The American Express story begins with the history of the company that launched what we know as the modern credit card phenomenon—Diners Club.
In 1950, Frank McNamara was entertaining dinner guests at a New York City restaurant. When it came time to pay the bill, Frank reached for his wallet, only to find it without cash. After a discussion with the restaurant manager, it was agreed that he could pay later.
Because of the embarrassment of that moment, Frank thought of a way in which he would never be without money. Thus, the idea of the Diners Club card was born; the card that started it all.
The idea gradually caught on
The idea of a card that could be used to pay expenses at restaurants caught on slowly. All through the early 1950s the question was, “Would consumers use credit cards or not?”
As the Diners Club card slowly continued its steady rise in acceptance, other companies began to take notice. When it became apparent that consumers would use credit cards, the next question was, “How far can the credit card idea go?”
If restaurants and gas stations would accept the card, why not hotels and airlines? If these companies would accept it, then why not their outlets in other countries? The idea of the world-wide travel and entertainment card was born.
The rapid growth of Diners Club
In 1956, the American Express company began to take notice of the rapid growth of Diners Club. American Express decided to do nothing in the credit card field since they already dominated the traveler’s check market. They were basically concerned that a credit card would just take money from its traveler’s check business.
But the continual rapid growth of Diners Club kept the idea of an American Express credit card alive. It was rumored that Ralph Schneider and Alfred Bloomingdale, each owner of one-third of the Diners Club common stock, might be persuaded to swap their stock for shares of American Express.
It was determined that the Diners Club company could be acquired for $4-5 million in stock. But for that amount of money, it was thought American Express could launch its own card.
American Express researched the idea of starting their own card. It determined that the credit card business was quite lucrative. It was a simple business to run that didn’t take much specialized knowledge. But still, nothing was done.
The dominance of Diners Club
Diners Club continued to dominate the credit card market. By 1957, it had over 400,000 cardholders. That was phenomenal growth considering it had 200 cardholders in 1950. Because of Diners Club size and dominance in the market, it was thought that the only way to enter the credit card business was by acquiring Diners Club.
American Express again investigated how much common stock would be required to obtain the company. At this point, it was determined that to acquire 80% of Diners Club would require $20 million in American Express stock. Only 14 months earlier the entire company could have been bought for $4-5 million. American Express decided that it took too much money and again did nothing.
Then Diners Club’s success began to be felt by American Express. Too many people were traveling to foreign countries with their Diners Club cards instead of buying American Express traveler’s checks. Something had to be done…
American Express enters the credit card market
American Express decided to enter the credit card market in which Diners Club was the undisputed leader with an eight-year head start. American Express thought since the Diners Club card was $5, then they would come out with theirs at $6.
There was no reasoning behind this move, other than American Express wanted consumers to believe their card was better. It was decided that the company would come out with the card six months later. The date would be October 1, 1958. Six months would be plenty of start up time since everyone believed the credit card business to be a simple venture.
When the decision to start the credit card operation was made, American Express had no staff, no technical knowledge, and no one with experience in the credit card field. The credit card industry was so young that they couldn’t go out and hire people with experience. So with no idea of what they were getting into, off they went to prepare to start a credit card company in six months.
Leverage through advertisements
The first thing to do was call the company’s advertising agency so they could prepare the marketing to launch the idea. It was decided that American Express should run full-page advertisements to announce their entry into the credit card business. This was done to discourage any companies who might be considering entering the field.
Another idea was to include a small, inconspicuous coupon in the ad. This was done so the company could receive a few responses that would be used for initial analysis.
The ads were run. A few days later the company’s mail room called the men in charge and told them the responses were in. The men went to the floor where the new credit card operation would be set up. They were expecting to find a couple of dozen responses. Instead what they found were a dozen large mail bags stuffed with inquiries about the new card.
Almost overnight expansion of operations
The realization of what was to take place suddenly struck the executives of American Express. It was immediately obvious that to have an international credit card, there had to be locations around the world that would accept the card. Salesmen were ordered on planes flying to various countries around the globe to sign up as many establishments in major cities as possible.
People had to be hired to help run the new operation. American Express started hiring practically anyone who approached them for a job.
When October 1st arrived, the company began operations with 275,000 card-holders on the first day. With the credit card division now officially open, applications poured in.
The new American Express cards were used by consumers with great enthusiasm. While the new accounts department was busily issuing tens of thousands of new cards, the billing department wasn’t concerned in the least. Finally, when the company had been operating for three months, the accounting department realized what was taking place.
Unfortunately, they were already behind with the billing by two months. Then came a tremendous shock for American Express. What had always been an easily-run company was now a mad house with thousands of nasty letters from complaining customers. This was quite a blow to a company that was used to so few complaint letters a year that the president personally read most of them.
The problems the new company had to face were numerous. Many of the customers’ bills were wrong. Some establishments weren’t getting paid the money American Express owed them. Stolen credit cards were another problem.
Addressing the problems
With all the problems, the goal became “better service”. The company was afraid the poor service the credit card division was giving would chase off the travel and traveler’s check customers. While the company worried about chasing off the good customers, they were also having difficulties with the ones who stayed. Many of the customers weren’t paying their bills on time.
Most credit customers were used to dealing with department stores that required payment once or twice a year. These stores marked up their goods accordingly. It was difficult for consumers to understand the importance of paying American Express promptly.
In 1961, the credit card operation had over 800,000 cardholders. American Express had already spent over $13 million on the venture and still saw no sign of breaking even. What they needed was someone who could take the credit card operation into profitability, so they hired George Waters.
Raising the discount rate
Waters had marketing experience from being an executive at a large supermarket chain. He urged American Express to raise the discount rate (the percent American Express charged a business for accepting the card) from 3% to 4%. Also, the card’s annual fee needed to be raised from $6 to $8.
It was a big decision to make since it meant that American Express was supposed to be a better card than Diners Club. At the time it wasn’t. So what had to be done was prove to the customers and businesses that the American Express card was better.
Analyzing customer complaints
Waters began to analyze the customers’ complaints. Every evening when he left work, he would grab a handful of complaint letters to read on the one hour train ride to and from work. The complaints he read were assigned to employees the next day so a solution could be found. This continued every work day until the complaints had slowed to a trickle.
At the same time, Waters was working with businesses explaining why American Express raised the discount rate. It was decided that 0.5% of total credit card sales would be applied to advertising to help establishments.
With money poured into advertising saying “where to go” to use your American Express card, the resistance to the raised discount rate soon ended. This allowed American Express to continually raise its discount rate until it was at the same percent as Diners Club.
The business gained momentum
By 1962, American Express had over 900,000 cardholders. Cardholders were able
to cash personal checks for up to $50 and get $300 worth of traveler’s checks at American Express offices anywhere in the world. The future was beginning to look bright.
Collectible American Express cards
What a shock! One card’s price has skyrocketed even before the Schroder’s and Warman’s pricing guides are printed. The March 1987 issue of KOVELS ON ANTIQUES AND COLLECTIBLES reports the first American Express card at $125 in good condition.
There is only one way I know to guard against counterfeits (although this isn’t foolproof). Only purchase expensive pieces that are in a collection. In other words, if I were offered an early American Express card I would insist on buying or at least seeing the other pieces in the collection.
It’s highly likely that if someone saved an early American Express card then other cards were saved with it. If the card is a lone specimen, then I would consider leaving it severely alone or I’d offer a low amount.
Copyright 1987 by Greg Tunks