What Credit Card Company Transformed the Industry?

Credit cards have undergone an evolution, from early forms of credit like charge coins and metal plates used by individual retailers, to the widespread plastic cards today. While various charge cards existed in the mid-20th century, typically requiring payment in full each month, a transformative shift occurred with the introduction of a general-purpose credit card allowing for revolving credit. Bank of America, through its innovative BankAmericard, played a key role in reshaping the financial industry and laying the groundwork for the modern credit card system.

Bank of America’s Early Credit Card Efforts

Bank of America recognized the inconvenience for consumers managing multiple individual credit accounts. The bank sought to create a single, general-purpose credit card to simplify lending and offer an accessible personal loan. This led to the launch of BankAmericard on September 18, 1958, with Fresno, California, chosen as the initial test market. Fresno was selected due to Bank of America’s significant market share and relative isolation.

The bank initiated a strategy known as the “Fresno Drop,” mailing 60,000 unsolicited BankAmericard credit cards to residents with pre-approved credit limits, typically ranging from $300 to $500. Over 300 Fresno merchants were recruited to accept the card prior to its launch, agreeing to a merchant fee, often around 6% of the transaction value. Despite the innovative approach, the program faced challenges in its early stages, including substantial financial losses, with an estimated $8.8 million to $20 million lost within 15 months. Delinquency rates soared to over 20%, and the unsolicited mailing led to rampant fraud.

The BankAmericard’s Transformative Model

The BankAmericard introduced a key innovation: the concept of revolving credit. Unlike earlier charge cards that demanded full payment of the balance each month, BankAmericard allowed cardholders to carry a balance forward, making minimum payments and incurring interest on the outstanding amount. This flexibility increased consumer purchasing power and convenience.

Another key element was the development of an open-loop system. This system enabled transactions between different banks and merchants, creating a broad network where a card from one bank could be used at any participating merchant. This contrasted with proprietary, closed-loop systems where cards were only accepted by specific retailers or a limited network. The open-loop model facilitated the widespread adoption of the card.

Bank of America pioneered a licensing strategy for the BankAmericard system starting in 1966. This allowed other financial institutions across the country and internationally to issue BankAmericard-branded cards. Licensee banks paid an entry fee, which could be around $25,000, and a royalty on cardholder spending, 0.5%. This approach circumvented restrictions on interstate banking and rapidly expanded the card’s reach, creating a standardized framework for credit card operations that could be replicated by other banks. The licensing model transformed the BankAmericard from a single bank’s product into a national, and eventually international, payment system.

Industry Response and Expansion

The early success of BankAmericard, which became profitable within three years despite initial losses, prompted a response from the broader banking industry. Many banks recognized the potential of the general-purpose credit card and entered the market. Rather than developing individual proprietary systems, many chose to collaborate, leading to the formation of competing consortia.

A key development was the creation of the Interbank Card Association (ICA) in 1966. This cooperative was formed by a group of banks, including some in California. Unlike BankAmericard’s initial single-bank dominance, ICA was structured as a cooperative, governed by consensus among its member banks. The ICA later rebranded its card as Master Charge in 1969, eventually becoming MasterCard in 1979.

The emergence of these competing networks spurred the widespread acceptance of credit cards by both merchants and consumers across the nation. The period between 1966 and 1968 saw a rapid increase in credit card offerings, with approximately 440 new cards introduced by banks nationwide. This expansion solidified the credit card’s position as a common payment method, establishing the dual-network structure that defines the industry today.

Evolution into Visa and Lasting Impact

In 1970, Bank of America relinquished direct control of the BankAmericard program. The various banks that had licensed the BankAmericard system took over its management, forming an independent entity named National BankAmericard Inc. (NBI). This transformed the program from a franchising system into a jointly controlled consortium, similar to Master Charge. Dee Hock, a manager at National Bank of Commerce who recognized the need for a more organized system, played a significant role in this restructuring and became NBI’s first president and CEO.

NBI was rebranded as Visa in 1976. The name “Visa” was chosen for its universal recognition across languages, signifying global acceptance and moving away from the Bank of America association. Simultaneously, international operations consolidated under Visa International, establishing a unified global brand.

The transformation of BankAmericard into Visa, alongside the parallel development of MasterCard, impacted modern commerce and consumer finance. These networks enabled convenience for consumers, increasing purchasing power and facilitating a shift from cash and checks. The standardized systems and global reach established by these pioneers continue to underpin electronic payment transactions worldwide, making credit cards integral to the global payments landscape.