by Kaz Nejatian
But Charg-It was an invention of Brooklyn, not Manhattan. People using it were not the most affluent people in the city. Bloomingdale’s and Saks had no reason to accept Charg-It as a method of payment. Even Gimbel’s, which catered to less wealthy clients, didn’t have a business-need to accept Charg-It. After all, Gimbel’s of 1930s was located in Herald Square in Manhattan, not in Brooklyn. Furthermore, Gimbel’s may not have been keen to have its middle class customers exposed to the immigrants coming in from Flatbush with their Charg-It cards. After all, in the 1940s Gimbel’s was fighting long and hard to avoid hiring African-Americans in its New York stores. It is hard to imagine it wanting a group of immigrants trekking to its stores.
While Charg-It was eventually able to expand beyond Brooklyn, attract wealthier clients, it was not able to do so before a wealthy Manhattaneite took over the world with his claim to have invented the world’s first universal card program.
In payments, to the victors go the spoils. Thus, very few people remember Charg-It and John Biggins.
Diners Club
Quite a few people, however, do know the payment world’s “First Supper”.
As the story goes, one evening in 1949, business executive Frank McNamara was having dinner with some of his friends. When the bill for the dinner arrived, McNamara realized that he did not have enough money to pay the bill. The banks were closed and there was no way to get more money until the next morning. An embarrassed McNamara, the legend goes, called his wife who brought the money to pay for the bill. This embarrassing event set Frank McNamara on a course to create the world’s first credit card, Diners Club.
Unfortunately, like many things that everyone knows as true, this story is almost certainly false.
First, Frank McNamara was the CEO of the Hamilton Credit Corporation – a very large retail finance company. He did not need an unpaid bill to give him the inspiration to create a credit card program. Second, nearly all restaurants frequented by business executives in Manhattan in the late 1940s would have had charge accounts for their customers similar to the ones present at department stores. All McNamara would have had to do to pay the bill was simply open up a charge account. Third, Diners Club was founded not by McNamara alone but by four well-suited executives. The other three founders were Matty Simmons, who had been a public relations executives for restaurants and nightclubs, Alfred Bloomingdale, whose family owned one of the biggest retail companies in the world, and Ralph Schneider, McNamara’s personal attorney.
Regardless of its starting story, Diners Club made some very important decisions in its early operations. First, Diners Club focused exclusively on restaurants in Manhattan. This meant that its cards would only be attractive to the relatively wealthy portion of the population who lived in Manhattan and had enough wealth to be able to afford to eat at restaurants with some frequency. Another group of high frequency users were salespeople in New York whose job involved taking clients out for dinner and drinks. These salespeople would frequently have to pay for dinners with their own money and would welcome an opportunity to simply hand the monthly bill their bosses.
Second, unlike Charg-It and other card programs, Diners Club charged the businesses who accepted its cards a very high fee. This fee was initially set at 7% of each transaction. Restaurants in Manhattan were happy to pay this amount since they were used to paying hotels and travel agents who sent customers to them a 10% referral fee.
Thus, in 1950, a year after the company’s founding, the Diners Club credit card was introduced to the public. In its first moth of operations, Diners Club cards were used to spend $2,000 in New York restaurants – equivalent to almost $15,000 in 2017 dollars. From that spending, McNamara and his three co-founders made less than $200.
It was by no means clear that Diners Club would be a success. In fact, in 1951 after a year of growth, Diners Club had lost nearly $300,000 (nearly $2.5 million in 2017 dollars.) It was this loss that caused McNamara, who owned 70% of the company, to sell his shares to Bloomingdale and Schneider.
Over the course of the next seven years, Diners Club expanded beyond New York restaurants. By 1957, when American Express launched its own charge card, Diners Club cards were accepted in restaurants, hotels, bars, and airlines all over the United States and Europe.
Interestingly, the first Diners Club cards were not really cards. They were books that listed some information about the card holder and a list of places where the cards could be used. It wasn’t until the late 1950s that Diners Club issued its first stand-alone card and not until 1960s that it issued its first plastic card. By 1960s, however, Diners Club and all its copycat companies such as Trip Charge, Golden Key, Gourmet Club, Esquire Club, and Carte Blanche had been overtaken by a much larger payment card company – one that dominates our payment world to this day, Visa (then known as BankAmericard).
Fresno Drop
On September 17, 1958 fewer than one million modern, universal credit cards existed in America. By 1970, more than 100 million credit cards were in the wallets of American consumers.
Those 100 million credit cards changed the face of US payments forever; but the fact that the country was about to change went unnoticed on September 18, 1958. It went unnoticed in New York. It went unnoticed in Boston. It even went unnoticed in Fresno, California – the epicenter of the credit card earthquake that was about to shake America. The Fresno Bee, the small city’s daily newspaper, barely covered the news of what had happened.
In the two weeks before September 18, 1958, over 60,000 households in Fresno had found in their mailboxes a thick, brown envelope.
Inside the envelope, there was a plastic card with the bold letters “BankAmericard” printed on it in blue and gold. “Bank” in blue, “Americard” in gold.
Below those letters, a nine-digit account numbers had been embossed into the plastic. Beside those digit the letters “Mar 59” were embossed, below these was written “good thru” in a gold color matching the logo. Below this, the name and the address of the receiver was embossed. At the bottom of the card, the receive would find, printed in blue italics were the words “Bank of America Charge Account Plan.”
Without asking for it, and without knowing what it was, nearly all of the residents of Fresno, California, had received a credit card with a $300 spending limit from Bank of America.
On September 18, all of these cards went live. Card holders didn’t have to call Bank of America to activate the cards. They didn’t have to do anything. They simply had to show up to any store in Fresno and use their cards. They could spend the money without any worry, and if they didn’t have enough money to pay the account off at the end of the month they were charged 18% annual interest.
Bank of America wasn’t the first bank to try to create a credit card program. Many others had tried and failed. The banks simply could not convince enough Americans to apply for the cards and enough merchants to accept the card.
Bank of America had seen these bank programs start and fail. That’s why it picked Fresno, California as its starting place. Fresno was an isolated city. If the program was a massive failure, very few people outside Fresno would notice. Bank of America’s reputation would not be harmed greatly. As importantly, given Fresno’s size and isolation, the bank could spend months in the lead up to September 1958 convincing merchants that they would sell more product and have an easier time collecting their money if they accepted Bank of America’s new card program.
By September 1958, nearly all merchants in Fresno had signed up to accept BankAmericards. By the time the envelopes arrived in Fresno, over 300 merchants had signed up and agreed to pay $25 per month to rent the imprinters needed to copy the BankAmericards. They all had also agreed to pay 6% of each sale to Bank of America – believing that the Bank would drive customers to their stores in the lead up to the Christmas holidays.
Having solved the first problem, i.e. getting merchants, Bank of America attacked the second problem, i.e. getting customers to apply for the card. It simply
decided that it didn’t need anyone to apply. It didn’t need to do a credit check. It simply sent every household in Fresno, California a card and hoped for the best. It was perhaps helpful that the team of people in charge of BankAmericard at Bank of America had come from the bank’s internal think-tank rather than from its loan department. It is hard to imagine any loan manager approving loans for people about whom the bank knew next to nothing.
Thus, with the thump of a thick brown envelope started America’s credit card revolution. Within three months of the Fresno Drop, as it became known, Bank of America was handing out tens of thousands of cards in San Francisco and Sacramento and tens of thousands more were arriving in the mailboxes of people in Los Angeles. By October 1959, almost exactly a year after the September 1958 drop. Bank of America had put 2 million credit cards into people’s wallets and had singed up over 20,000 merchants all over California to accept these cards. In less than a year, a bank that had no credit card program ended up more than tripling the total number of credit cards outstanding in the United Sates.
One would think that having seen this success, other banks would follow Bank of America’s lead. Yet, no one did. No other bank followed Bank of America’s aggressive lead into the universal credit card world.
Most other bank CEOs looked at what Bank of America was doing and said, “no thanks!”. At the time, their response must have seemed reasonable. In its first year of operations, nearly 22% of people who had used a BankAmericard did not pay their bills. In 1959, Bank of America lost nearly $20 million in its BankAmericard division ($167 million in 2017 dollars.)
While other banks ran away from this business, Bank of America doubled down in 1960. It wasn’t until the mid-1960s that other banks realized that Bank of America was building a massive business for itself by accepting the early losses and by then Bank of America have started selling its BankAmericard program to other banks outside California so they could send out BankAmericards to their clients.
By 1970 all the banks that were issuing BankAmericards joined together to form the National BankAmericard Inc. From that point this company would manage the technology running BankAmericard program for all of its member banks.
A year earlier, seeing the BankAmericard success, United California Bank, Wells Fargo, Crocker National Bank and Bank of California formed the Interbank Card Association to launched their join card program. Interbank called its card MasterCharge.
1977 BankAmericard was renamed the Visa. In 1979, Interbank changed its name to MasterCard.
Today, in 2017, Visa is one of the world’s largest companies with a market capitalization of over $200 billion. MasterCard has a market capitalization of nearly $130 billion. Each of them is larger than all but a handful of US banks. Combined together, they would be the most valuable financial company in the world.
Debit Cards
As BankAmericard was establishing its presence across the United States, another technological advancement changed the history of money in the United States.
In 1968, after moving five times in 12 years, Don Wetzel was tired of selling IBM products and being on the road. He quit his job and joined a few other ex-IBM employees at a newly formed company called Docutel.
Shortly after joining Docutel, Don Wetzel found himself waiting in a line at a bank in Dallas, Texas where Docutel was headquartered. Like every other American in 1968, Don Wetzel must have been accustomed to waiting in lines at the banks.
This time, however, something bothered him about the wait. Immediately after the trip to the bank, Wetzel walked into the Docutel office and told his colleagues that he thought Docutel could build a machine that would, according to him, “perform at least 90 percent, perhaps more than 90 percent, of all the transactions processed by a teller.”
Within a few months, Don Wetzel and his team had developed the world’s first ATM machine and within a year, on September 2, 1969, the first ATM machine was installed at a Long Island branch of Chemical Bank.
Within a year of that first machine, nearly every bank in the United States wanted a Docutel ATM. By the end of 1970, Docutel had so many orders that its delivery time for new machines had extended to more than 30 months.
Within a decade, nearly every bank in the United States had an ATM machine. By 1985, there were nearly as many ATM machines in the United States as there bank branches. By 2002, there were 352,000 ATMs in the United States, nearly five times the number of bank branches in the United States.
While ATM machine have proven to be highly successful, another innovation made by Docutel in the invention of the ATM machine is even more prevalent today.
In 1968, it was not at all clear how the bank cards could be read by ATM machines. All bank cards and credit cards of the era, including the BankAmericards, were read at point of sales by imprinters - by then called zip-caps for the noise they made or knuckle-busters given the frequency with which the user would harm his or her knuckles using the contraption. These machines were not all that different from the imprinters that had been introduced in retail shops alongside charge-plates in the late 1920s.
But the imprinters could not work with a digital machine. To allow the machine to read the card, Docutel needed to store data such as account number, checking account number, savings account number, credit card account number, the bank's routing number and the customer’s name. It also had to store this information in a way that could not be read by any machine that a fraudster might create.
To solve this problem, the team at Docutel took an already existing technology, the magnetic tape, and married it to the payment card. The magnetic stripe, now omnipresent on all payment cards, did not exist before 1969.
The early cards used in the Docutel ATMs were not, of course, debit cards. There was no way for any ATM to know whether a bank account had any money left in it or not. The cards used in the ATMs were credit cards that had a strict daily spending limit. It was not until 1972 that debit cards were introduced to the United States. By then, the Docutel ATMs installed in the bank branch were able to communicate with the bank’s computer system so that the amount of money given to each customer could be immediately subtracted from his or her bank account.
Even then, these early cards could not be used inside stores as debit cards. It wasn’t until 1976 that the first electronic point of sale systems were installed in stores. Debit cards only became usable inside stores when Angelo’s and Starmarket, grocery chains located in Massachusetts, installed new systems that would allow their systems to communicate through a third party with the banks.
It is hard to exaggerate the importance of debit cards and ATMs in the United States today, but in 1970, over a third of American households did not have a bank account. These people were not underbanked by necessity. They simply chose not to have a bank account.
Before the wide prevalence of ACH payments (as outlined above) and debit cards, it was just not that difficult for an American household to go about life without a bank account. A worker would simply get paid in cash or with a check. There would be no need to deposit that check into a bank account since the local department store would gladly cash the check for free; and the local department store was open for business far longer than the local bank branch.
Why would a family who didn’t need a mortgage open up a bank account if opening up a bank account required standing in lines to deposit checks, to get cash, and to pay bank fees?
Banks saw this attitude towards their services and tried to offer the ATM and the debit card as their answer. With an ATM, there would be no operating hours. There would be no lines.
And the new ATMs, like the human tellers before them, had to have names. First National Bank called their ATM Tillie the Teller and boasted that “she's a bubbly, giggly kind of character.” The bank even held birthday parties for Tillie full with her own personalized “For She's a Jolly Good Teller” recorded song. Other banks named also named their ATMs. An August 8, 1977, issue of New York Times boasted that banks had given their
ATM machines a wide variety of names; from the creepy Miss X to the loveable Buttons.
As ATMs became more present across the United States, more and more Americans found a need to carry with them a debit card; but it took some time for debit card transactions to take off as many had envisioned.
For the first decade of their existence, debit cards were used only in local pilots; such as those launched in Angelo’s grocers in late 1970s. Even by the early 1990s, over half of the debit cards in the United States were still held by California residents and debit card use fell far behind cash (which still accounted for more than half of the transactions in the United States), check (which accounted for nearly a quarter of transactions), and credit cards (which accounted for about a fifth of the transactions).
In 1990, there were fewer than 300 million debit card transactions in the United States. That’s fewer than 2 transactions per person per year or less than 2 out of every 100 transactions at retail stores for the year.
