As Christmas approached in 1966, Chicago's banks gave criminals the best gift of all: free credit cards.
They didn't do this intentionally, of course, but that holiday season the city's banks put thousands of credit cards into criminal hands, with disastrous consequences. Although embarrassing and costly, the Chicago credit card fiasco did have an upside: it led to consumer protections that are still with Americans today.
Bank of America began the first large-scale bank credit card programme in California in 1958. Its initial losses convinced other large banks to steer clear of the market, but by 1965 it was apparent that Bank of America's programme had become profitable, and other banks soon began investing in similar systems.
In Chicago, the city's major banks joined with the smaller Pullman Bank & Trust to form the Midwest Bank Card Association, an interchange network similar to today's MasterCard and Visa, which made each bank's cards acceptable by all merchants participating in the system.
At the time, Illinois did not allow banks to have subsidiary branches. And Chicago's big banks, located downtown, were eager to target customers living in the affluent suburbs. Bank credit cards were still an unproven product, and these banks knew it would be difficult to convince suburbanites to drive into the city to apply for cards in person. So they planned to mail unsolicited cards instead - hoping, simply, that once consumers had the cards they would use them.
The banks agreed to delay their mailing campaigns until 1967, so they could put appropriate security measures in place. But the calm lasted only as long as the doors were closed.
When they opened, chaos broke loose. And they opened early. As the smallest member of the association, Pullman Bank & Trust feared the market power its partner institutions could bring to bear. To get a jump on them, it launched its unsolicited mailing campaign in November 1966.
Caught unprepared, but unwilling to cede the valuable suburbs, the remaining banks rushed in, too, eventually flooding the holiday mail with millions of unsolicited credit cards.
Although the banks would later claim they had carefully screened their mailing lists, the evidence suggested otherwise.
One woman received cards from two separate banks, which was unfortunate, since she had been dead five months. Babies and small children also received cards in the mail.
These errors were embarrassing, but the biggest problem was fraud. By starting their programmes in November, the Chicago banks dropped millions of cards into a postal system already oversaturated with holiday mail and staffed by sometimes sticky-fingered temporary employees. Further, the banks announced what they were doing publicly, lighting a beacon for Chicago's well-organised underworld.
As credit cards mingled with Christmas cards, criminals scooped up thousands of them at the post office and from mail boxes. Unlike cards today, these cards were typically live and ready to use, often requiring nothing but a signature - a forged signature would do - to facilitate fraudulent Christmas shopping.
Some merchants cooperated with criminals, billing the banks for merchandise on the stolen cards and splitting the proceeds with the thieves. Thirty business owners were eventually indicted, and many others were charged with stealing cards from the mail.
Estimates of the losses from the debacle range from US$6 million ($43m or Dh158m at today's rates) to $12m. For the banking industry, the incident was sobering. Still, it didn't stop banks from mailing unsolicited credit cards, it only convinced them to do so more carefully.
The Chicago debacle drew significant attention from legislators, and prompted Congress's first substantial attempt to regulate the emerging bank credit card industry. The effort took four years and led to a variety of reforms, including a ban on unsolicited credit card mailing and a cap of $50 of consumer liability for a lost or stolen card.
American consumers are still shielded by this limited-liability provision - a gift to be thankful for this holiday season if victimised by a pickpocket or identity thief.
* Bloomberg News
