The Drop

Nothing has triggered anxiety, fear, and envy in the American psyche quite like consumer credit. It’s how many of us pay for vacations, emergencies, groceries, subscriptions, luxury items, etc. But the widespread use of credit cards has an origin story that was bold and unexpected.

On September 18, 1958, Bank of America (BoA) started an experiment that changed the way we would spend forever. They strategically unleashed 60,000 credit cards on the residents of Fresno, California without warning or even a sense of demand. This aggressive strategy was not just a marketing blitz but an experiment that would test the concept of plastic money on a massive scale. This is what the credit card industry likes to call a ‘drop.’

A New Desire to Spend

The above quote reflected the tone of America following the Great Depression. The depression had financially beaten people so badly that they rarely even thought about taking financial risk. Before the introduction of credit cards, banks were skeptical of extending consumer credit out of fear that widespread consumer debt was harmful for America. And if you think about where we are today — they kinda had a point.

However, by the 1950s, the booming post-war economy and the rise in consumer goods began to change the attitude toward spending. TVs, refrigerators, cars, and other modern conveniences simply made people want… things. The Depression made people think more about going without until they had money saved to buy something, but when these new gadgets came out, people were tired of going without and wanted to find a way to have these new things.

This led to people spending money they didn't have. So, when you now drop a new invention like a credit card in their hands, it gives a boost to a new found desire to spend. This boost set the stage for Americans to use credit to get a taste of something that we became addicted to — immediate gratification.

Diner’s Club → Bank Americard

Before BoA's bold move, there was the Diner's Club card, which launched in 1950 primarily for businesspeople to charge their dinners from multiple restaurants to a single tab. This concept of a single payment tool for multiple vendors was exciting at the time, but it was not even close to what BoA imagined was possible. The Diner’s Club card laid the groundwork, but it was BoA’s invention that brought credit services to the general public.

The Bank Americard, later renamed Visa, revolutionized banking by eliminating the process of loan approvals for every purchase. People would come into banks four to five times a year to get loans. Vacations, school clothes, holidays, medical emergencies, etc. People just needed access to money. And each time, the consumer would need to sit with a loan officer and fill out their family history like they were at a doctor’s office; and then the loan officer would determine their “fitness” to get a loan. Every. Single. Time. So, even if you just wanted $250, you had to go through this process. This made it difficult for banks to generate a profit and it may seem like it would be frustrating for customers, but there was no other option.

By the time credit cards came on the scene, many Americans had a dozen or more different forms of credit that was charged to an account: gas accounts, department store accounts, airline accounts, auto accounts, pharmacy accounts, appliance accounts, etc. Bank Americard changed that by consolidating various forms of credit into a single, bank-issued account. This innovation simplified consumer borrowing and spending, transforming the credit card from a financial tool to a part of American life.

The Drop

Introducing credit cards to America put BoA in a chicken-and-egg situation. They needed the merchants (stores) to be on board to provide value for consumers, and they also needed enough card holders to make it worthwhile for the stores to accept the credit card. So, instead of recruiting card holders to participate, BoA created their own participants. They sent out cards that ranged from $300 to $500 to anyone who banked with BoA in Fresno, CA. Then they went to the merchants and pretty much let them know that 60,000 customers had credit cards in their hands and if they wanted to accept payments then they would need to get on board. BoA also took a 6% cut to remove the payment processing headaches from the merchants, guaranteeing them payment in days rather than months. So, it seemed like a win-win for everyone involved.

Within three months of dropping cards in Fresno, BoA started mailing cards to neighboring cities like San Francisco and Sacramento. And then southern California. And then every single nook and cranny in California. Eventually, they put 2 million cards in circulation in California and had 20,000 merchants signed up to use it. But you didn't think they dropped thousands of credit cards on a large American city and came out unscathed did you?

Delinquency and fraud went nuts. BoA expected delinquency to be 4% — it was 22%. Tons of people were going into collections. Criminals found out how to cheat the system by deciphering the symbols on stolen cards. Prostitutes in Los Angeles would easily steal cards from “customers“ and make purchases under the transaction approval limit. People were breaking into warehouses and stealing the Bank Americards that weren't embossed yet and then sell them back to the banks, and the banks often bought them back because they feared the thieves could emboss them themselves and use them. 15 months after the launch, BoA lost about $20 million.

A Market to Themselves

BoA was the first to try this credit card experiment on a massive scale — and for a moment, they were the only ones. BoA had the credit card market to themselves from 1958 to 1966 because no other banks wanted to step in and possibly take those kinds of losses. But BoA saw their profits creep up from $179,000 in 1961 to $12.7 million in 1968. Once other banks saw these profits, they decided to jump in. Eventually, rewards programs and other incentives were introduced by banks to differentiate themselves and entice consumers to choose a particular card and differentiate different credit card offerings from banks, but the Bank Americard was first piece of plastic that ultimately changed the way we spend.

No other country in the Western hemisphere relies on consumer credit like America. Between 1958 and 1990, there was never a year when the amount of outstanding consumer debt wasn't higher than it was the year before. In a way, consumer credit has built this country. From the ability to buy cars and appliances to paying for travel and big events like weddings, credit has allowed us to make ends meet for major life experiences. But it could also fuel a constant desire to spend and get the sweet taste of instant gratification. And when you look at recent consumer debt stats, it’s been more of the latter.

Jay T.