Biggest Loser Turns Biggest Winner. The Little Known History of the Credit Card.

Between 1979 and 1981, Citibank lost over $500 million on its credit card operations. By 1990, this had changed and credit cards were suddenly profit leaders at the bank. What happened?

Easy answer: Citibank (and many other banks) realized that they were pitching credit cards to the wrong market segment. Since nearly the inception of credit cards, banks had been offering credit cards almost exclusively to the financially well-off; but after years of lackluster profit performance with credit card operations, the banks finally realized that the truly big gains were to be made by offering credit cards to lower income and middle income market segments. They began to market to the elderly, the student and to most anyone of modest or lower income, specifically targeting low-wage clerks, young professionals, clerical support staff, struggling teachers and many laborers. The banks saw it as a matter of survival—theirs, not yours!

Banking was at a troubled crossroads in the late 1970s. Bank industry profits were flat or in decline as traditional business and mortgage lending suffered losses associated with the troubled economic times. Compounding the profitability problems, the usually more glamorous and profitable areas of banking business such as third world lending and commercial realty lending were also then of hit-or-miss profitability. The banking industry needed a new profit source. Credit cards issued to middle/lower income borrowers were then introduced to fill the profit void.

The best explanation of this shift in credit card marketing focus to the less well off might be found with Robert D. Manning’s year 2000 book, “Credit Card Nation”, published by Basic Books. ISBN 0-465-04366-6. The following quotes from the book appear in chapter 1, pages 9, 12-13 and 20: “During the 1980s, the credit card industry’s marketing campaigns successfully expanded into middle-class markets, including blue and white-collar workers who suffered unexpected employment disruptions due to corporate downsizing and recession-related layoffs. This profitable linkage with lower-income households early in the decade emboldened banks to target other nontraditional niche markets such as unemployed college students and retired senior citizens in the mid-1980s, then the working poor and the recently bankruptcy with secured credit cards in the late 1980s and early 1990s. The results were impressive. The profusion of credit cards generated rapidly escalating consumer finance charges, merchant discount fees, and, of course, profits. Between 1980 and 1990, the charges of the average U.S. household jumped sharply from $885 to $3,753 per year, or more than twice as fast as disposable income, while average cardholder debt soared from $395 to $2,350. Credit card issuers earned between three and five times the ordinary rate of return in banking in the period 1983-1988.”

“By the end of 1994, the typical American card holder had amassed nearly $4,000 in revolving debt on a total of three of four bank credit cards with an annual interest rate of about 17 percent.”

Credit card marketing budgets concurrently exploded, too. Marketing expenditures by Visa, MasterCard and American Express had climbed to $75 million by 1985. The big three then more than doubled marketing expenditures by 1994, with a 1993-1994 2-year total combined expenditure of $385 million, (plus another $40 million spent by Discover) over the two-year period 1993-1994. Then combined credit card industry marketing budgets doubled again within a mere four-year period, climbing to $870 million total expenditure for 1998.

So, in a mere 14 years ending in 1994, the average household credit card revolving indebtedness had increased by about 1,000 percent (a 10 fold increase!) from $395 to nearly $4,000, and credit card industry marketing budgets had increased by something approaching 400% (a 4 fold increase).

So, does credit card marketing contribute to bankruptcies and indebtedness? Quite possibly.

1998 saw 1,441,891 bankruptcy filings. 1980 filings stood at about 300,000.

So putting it all together, average household revolving debt increased by 10 fold (about 1000 percent) 1980 through 1998 to a high of $4,000 as 1980s and early 1990s marketing expenditure of credit card products (much of which was to lower and middle income households) concurrently increased by a nearly similar 1000 percent (10 fold) 1985 to 1998 to $870 million. Following suit, bankruptcy filings in roughly the same period 1980—1998 increased nearly 5 fold (a little less than 500 percent) from 300,000 to about 1.4 million.

The banks found a way to turn the biggest loser in their stable of operations into the biggest winner of profits. The banking industry turned a broken-down, sway backed and under appreciated old nag of a pony into a Kentucky Derby jackpot winning thoroughbred—in part by feeding it what grew into an $870 million annual diet of marketing. Profits jumped and a whole new industry was created: the modern credit card. This led to an amazing turn around for the banks, mostly at the courtesy and expense of middle and lower-income America.

If you are struggling under a mountain of debt and do not see much hope of completely escaping from the debt within the next 24 months, then you should strongly consider consulting with us regarding a bankruptcy filing. Your initial one-half hour consultation is completely free!

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