Secret History of the Credit Card
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A Little Gift from Your Friendly Banker by Paul O'Neil

"The mails bring credit cards to millions, opening new vistas for crime, chaos and comedy."

This March 27, 1970 Life magazine article is one of the first comprehensive looks at the credit card industry and anticipated many of the problems associated with debt that are prevalent today. [Reprinted here with permission. Copyright: Life Magazine].

American banks have mailed more than 100 million credit cards to unsuspecting citizens of the Republic during the last four years, and have offered each recipient not only a handful of "instant cash" but a dreamy method of buying by signature after the lettuce runs out. One should not conclude that bankers no longer consider money a sacred commodity. They do. They do. But the soberest of trust institutions now suggest that we forget those strictures on thrift with which they belabored us so vigorously in the past and "live better" by refusing to "settle for second best." This means that our friendly banker hopes we will run up credit-card bills we cannot pay off in 25 days and will allow him to charge us EIGHTEEN percent a year on the resultant debt. It does not mean that he trusts us. He will put us on the "hot list" in a flash if we go broke in the process or try to support mistresses at his expense.

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We tend to be such 1) slippery, 2) careless or 3) compulsively extravagant louts that bankers have always viewed our attempts to wheedle loans from them with vast suspicion, and have kept the notes by which such transactions are solemnized locked up in fortress-like vaults. The credit-card concept has led them to something very like mailing off hundred-dollar bills to every Tom, Dick and Harry in town, with accompanying notes pledging the receiver to act like a good chap and pay it all back later. They have gamely stifled an instinctive sense of horror in so doing because the cards also present them with an irresistible opportunity for new commercial accounts and the quick, vastly profitable development of widespread consumer credit. Still, some of the effects have been hilarious. In Chicago, during 1966, banks fought each other like jackals to get their cards into the hands of the public only to discover that brigades of thieves, con men and deadbeats were galloping through stores with them and running up disastrous sums in fraudulent or uncollectable debt. And bankers have had to endure incessant complaint at the invasion of privacy inherent in unsolicited distribution, the most vehement of it from innocents discovering -- on receipt of bills for mysterious purchases -- that cards bearing their names had been waylaid, forged and misused without ever reaching them.

Credit cards, and particularly bank cards, have inspired new and enduring types of whitecollar crime, have attracted the beady attention of the Mafia, and have revealed a fascinating capacity for dishonesty in employees the postal system, who steal them from the mails and sell them for prices up to $50. Their vulnerability to theft while being manufactured, embossed and transported in bulk suggests the possibility of even more spectacular crime in the future; so does the possibility that some larcenous-minded electronics expert might jam up the big computers which record and assess the credit buying they inspire. One of the banks' fondest selling points -- that the cards are devices which "simplify" life -- is the subject of ironic controversion: insurance companies insist on offering policies to protect the citizen against lawsuits if his cards are lost or stolen. Legislators, meanwhile, view the proliferation of cards with increasing alarm and offer bills to restrict the presumptuousness, even insolence, with which banks utilize the mails in recruiting converts.

But bank cards are here to stay. At least 20 million of the people on whom they have thus far been dumped seem absolutely delighted with them. Most of these enthusiasts are proving perfectly capable, moreover, of maintaining a steady if sometimes precarious balance between improvidence and solvency while using them. Seventy-eight percent of these users are even more obliging; they not only "roll their credit" -- by paying off less than they owe each month and thus staying in debt for indeterminate periods -- but show no slightest restiveness at the "small service charge of one and one half percent a month" this privilege costs them. An enormous number of people have thrown their cards into the garbage can, of course, or have cut them up and mailed the pieces back with ill-tempered instructions as to methods of eventual disposal. New York's indignant Democratic Congressman Jonathan B. Bingham has gone further: he has been able to register his objections to plastic credit on the floor of the House of Representatives. These began when Boston's State Street Bank and Trust Company sent him an unsolicited BankAmericard last winter with "my name slightly misspelled." He sent it back with an "angry note." The bank answered with a statement of credit-card indebtedness: a bill for a "$10.79 purchase my wife had made by mail from S. S. Pierce Co. -- and which she had already paid by check." He dashed off another angry note. "What naiveté," he cried later, on the floor. "The computer was completely unimpressed." He just got another statement, this one with l6¢ in interest added and a "sharp reminder" of his financial delinquency. "I feel," he has told his fellow legislators, "like a character in a Kafka novel!"

But such soreheads -- even if they are soreheads who have been elected to high office -- do not count. The average man, his senses dulled by an endless reception of junk mail, simply chucks his card in a desk or cupboard or dresser drawer if he is among those who are not instantly galvanized their bank's sudden new interest in their well-being. He may eventually betray reactions characteristic of the sorehead group: when the bank sends him a follow-up statement (which shows no charges but is simply intended to goad him into revealing whether he still has his card), he may poke holes in it or punch it full of staples and send it back to confuse the bank's computer. But as long as the card stays in his dresser he is subject, though he is not aware of it, to a curious and enduring sort of subconscious temptation. Bank records indicate he will eventually dig it out and give it a try and will thereafter tend to use it again … and again …

Banks themselves, meanwhile, have hacked away a good deal of the naiveté, inefficiency and confusion which hampered their early efforts to invent and play the new credit game. They have largely abandoned their efforts to go it alone while doing so. Nothing so suggests that the bank card is now a permanent and significant part of American life -- and an instrument of social as well as financial change -- as the fact that banks have now aligned themselves into the same pattern of dual national organization which has produced Republicans and Democrats, the A.F.L. and the C.I.O. and all the National and American leagues into which professional sport has so unerringly divided it. The overwhelming majority of banks now involved in, or just entering, the credit-card business utilize one of two national licensing systems: BankAmericard (developed locally and over a long period of time by California's Bank of America) and the Master Charge card (which competing San Francisco banks hurriedly conceived in 1967 as a response to it).

Promoters of the belated Master Charge card have been forced to play "catch up," as they say in football, and have displayed a certain tendency to fumble and throw long on first down. They have exerted themselves mightily, nevertheless, and both systems are now racing along almost exactly neck and neck. Each card is presently being issued by more than 3,000 banks.

Each system claims slightly more than 20 million "holders." Federal Reserve economists estimate that half of them -- 10 million possessors of BankAmericards and another 10 million owners of Master Charge cards -- use their credit accounts actively and maintain an average indebtedness of $185 apiece. The remaining 20 million members of plastic society have yet to use their cards but still have not, to the banks' best knowledge, tied them to the legs of carrier pigeons, scuffed them up by forcing locks with them, or otherwise abandoned, destroyed or mutilated them.

These overall figures make it dramatically plain that American banks have hoisted themselves, almost overnight, into a position of strategic dominance in the credit-card business. The grand total of all other such credit symbols -- oil company cards, restaurant cards, travel and "entertainment" cards, and department store charge plates -- still exceeds the total of all bank cards, but no single competing company comes close to matching either BankAmericard or Master Charge. The bank card's rate of growth, moreover, is still dizzying; the number of issuing banks has increased nationally by 68% in the last 12 months.

Bank cards still encounter areas of resistance. Most big department stores refuse to honor them since these institutions use their own credit lists to push merchandise by mail and have no impulse to surrender this means of communication with their customers. Restaurants in many places will have no part of them. They do not yet threaten the three established "travel and entertainment" cards -- American Express, Diners' Club and Carte Blanche, which charge a $15.00 annual fee, spurn applicants making less than $7,500 a year unless they have lots of money in the bank, and grant unlimited credit on a 30-to-60-day interest-free basis. But Master Charge and BankAmericard are already so pervasive (the first good in 49 states, the second in 44 and both honored in dozens of foreign countries) and so broadly usable (almost 600,000 retail outlets ranging from pet shops to airlines) that it is difficult not to think they will wipe out most other cards in the long run. Both bank systems tirelessly seek new uses for plastic; holders in 10 different states where banks have made the proper arrangements can now use them in paying up to $500 worth of federal income taxes.

The bank card is still in a state of fiduciary adolescence, but it has already experienced several distinct evolutionary phases -- the last, and most stable, of which can be said to have begun last year when four of the biggest New York banks and three lesser ones finally got into the franchised card game. These moratory giants gave plastic credit the sort of ultimate endorsement which, say, pot might achieve if Fifth Avenue dowagers began smoking it in the Oak Room at the Plaza.

It has taken two decades of experimentation to bring the big card game (initially conceived in New York in 1951) to this degree of sophistication. California's Bank of America, which seized upon the idea in 1961, was first to start it toward fruition. As it became apparent that the boys in California were dredging something comparable to the riffle at Sutter's Mill, colleagues all over the country began to catch the prospecting fever too, to shed their trepidation at the public's lamentable tendencies toward insolvency and, one by one, to try panning all those faceless folks out thar beyond the bank for traces of dust which had not yet been paid out: for the mortgage, the car and the grocer. The charge card promised to be an instrument which could extract pay dirt from several types of gravel -- the banks asked merchants for discounts or kickbacks of from 1% to 6% on all card credit transactions (in return for which they guaranteed the stores immediate cash for the goods involved in such sales) and, by assuming the job of long-term bill collecting themselves, stood ready to make another 18% per annum on customer indebtedness which endured longer than 25 days. And since a merchant had to open an account to get his dough every day, the card-issuing bank was also presented with a kind of secondary opportunity, a chance to snatch all his other commercial business from some less adventurous competitor.

During the early years of the great plastic rush, however, most of these visions proved to be mirages -- and mirages, worse yet, which hid all sorts of quicksand, loco weed and rattlesnake nests. Bankers setting out to play the new credit game were involved, almost instantly, in a sort of interlocking dilemma: they could not ask the public to use their cards if no merchants would honor them, and could not ask a merchant for acceptance and discounts without being able to suggest that an army of buyers was gathering outside his showroom windows. They were usually forced, thus, to launch both processes at once -- and had to be fast, fast, fast in "getting their plastic on the air" (creditese for card distribution) so that gangs of salesmen could hurry to the task of reciting mailing statistics and hauling tradesmen into the fold. They did so, in many cases, with a kind of eager innocence which none of them would have countenanced for a moment in firms with which they did business; a few of them, caught up in the excitement of the unfamiliar chase, seem to have become as blithely careless of consequences as a drunken sailor shooting craps in a Mexican whorehouse on New Year's Eve.

Some families got six or seven cards from one Chicago bank just before the holiday buying season of 1966 and were occasionally puzzled to discover that the plastic was embossed in the names of infant children. Endless thousands of cards have gone astray in every big city -- at times as many as 10% of those put into the mails -- because metropolitan cliff dwellers move so continuously. They have been mailed off to unemployables, drunks, narcotics addicts and to compulsive debtors, a process President Johnson's Special Assistant Betty Furness found very like "giving sugar to diabetics."

A study of 84 representative card operations which San Jose Attorney Richard N. Salle and Economist Constantine Danellis conducted last year for the Charge Account Bankers Association showed that only a fifth of the banks investigated checked the credit background of those to whom cards were mailed. Only a third required some minimum balance when sending cards to their own customers. Thirty percent used mailing lists of people with whom the bank had no experience at all, and the citizen who actually came forward and requested a card was welcomed with open arms between 50% and 75% of the time -- a fifth of the banks did not even bother to find out if he had a job.

Since bankers try to stay as far as possible from the purlieus of venality, they should doubtless be forgiven for failing to anticipate some of the excited skulduggery they triggered with their mass mailing campaigns. Few if any of them realized that every big city has specialized thieves who prowl apartment house mailboxes on the first of every month looking for relief checks. By sending credit cards out on the first, too, they automatically introduced hundreds of light-fingered parasites to a new and heady means of sustenance. Banks seldom stopped to consider the folly of mailing vast heaps of cards on Friday, thus immobilizing them in substations or post offices over the weekend and all but inviting clerks with low moral thresholds (and correspondingly low salaries) to adopt a few of them at their leisure. Least of all did the new plastic entrepreneurs anticipate the hundreds of small store operators who have formed alliances with possessors of forged, stolen cards, "sold" them hundreds of dollars' worth of fictitious goods, and blithely billed the bank for the resultant nontransactions.

Neither the Department of Justice nor the FBI will make any estimate of the number of bank-card frauds in recent years. Chief Postal Inspector William J. Cotter, while admitting to 80 arrests of postal employees last year and a 700% increase in the last four years in time spent on credit-card investigation by his department, likes to blame the trouble on "long-haired musicians who use stolen cards in one town today and another tomorrow." People who would never steal property or forge a check will run up bills on a stray credit card. The letter carrier who finds himself returning unwanted cards to the bank, the garbage man who discovers discards in the rubbish, the resident of a boardinghouse who finds one misaddressed on the hall table or the slum housewife who gets one in the mail, all tend to feel fate has sent them a handy little present. So many have been lost, stolen or have gone astray during big orgies of distribution that the smart cheater has been able to use one for a few hours or a few days, throw it away and start using another with only the remotest risk of being caught. If you know the right people in New York today you can buy a validly stamped but unsigned driver's license for $150, forge it, and thus furnish spurious proof of identity if questioned about a forged bank card.

Sixteen retailers, three gas station operators, a postal employee and ten co-conspirators have recently been indicted by a federal grand jury in Chicago -- but not before two and a half years of untrammeled larceny in which they did five banks out of "millions of dollars." Brooklyn District Attorney Eugene Gold rails at "helter-skelter card distribution" and, like many another prosecutor, feel he is being called upon to sweep up mistakes the banks could have avoided with care and foresight. Credit-card fraud has become Brooklyn's leading "white-collar crime," and Gold's office handles 20 complaints which stem from it and institutes one new criminal prosecution involving it every day.

The banks have gone to a great deal of trouble to soothe the misgivings which criminal misuse raises in the breasts of prospective holders and to assure them that they will not be liable for debts incurred after loss or theft -- IF (ah, dulcet phrase) they report the incident within 24 hours. There is nothing in the fine print, however, about the fellow who may not miss his plastic for a week or 10 days after it has fallen into the hands of some rascal. This is doubtless wise. The average bank will launch itself after such an unfortunate like a grizzly charging a rabbit if it decides he has been "negligent," and could hardly improve its image by publicizing the ominous fiduciary snuffling and the squeaks of horror and dismay which characterize these undignified little episodes. There is nothing unique, for instance, about the methods with which New York's First Nation City Bank is attempting to extract dough from a hapless Brookline exterminator, Daniel Orlick.

Orlick and his wife Gloria were not only delighted but flattered when First National City invited them to sign up for one of its credit cards last year -- a fellow in insect eradication does not make much money or hear much applause as he practices his specialty, and both felt a sense of improved status when they were embraced by plastic society. But Orlick, alas, seldom actually used his card and had no idea how long it had been missing when he duly wrote the bank, last April 16, to say he had lost it.

He was not only horrified but astonished (since the card had a credit limit of $400) to receive a statement for $558.82 by return mail. Another statement quickly followed, this time for $1,137.06. Gloria telephoned the bank in agitation to say 1) that her husband had reported the loss, 2) to ask how a crook could evade the $400 limit and 3) to protest that the Orlicks didn't have $1,137.06 to pay for anything, least of all some nogoodnik's illegal pursuit of la dolce vita. "Nobody at the bank seemed to know what was going on," she says. "I had an awful time just getting somebody who would talk to me. And when they finally switched me to a man in the collections department he was terribly cold and nasty … he just told me to get the money and said he didn't care how we did it."

Statement, meanwhile, followed statement -- the last of them for $1,636.02. One of them listed the license number of a car for which Orlick's personal crook had bought gasoline. "I thought I'd hit gold," cries Gloria. "I called the cops. I called the bank's security department. But they both told me it had been a rented car or something." Rented car or not, the Orlicks stubbornly went on refusing to pay, and First National City, having failed to squeeze the crook's total expenditures out of them, now calculates that his spending amounted to no more than $963.98 at the time Orlick reported the loss of his card. The bank is presently hacking at them through the offices of a lawyer, who has added legal fees to the $963.98 which bring it up to $1,156.76 and has hauled them into court to attempt to collect it. The Orlicks have consulted a lawyer, too. "He tells us to settle," says Gloria, "since he won't defend us for less than $500. We don't know what to do. Right now we're living with it, y'know?"

Plastic society will doubtless go on producing similar victims, since its members will inevitably go on using their status symbols, too, but bank-card fraud is nevertheless being reduced in many sections of the country. Progressive banks check the credit of prospective holders with increasing diligence, and have hit on simple but effective means of tightening up their mailing techniques. Manufacturers Hanover Trust Company of New York, for instance, now hides its cards in pieces of paperboard to prevent their being "felt" by mail handlers, encloses these "carriers" in plain envelopes of varying colors, sorts the envelopes into batches intended for specific neighborhoods, and delivers each batch to its particular substation in mailbags which remain sealed until turned over to letter carriers. Unsolicited mass mailing itself, meanwhile, has largely served its purpose and is dwindling away; banks which have utilized it to recruit their basic cadres of users are abandoning it to court volunteer applicants by more selective means, and are inventing methods (free bottles of wine for those who pay restaurants with credit cards rather than vulgar cash) of "activating" all that old but virgin plastic lying around, unused, in the cupboards of stubborn, debt-shy and unspeakably old-fashioned burghers.

There are those who believe the credit card is provoking a revolution in banking as profound as that which ensued after London's goldsmiths began issuing notes rather than actual cash during the 17th Century, and that the arrogance, haste and confusion attendant on its introduction must be accepted, even forgiven, as by-products of inevitable and salutary change. Whatever the validity of this view, one must guess that plastic credit is equally significant as a social phenomenon and, salutary or not, will influence the values and living habits of the average man at least as dramatically as it influences the techniques of the countinghouse. Millions of card users, for instance, are already the creatures of big, third-generation computers, machines which provide the real key to successful card systems since they eliminate paper work and can oversee and monitor the financial condition and buying habits of enormous masses of people.

Both BankAmericard and Master Charge banks have banded into regional "interchange" associations which finance and operate this electronic hardware on a communal basis. The Master Charge groups alone, for instance, maintain 13 central computer centers in the U.S., the biggest and most fascinating of them in an industrial park at Long Island's Lake Success. The Long Island plant now represents 220 banks in New York, New Jersey, Connecticut, Pennsylvania, West Virginia, Ohio, Florida, Wisconsin and Delaware. Its gleaming, white-brick building houses complex machinery which "captures" data from an endless flow of sales slips, and two IBM 360-50 computers which not only store the resultant torrent of information, but can vomit back status reports on any of two million cards in the twinkling of an eye.

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How deeply has a card user eaten into his $200 or $400 credit limit? The computer knows. Has a card been used to make "suspicious" purchases -- three sports jackets in one day, say, or seven automobile tires? The computer will express a kind of electronic anxiety when it is next asked for comment. Eastern Master Charge merchants, 30,000 of whom now operate under the jurisdiction of the Long Island installation, must dial a telephone code number and communicate with the computer before charging any item of $5O or more. Rows of girls, who wear telephonic headsets and spend their days facing television screens at the center, act as intermediaries in this process; the merchant reads his customer's Master Charge number, over the telephone, the girl punches it on a numerical keyboard, and the screen instantly reveals the condition of the card account in question. The Lake Success plant maintains its own private police -- a knot of poker-faced ex-cops in vaguely unnatural sports jackets -- who cut in on the line if the computer announces that a card has been lost, stolen or has been misused, and tell the merchant to grab the plastic if he can do so without bodily harm and attempt to detain the customer while they alert the local cops.

All this screening -- and the fact that banks themselves are assembling larger and large "security" forces which investigate fraud and turn their evidence over to the police -- is gradually bringing misuse under control. There are still gaps in these chevaux-de-frise: the advent of bank cards usable anywhere in the country or in Europe has offered the credit crook something of the same opportunity zone defenses offer the pass receiver in football: if he moves fast enough from one computer area to the next while entertaining blonds and running up hotel bills, he can very probably stay a jump ahead of the law for a long time. And the card associations nervously anticipate bigger crime. The embossing machines which imprint names and numbers on plastic blanks at Lake Success are installed in a glass-walled room. The women who run them must lock up their coats and handbags on reporting to work and endure the constant scrutiny of guards while on shift. Both blanks and finished cards are taken in and out of the industrial park in armored cars.

But if credit-card crime can be expected to go on providing the kind of headlines bankers deplore, it is far less important than the antidotes it inspires. The control and communications systems which are being developed to make plastic credit fraud-free and efficient also involve the ordinary card user and will do so more dramatically in the future. The bank card is an imperfect medium of exchange at the moment because nobody can be absolutely certain that it, unlike the impersonal $20 bill, is always backed by real buying power. If a seller could make sure a credit-card buyer is who he says he is on every occasion and could discover whether he has enough cash in his account to pay for his purchase, this difficulty could be eliminated. Bank associations, thus, are pressing for means of achieving "instant communication and instant credit verification."

IBM and TRW, Inc. are currently engaged, for instance, in the development of an experimental system known as Omniswitch. Banking alliances such as the eastern Master Charge institutions, which have commissioned this particular work, hope in the end to achieve computers which can not only be reached, automatically, from any telephone in the country, but which will recite the state of the customer's account in clear English ("audio response") and, on being instructed by a few taps of a touch-tone button, will deduct the price of his purchase at the very moment he makes it.

It would be hard to guess just how completely Americans might embrace the sort of social implications such a system could inspire -- although millions have already cast a vote for some of them by signing their present cards and millions more will doubtless follow suit. The credit card is inflationary (merchants must be expected to ooch prices a bit to compensate for their kickbacks to the banks), even though it is responsible for only 2% of to day's $98.2 billion in consumer debt. It is expensive, at least for the majority which pays 1.5% a month on its bills. It can still lead to hideous embarrassments if lost. But it remains, in its curious way, a status symbol; most banks refer to it as a "charge" card rather than a credit card, since they have discovered that a vast segment of the middle class believes debt is sinful but charging is chic. More fascinating yet, it seems to be a kind of key to dreams. Bank-card advertising, like those airline commercials which call upon us to drop everything and take fly-now-pay-later flights to Hawaii or, God save us all, Zurich, subtly suggest that actual money is not really involved. There is a possibility, thus, that credit cards could become a major medium of exchange and that the future American could end up with just one of them as his means paying for almost every thing - his house and car as well as his suits and lunches. The one-card man would be called upon to tell his bank's computer more about his life, times, financial condition, fondness for drink or drugs than many of us might like to confess today, but he might be privy to delights which we are denied. Take lifetime credit for newly married couples, calculated on an actual basis from estimates of total potential earnings and expenses. Such couples could get a kind of additional bonus, too -- at least according to New York Marketing consultant Lawrence G. Chait: "The credit man would become the family counselor."

And a one-card world might just provide realization, at last, of that splendid concept, the Universal Number. One would be privileged if so, to possess a personal number from the cradle to the grave would be printed on one's bracelet, stamped on one's school books, utilized as one's lifetime license number and as one's serial number in the service -- and, course, embossed on one's all-time credit card. Those who pine for simplistic and revelatory society will be comforted to know that the committee of the American Bankers Association is aware of the opportunity and is considering the added efficiency it could bring plastic credit.

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posted nov. 23, 2004

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