many smaller and medium-sized banks
in recent months.

Nearly one-half of the increase was accounted

for by banks with total deposits between $10 and $50 million, and
another one-fourth of the increase represented the entrance of
banks with deposits of from $50 to $500 million.
The October report provided separate information for the
major types of credit card and check credit plans.

A sizable

number of banks were involved in more than one type of plan.

Thus,

while 848 banks reported outstanding credit balances, the outstandings were—in fact—generated by more than 970 different
plans.
Another finding of considerable interest and significance
was that the number of banks offering check credit plans was much
larger than the number of banks with credit card operations#
Indeed, the ratio of the check credit banks to credit card




-5-

institutions was more than 2 to 1--579 banks to 258.

On the other

hand, the total business generated by check credit plans was not
nearly so great as that arising under credit cards.

Credit card

outstandings amounted to $640 million as of October 4, while
check credit balances came to only $481 million.
Finally, it may be noted that a sizable number of banks-136 in all—have working arrangements involving cards issued by
the national travel and entertainment credit card companies.

Most

of these banks, however, have their own check credit plan as well.
Tables summarizing the credit card information from the
April and October Call Reports are attached to this statement.
The total amount reported outstanding by all insured
commercial banks under credit card and check credit programs now
amounts to only about 3 per cent of the total consumer instalment
credit held by banks and to a little over one per cent of total
consumer credit outstanding.

As existing programs are expanded,

however, and as additional banks enter the credit card field, the
volume of such credit will grow and its ultimate impact on the
economy will become more evident.
Thus, it is reasonable to expect that bank credit cards
will contribute to the growth of consumer credit; but it is also
reasonable to expect that this growth will continue at about the
rate that has existed throughout much of the period since World
War XI.




Over the last decade, the total amount of consumer credit

-6

outstanding has grown from a little under 14 per cent of disposable
personal income to about 17.5 per cent.

The rate of growth of

retail charge accounts and revolving credit, the segment which
will be primarily influenced by bank credit cards, has been quite
modest, increasing from about 1.8 per cent to 2 per cent of
disposable personal income over the last ten years.

We have no

basis for concluding that bank credit cards will cause any sharp
divergence from these trends, which have primarily been a reflection
of gradual changes in the payments habits of consumers.
Moreover, there are several factors limiting the
expansionary impact of bank credit cards that will probably
continue for some time in the future.

First, some of the credit

extended under bank credit card plans has been a replacement for
existing credit.

Many of the merchants signed up under bank credit

card plans are using the bank plans to substitute for their own
former credit arrangements.

This is particularly true of speciality

shops and small- and medium-size retail merchants.

In addition

to this kind of substitution, the cash advances provided under
both credit card and check credit plans are frequently being
used in place of small personal loans.
Many holders of bank credit cards have used them
primarily as a convenience in facilitating payments rather than
as a means of increasing their debt balances.

Between a fifth and

a third of cardholders under established plans pay off their credit




-7-

card balances each month; in the initial stages the proportion is
higher.

Those that pay off in instalments are repaying substantial

portions each month.

Under existing plans, the minimum monthly

repayments permitted range from 5 to 10 per cent and the average
repayments exceed this minimum.
Federal Reserve System Research Effort
The Federal Reserve System in March of this year organized
a special research effort to study bank credit card and check credit
operations.

This study will assemble comprehensive information on

the nature of the various credit card and check credit plans now
in use by banks; assess the implications of bank activities in
this area for bank competition, bank supervision, and banking
structure; compile data on the amount of this type of credit in
relation to the total volume of consumer credit; and evaluate the
impact that its further expansion may have on the financing of
consumer expenditures and on consumer savings.
Substantial headway has been made on this assignment,
A considerable number of personal interviews have been conducted
with bank officials and other executives responsible for the
development and management of the principal credit card and check
credit plans.

With the cooperation of the Comptroller of the

Currency and the Federal Deposit Insurance Corporation, special
questions on the amount of bank credit outstanding under such
plans were added to the April and October Call Reports to provide




-8-

benchmark information on the extent of bank activity in this field.
A system of current monthly reporting of credit extended and the
amount outstanding under bank credit card and check credit plans
has been developed.

The first statistical report under this

program will cover operations during the coming month.
In continuing our study, we will conduct within the next
few weeks a complete survey of all banks with credit card and
check credit plans to supplement the information we now have and
to obtain the necessary information for a comprehensive analysis
by size of bank and geographic distribution.

This survey will

cover not only the major features of the various plans, but also
information on operations, such as number of cardholders, number
of active accounts, number of merchants, and delinquency and loss
experience.

We shall also develop information on the major non-

bank credit card plans to provide the necessary perspective for
evaluation of the bank plans.
We hope that the results of our study and analysis, as
they become available, will assist the deliberations of this
Committee in this area.
Strengthening of Bank Examination Procedures
In the meantime, to identify any major deficiencies in
the credit card and check credit plans operated by State member
banks and to keep informed of developments in their operation, the
Federal Reserve System has strengthened its examination procedures
to include a supervisory review of such plans.




-9-

Under the new procedures, the System's examiners are
reviewing and appraising the policies and practices followed by
State member banks in establishing and operating these plans, as
they do with all other forms of bank credit.

As indicated on the

attached copy of the examination report page recently adopted for
these plans, examiners ascertain the trend in total volume of
receivables or billings since inception of each plan and the
maximum volume the bank expects to attain, as well as the credit
limits and repayment requirements in effect under each plan*

They

also look into the total number and volume of delinquent accounts,
the bank's policy for charging off such accounts, and its loss
experience.

More importantly, however, any unsatisfactory

features or deficiencies in the operations of the plan—such as
failure to investigate properly the creditworthiness of the
individual customers and the integrity of the participating
merchants, ineffective collection practices, lack of control
over unissued cards, or inadequate procedures for reclaiming
delinquent cards—are called to the attention of management and
immediate correction is requested.
But I would also like to stress that we do not look
upon our strengthened examination procedures as a vehicle for
relieving banks of their own responsibilities in the credit card
field.

We must rely in the first instance on bank management to

exercise particular caution in venturing into this new field and
to weigh carefully the lessons that may be learned from the




-10-

experience of the innovating batiks.

It is reassuring that those

banks that experienced the most difficulty with their initial
mailings of credit cards have subsequently taken steps to tighten
their procedures.

Other banks that have entered the credit card

field more recently have taken precautions against a repetition
of the earlier experiences of banks that ran into difficulties.
These hearings should aid in evaluating these practices
and in reminding bankers that the essential requirements of sound
credit administration--including maintenance of proper credit
appraisals, controls to minimize losses from unauthorized or
improper use, and insistence on appropriate collection methodsapply to credit cards and check credit plans as well as to other
forms of credit.
Loss Experience
As is generally known, it is costly to launch a credit
card operation, and many banks have had to absorb losses during
the start-up phase.

However, to date, the losses have had a

relatively minor effect on bank earnings because lending through
credit cards has represented a minor share of total bank operations.
We know of no instance in which a bank's capital was impaired
because of losses incurred through credit cards.
With respect to current operations, the information
that we have been able to gather on well-established credit card
plans indicates that losses on credit extended to cardholders
compare favorably with comparable types of consumer credit




-11-

extensions,

Data for a few banks show credit card losses ranging

from one-half to one per cent of the amount of credit extended.
For all banks, losses on consumer instalment credit have averaged
about one-half of one per cent in recent years.

In comparison,

the loss ratio on personal loans has been roughly two-thirds of
one per cent.
Distribution of Unsolicited Credit Cards
The mailing of unsolicited bank credit cards has
attracted considerable attention.

We have attempted to analyze

this practice with some care, and we would like to share our
tentative conclusions with the Committee,
Inducements for Mass Mailings:

Mass mailings need not

involve unsolicited issuance of credit cards.

However, banks

have found both practices to be desirable in launching credit
card operations.

This does not mean that the individuals to

whom cards have been sent have not been selected with some care.
Experience has varied on that point.

All of the banks that we

have contacted reported that they found it desirable in launching
their credit card plans to send out cards unsolicited to mailing
lists in order to develop a body of active accounts as quickly as
possible.

The banks did this with the realization that there

would be some problems and some losses during the initial stages.
But, as a matter of business judgment, they found this procedure
helpful in order to sign up merchants.




They believed that the

-12-

total costs of launching their plans would have been less, even
including losses, than would have been the case if a slower
buildup had been undertaken through requiring individual applications for credit cards.

All of the banks contacted, however,

indicated that after their plans had been launched in this
fashion they relied primarily on applications as a source of
new cardholders.
Characteristics of Mailing Lists:

The initial mailings

of credit cards, while unsolicited, were on a selective basis.
The banks started with lists of their customers—some using
primarily demand deposit customers while others also used savings
deposit and loan customer lists.

Some banks also used lists of

prominent individuals compiled by their bank officers.

All of

the banks undertook some screening of customer lists, although
some banks were more careful in checking the lists than others.
In some cases, a credit check was made through outside credit
bureaus, but in a few instances screening was limited to eliminating
those names which had balances below a certain minimum or adverse
credit repayment records.

It does appear that a very few banks

also used mailing lists obtained from outside their banks.
Objections to Unsolicited Mailings:

One objection has

been that many people received two or more credit cards and that
cards were sent to babies and small children.

This did occur to

some extent because deposit account lists were used and the




-13-

checking to eliminate duplicate names was not always as thorough
as it should have been.

Furthermore, some persons have several

accounts under slightly different names or at different banks,
and the elimination of all such duplication is almost impossible.
Babies with sizable savings accounts (frequently opened by grandparents) could not readily be distinguished from adults.

While

this situation gave rise to some annoyance, it does not appear
to have caused any serious problems.
Another objection to the unsolicited mailing is that
bank customers have been irritated by receiving one or more
credit cards which they did not want and have felt obliged to
take the trouble to destroy them.

But our information is that

the proportion of complaints that banks have received has been
quite low, amounting to much less than one per cent of the cards
mailed, and the number of such complaints has been far exceeded
by the number of people who have welcomed the receipt of an
unsolicited card sufficiently to use it.

Indeed if this were

not the case, bank credit cards would rapidly decline in number,
and their usage would shrink sharply.
Opportunity for Fraud;

The opportunity for fraud that

accompanies some of the mass mailing has been viewed with
considerable concern.
concern.

The Federal Reserve System shares that

The difficulty appears to stem not only from problems

of security control in the initial mailing arrangements, but also
from other thefts, and from cards being sent to persons who are




-14-

bad credit risks and who misuse their credit cards.

Most of the

banks have taken adequate precautions in the mailing process,
sometimes working closely with the postal authorities, and most
have done an adequate job of screening their customer lists to
remove most of the poor credit risks.

The headlines have been

made in the few cases in which careful procedures have not been
followed.

As I mentioned before, those banks that have launched

credit card programs most recently appear to have learned this
lesson well and the problems have been kept to a minimum.
Dollar Limits on Credit Outstanding
In addition to prohibiting insured banks from issuing
unsolicited credit cards, H.R. 12646 would require a written
agreement between the bank and the cardholder specifying a dollar
limit on the credit that may be outstanding under the card.
To a considerable degree such a requirement would
duplicate existing practice.

All of the bank credit card and

check credit programs of which we have knowledge specify a credit
limit for each customer's account.

They also have an additional

control through the "floor limit11 on individual credit card
purchases.

This limit, which is usually $25 or $50, requires

the merchant to call the bank for specific authorization for any
purchase that is above the limit.
As they gain experience, some banks raise the total
credit limits for those customers who have good repayment records




-15-

and whose credit purchases are pressing on their existing credit
limits.

For some banks, these changes in credit ceilings require

the specific application of the customer—but for other banks they
do not.

In the latter cases, the customer may not be aware that

his credit limit has been changed.

We believe that the credit

card customer should be fully informed at all times as to his
credit limit.

In particular, we are hopeful that the practice-

already followed by some banks—of noting the credit limit on
each monthly bill will be generally adopted.
Concluding Comments
In summary, the Board is concerned about the problems
inherent in bank entry into the credit card field.

We have

strengthened our examination procedures to help ensure that
sound credit standards are maintained in credit card operations
by State member banks.

But supervisory procedures cannot substitute

for the exercise of sound judgment by bank management; we expect
banks to recognize the risks in this field and make special efforts
to ensure that the risks they take are prudent ones.

We are engaged

in a careful study of the implications of bank credit cards and
check credit plans not only from the standpoint of safety and
soundness of bank operations, but from other points of view as
well.

We will be glad to share the results of this study with

the Committee.
The Board suggests that it would be wise to defer action
on legislation in this area until further experience, study, and
systematic appraisal have shed additional light on the extent and
character of the problems involved.



TABLE I
BANK CREDIT CARDS AND CHECK-CREDIT PLANS
Total Credit Outstanding as of October 4, 1967
(Amounts in millions of dollars)

ALL BANKS

Federal Reserve
District

1. Boston
2. New York
3. Philadelphia
4. Cleveland
5. Richmond
6. Atlanta
7. Chicago
8. St. Louis
9. Minneapolis
10. Kansas City
11. Dallas
12. San Francisco
Total

*
**
#

Credit Cards

Executive Credit
and Related Plans*
No. of
Total
banks
credit

No. of
banks

Total
credit

17
16
6
7
8
25
69
15
12
5
9
69

22
66
17
27
29
33
126
12
6
8
294

7
33
4
3
6
26
14
8
2
10
3
20

258

640

136

#

Check--Credit

All Plans
No. of
Total
credit
banks**

No. of
banks

Total
credit

2

55
57
40
39
25
65
111
45
36
42
29
35

54
95
62
34
17
22
53
11
5
10
4
114

65
84
47
43
37
101
173
57
49
52
40
100

76
169
79
61
46
57
180
25
6
16
13
410

16

579

481

848

1,137

#
8

#
#
#
2
1
1

#
#
#

Revolving credit tied in with the Credit Cards issued by American Express, Carte Blanche, Diners
Club.
May not add across, since some banks offer more than one type of plan.
Less than $500,000.




TABLE II
BANK CREDIT CARDS AND CHECK-CREDIT PLANS
Total Credit Outstanding as of October 4, 1967
(Amounts in millions of dollars)

Federal Reserve
District

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total

#

Less than $500,000.




National Banks
No. of
Total
banks
credit

State Member Banks
No. of
Total
banks
credit

43
36
28
30
21
70
93
28
37
39
25
53

52
90
26
60
28
48
125
21
5
14
4
364

14
30
9
5
5
7
22
6
3
5
3
12

16
4
45
2

503

838

121

21
67
45

Insured
State Nonmember Banks
No. of
Total
credit
banks

2
2
31

8
18
10
8
11
24
58
23
9
8
12
35

235

224

#

#

3
12
8

All Banks
No. of
Total
banks
credit

76

7
16

65
84
47
43
37
101
173
57
49
52
40
100

169
79
61
46
57
180
25
6
16
13
410

65

848

1,137

#
2
5
10
2

#
#

Table III
Distribution of Insured Commercial Banks
Reporting Credit Card and Check-Credit Plans
October 4, 1967

By size of bank
Amount of deposits
(millions of dollars)

Credit Cards

Number of banks
Executive Credit* Check-Credit

Total**

12
39
46
38
34
56
15
18

6
9
18
21
28
39
6
9

21
37
117
111
87
144
32
30

38
85
170
157
130
194
38
36

258

Under 5
10
5 10 25
50
25 100
50 100 500
500 - 1 ,000
over 1,000

L36

579

848

By amount of credit outstanding
Amount of credit
(thousands of dollars)

Credit Cards

Number of banks
Executive Credit* Check-Credit

*
**

85
16
18
25
24
18
60
12

75
15
12
19
6
6
3

258

Under 25
25 50
50 100
100 250
250 500
500 - 1,000
1,000 - 10,000
over 10,000

136

—

Total**

173
66
76
87
52
45
68
12

287
91
95
110
71
62
103
29

579

848

Revolving credit tied in with the Credit Cards issued by American Express,
Carte.Blanche, Diners Club.
May not add across, since some banks offer more than one type of plan.




Table IV
BANK CREDIT CARD AND CHECK-CREDIT PLANS
Total Credit Outstanding as of April 25, 1967
(Amounts in millions of dollars)

Federal Reserve
District

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

National banks
No. of
banks

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total

28
34
23
27
16
51
78
22
15
29
19
30

44
61
20
54
18
40
95
10
4
10
3
248

11
25
7
1
5
7
12
6
1
6
3
6

13
46
40

372

607

90

* Less than $500,000.




Total
credit

State
member banks
Total
No. of
credit
banks

Insured State non- 1
member banks
No. of
Total
banks
credit

1
2
13

8
11
9
8
7
23
48
17
6
5
11
12

150

165

*

12
3
18
2
*

2
9
6
1
2
5
9
2

All banks
No. of
banks

Total
credit

5
11

47
70
39
36
28
81
138
45
22
40
33
48

59
116
66
55
31
48
122
13
4
12
10
272

52

627

809

*
*




Table V

Distribution of Insured Commercial Banks
Reporting Credit Card and Check-Credit Plans
April 25, 1967
By size of bank
Amount of deposits
(millions of dollars)
Under 5
5 - 10
10 - 25
25 - 50
50 - 100
100 - 500
500 - 1,000
Over 1,000

Number of banks
27
58
113
103
98
159
36
33
627

By amount of credit outstanding
Amount of credit
(thousands of dollars)

Number of banks

Under 25
25 - 50
50 - 100
100 - 250
250 - 500
500 - 1,000
1,000 - 10,000
Over 10,000

194
50
71
87
61
65
77
22
627

CREDIT CARD AND CHECK CREDIT PLANS
CREDIT
1. Briefly describe the nature and type or types of (1) credit card or check credit plans operated by the bank, (2) credit card plans with which the bank is affiliated and
acts as licensee or agent, and (3) credit card plans of an association of banks in which the bank participates. Indicate name of plans, date each plan was placed
in operation, and, where applicable, include terms of any licensing arrangements, number of cards distributed or accounts approved, number of active cards or
accounts, number of merchants participating, total unpaid balance of receivables or billings acquired for each type of plan offered.

2. Describe any credit card interchange system in which the bank participates and indicate terms of the interchange agreement.

3. Indicate the trend in the total volume of receivables or billings since inception of each of the plans offered and state the bank's estimate of the maximum volume it
expects to attain.

4. Does the bank obtain adequate credit information on individual customers before granting credit cards or approving check credit?

5. What are the maximum credit limits under each plan?

6. Describe the repayment requirements of each plan.

7. Are participating merchants required to obtain prior approval on credit card transactions over a stated amount?

If so, what are the limits?

8. (a) What are the rates charged cardholders and check credit accounts?
(b) State the initial fee charged the participating merchants, the discount rate for sales drafts, and rebate terms, if any.

9. (a) State the bank's charge-off policy on delinquent accounts and indicate the number and total amount of delinquent accounts.

PAST DUE
(000 omitted)

Accounts

No.

30-89 days
Amount

90 days or more
No.
Amount

Total
No.

Amount

Per Cent of
Total Outstanding
No.
Amount

Estimated Losses
No.
Amount

Credit cards
Check credit
(b) State the amount of net losses during the past three calendar years:
19

$

19

$

19

$

10. Describe any unsatisfactory features of the operation of the plans offered, other than those discussed above, such as lack of control over unissued credit cards,
ineffective collection policies and practices, inadequate procedures for reclaiming credit cards when accounts become delinquent, lack of preprinted expiration dates
on credit cards, failure to investigate merchants before they are enrolled in the plan, lack of provisions which limit the amount for which a check in a check credit
plan can be drawn, and any other deficiencies in policies or practices.