By John Steele GordonThe Franklin National Bank, founded in 1926 on New York’s Long Island, had a well-earned reputation for banking innovation. It had introduced junior savings accounts in 1947 and drive-up teller windows in 1950. It later introduced the ATM and certificates of deposit. (In 1974, this innovation came to an end when Franklin National Bank collapsed in one of the most spectacular cases of bank fraud in American history. That, however, is another story.)
But while drive-up windows and CDs were both great ideas, they didn’t change the world. In 1951, however, William Boyle, a Franklin employee, had an idea that did. The credit card revolutionized the world of retail commerce and beyond.
Large department stores had long offered their preferred customers charge accounts, but these needed to be paid in full every month. And small retailers could not afford the clerical staff needed to handle charge accounts. Moreover, they had little expertise in determining creditworthiness and thus risked default.
The ordinary family, with few financial assets, had always had very limited access to credit. But in the years after World War II that began to change. The G.I. Bill guaranteed mortgages for veterans. Men like William Levitt were meeting the new demand for houses by producing them on an industrial scale, turning renters into homeowners. Franklin was headquartered in Hempstead, New York, not far from the first Levittown, in the heart of the burgeoning suburbs surrounding New York City.
Boyle thought of a way to increase the bank’s business that would, at the same time, help out both local merchants and their customers. The Franklin Charge Card, as it was originally called, would relieve merchants of the expense and risks of maintaining their own charge accounts and allow customers to charge at many different places.
At the same time, by providing the card holders with a line of credit, it allowed them to make only partial payments each month. The bank, in turn, would charge the merchants a small fee for each transaction and charge the customers interest on the unpaid balances.
At first, the new credit card was used only as a means of handling the credit and collection needs of local fuel oil companies. But by the next year 750 local merchants and 28,000 customers, had signed up for the program and charged $2.5 million the first year. In 1952, the National Bank of Kalamazoo, Michigan, licensed the program from Franklin and signed up 30 merchants and 18,000 customers in three weeks. Other local banks also began offering credit cards.
In 1958, Bank of America “dropped” 60,000 of its new BankAmericards on its customers in Fresno, Calif., making local merchants eager to sign up as well. The practice of simply sending, or dropping, unsolicited credit cards was outlawed in 1970, after too many cards ended up in the hands of the uncreditworthy.
Bank of America soon began licensing BankAmericard to other banks, and in 1970, these banks created the independent issuer network that would become Visa. In 1966, a group of banks launched Master Charge, which merged with Citibank’s Everything Card in 1969. It soon became known as MasterCard. Now credit card holders were able to charge at retail stores and restaurants across the whole country and soon the whole globe.
An economy is nothing more than the sum of all transactions that take place in a certain place in a certain time. By greatly facilitating transactions, William Boyle’s credit card helped the global economy to grow, and benefited bankers, merchants and customers alike. It was, in other words, the sort of win-win-win innovation that makes capitalism so dynamic and so wealth-producing.