by Kaz Nejatian
This meant that before launching any system the banks would need to change California law. After much lobbying and after making it clear that customers would not be charged any fees for receiving payments under the system envisioned by SCOPE, California banks convinced the California legislature to change California law to make it clear that payments made electronically under the system envisioned by SCOPE were an acceptable method of payment of wages in California so long as the employees receiving the payment voluntarily opted into such a system.
Thus, after four long years of work, in the late afternoon of October 13, 1972, the world’s first paperless transaction was completed when magnetic tapes containing information from a few banks arrived in the San Francisco federal reserve building.
By January 1973, less than three months after the first automated clearance between the banks, nearly every dollar deposited in California was held by a bank that was a member of CACH.
CACH was very clear, and narrow, in its mandate. It was designed to “replace checks as a mechanism for the making of mortgage, insurance, utility and other regularly recurring payments by consumers, as well as for the making of wage, dividend and other recurring payments to consumers.”
The system, in other words, was not designed to handle one-time transactions. It also was not designed to handle transactions that occurred on different dates.
The original CACH process required that a depositor, i.e. the person sending money, sign a document laying out the exact amount of a recurring transaction and the date on which it was to be made. If a customer wanted to send $8 a month to the utility company and $200 a month to pay his or her mortgage, the customer had to provide two different documents. Each document would instruct the bank to make these recurring payments and it would be valid until the consumer went into a branch to revoke the instructions.
Perhaps because of these limitations, CACH volume grew slowly. By early 1973, CACH proponents were predicting that by 1976 CACH or a system like it would replace 35% of all payroll checks and almost 10% of all checks in the United States with a paperless system.
In fact, as it turned out, in 1976 only 100 million ACH transactions were processed in the United Sates. That same year, US banks processed over 25 billion checks.
Even this lower than expected volume, however, was very attractive to banks all over the United States. In conjunction with CACH, multiple other regional clearing houses were founded across the United Sates.
NACHA
In 1974, the National Automated Clearinghouse Association (NACHA) was formed as a non-profit association to merge CACH, the Georgia Automated Clearing House Association, the Upper Midwest Automated Clearing House Association, and the New England Automated Clearing House.
By 1978, virtually every bank in the United Sates was a member of NACHA and thus able to exchange funds and clear transactions without the use of paper throughout the country.
While NACHA became the rule-making body for ACH payments in 1978, it never took over the responsibility of clearing actual payments. Banks must also employ a so-called ACH operator to receive and transmit ACH files. As of 2017, only two such operators exist: the Federal Reserve and the Clearing House.
To this day, ACH is perhaps the least understood method of payment in the United Sates. While the initial uptake for ACH transactions was not as high CACH would have liked, ACH transactions have ballooned since the 1990s.
In many ways, ACH has become the underlying system beneath all non-cash payments. In 2017, a consumer may pay for a transaction at the point of sale with a credit card, but that transaction is settled between the various banks and retailers using ACH. The consumer almost certainly pays his or her bill at the end of the month using ACH. The credit card processor almost certainly pays the retailer using ACH.
Starting in 2001, even many check transactions are converted to ACH transactions before being processed. In 2017, virtually all non-cash transactions in the United States that involve more than one bank end up being ACH transactions somewhere along the way.
In 2015, for example, there were 2.56 trillion dollars’ worth of debit transactions, 3.16 worth of credit transactions, and 26.83 trillion dollars’ worth of check transactions. That same year, the United States had 54.76 trillion dollars’ worth of ACH debit transactions and 90.54 trillion of ACH credit transactions.
If the world of payments were an apple pie, the credit card and debit card transactions would be the slice of the pie that the dog gets to eat after you accidentally dropped it on the floor. ACH would be the slice that your slightly inebriated uncle would want to grab if you let him. When it comes to value (not number) of transactions, ACH is basically the main game in town.
Full disclosure: My company, Kash, has developed a proprietary system of payments called Direct Debit which uses ACH as the underlying method of payments.
Direct Debit’s goals are simple. Direct Debit allows merchants to accept payments from retailers without having to pay expensive credit card and debit card fees and without having to worry about credit card and debit card fraud. For more, please visit www.kashpayments.com
4 Cards
Like bills and checks, the history of credit cards starts in Massachusetts.
It is difficult to tell when the first payment cards came into use - the answer depends on what one means by a payment card.
What is not difficult, however, is to tell who first invented the idea of the credit card. That honor belongs not to a banker, but to a science fiction writer named Edward Bellamy.
Published in 1888, Looking Backward: 2000–1887 was one of the first commercially successful science fiction books written in English. It was the third-largest bestseller of its time, coming right after Ben-Hur in the bestseller tables.
The book is the Marxist version of Atlas Shrugged. After its publications, it almost immediately created a political movement. In the United States, over 150 so-called “Bellamy Clubs” were formed to promote the book’s propaganda against the capitalist state. These clubs, like the book, promoted nationalization of private property and attempted to influence the politics of the late 19th century United States. Interestingly, the year Looking Backward was published in the same year that the Greenback Party (mentioned in Chapter 1) was dissolved.
Looking Backward: 2000–1887 is the story of a young Bostonian who finds himself having travelled through time from 1887 to 2000. Having left the cruelty of capitalistic society in the late 1800s, Julian West finds himself awake in a socialist utopia in the year 2000.
In the year 2000, one of the first things that Julian West does is get himself a “credit card” – from best we can tell, this was the first time this phrase was used in the English language. The credit card envisioned by Bellamy in 1887 feels shockingly real.
“… a credit card issued him with which he procures at the public storehouses, found in every community, whatever he desires whenever he desires it. This arrangement, you will see, totally obviates the necessity for business transactions of any sort between individuals and consumers.”
Bellamy even envisioned that to make a credit card work in the year 2000, the retailer would need to keep a copy of the receipt.
“The duplicate of the order,” said Edith as she turned away from the counter, after the clerk had punched the value of her purchase out of the credit card she gave him, “is given to the purchaser, so that any mistakes in filling it can be easily traced and rectified.”
One thing Bellamy did get wrong, however, was who would pay the bills in 2000. The monthly bills on Bellamy’s credit card were not paid by the time-travelling Julian West, but by the US government whose full force and power, the book, were used to pay for its citizens’ needs and wants.
While Bellamy did get that fact wrong, it is possible that his novel did actually lead to the creation of the credit card.
Sometime between 1888 and 1890, James Congdell Fargo took a trip from his hometown of Buffalo, New York to Europe. J.C. Fargo (as he was known) was a we
ll-read man. It is possible he had read, perhaps on the long boat trip across the Atlantic, Bellamy’s book.
Once in Europe, Fargo found it very difficult to obtain cash. As was typical for travelers in those days, Fargo had carried with him letters of credit. He was a rich and a well-known man. He had founded American Express (then a parcel delivery company) and Wells Fargo (then a regional carrier in California). His letters of credit, however, were of no use to him in most European cities. Outside the biggest cities, merchants and banks simply looked at the letters of credit with confusion and refused to give Fargo the money he needed to enjoy his vacation.
Upon his return from Europe, an irate Fargo ordered American Express executives to solve this problem. To solve it, American Express in 1891 introduced the American Express Traveler’s Check. With a traveler’s check, all Fargo would have to do is to show up at the local post office, all of which had dealings with American Express and trusted its credit, to obtain the cash he needed.
Since the Traveler’s Check was the world’s first real charge card, it is broadly accepted that without it payment cards as we know them would not exist. The impact of Traveler’s Checks, however, is not just in getting the ball rolling on the entire payment card industry. In 1957, nearly a century after the Traveler’s Checks were introduced, the team in charge of Traveler’s Check created the first broadly accepted charge card in the world.
Though Diner Club had launched in 1950 (more on this below), it was America Express’s entry into this market in 1957 that spurred the creation of two major products that would go on to become MasterCard and Visa. It was also this American Express team that formed First Data – now the world’s largest payment processor.
Early Retail Cards
It is difficult to place a precise date on the invention of retail credit in the United States. It is possible, however, that retail credit predates the US Civil War for a few reasons.
A book written in 1915 by Ben Blanton entitled Credit, Its Principles and Practice, A Practical Work for Credit Men suggested that by 1915, the practice of retail credit was at least a few decades old. In fact, the first chapter of the book is dedicated to convincing the reader that the “old methods” were no longer working in 1915 and that it was time to adopt the modern “scientific basis”.
A pamphlet distributed in 1917 by the National Association of Credit Men shows the group’s seal indicating that the group was founded in 1896 with simply one word as its motto: vigilance.
It is almost certainly the case that the National Association of Credit Men was founded at least some years after its New York counterpart the Associated Retail Credit Men of New York City; however, the date for the formation of the New York group is difficult to determine.
Regardless, it is safe that assume by the late 1800s there were so many men, as they were mostly men, employed by retailers to work in their credit departments that there was a need for a national lobbying group to represent these men.
Going back even further, we know that starting in 1807 Cowperwaite and Sons, a furniture retailer in New York City, was selling its furniture to local buyers on installment.
By the mid-1800s, Singer Sewing Machine Company was selling tens of thousands of sewing machines to American families on credit. By 1876, Singer had sold 2 million sewing machines in America, nearly all on credit.
While it is difficult to pinpoint the exact date on which the first retail credit purchase was made, it is easy to tell that by the early 1900s Americans loved retail credit. During the first half of 1930, for example, approximately only 45% of all department store purchases in the United States were made by cash or check. The remaining 55% of the purchases were made on credit.
Of course, in the 1800s the customer credit accounts were not accompanied by payment cards. They were simply charges kept on a book with the customer’s name next to them.
Cards came into vogue in 1914 when large retailers gave credit cards to their customers. These were simple paper cards that would help cashiers recognize the customers so that the customer would not need to make the trip to the credit counter where the credit book was kept.
While retailers could afford to have such cards outstanding with no expiry dates, oil companies could not. A retailer would know his or her regular clients much better and could simply tell whether the person presenting Joe Smith’s card was actually Joe Smith. A gas station attendant, however, saw many times more clients each day. Therefore, the paper cards that were issued by oil companies did have a expiry date. Every three or six months, a customer would have to speak with the gas station manager to get a new card.
These oil cards were incredibly popular. By the mid-1930s, for example, the State of Indiana had nearly 3.5 million residents living in approximately one million households. During that time, nearly 40% of American households owned an automobile. That means that in mid-1930s nearly 400,000 households in Indiana owned an automobile. During this same period, Standard Oil of Indiana distributed nearly 250,000 payment cards in the state – meaning 6 out of 10 people in Indiana that could possibly have an oil payment card had one from Standard Oil.
Obviously, Standard Oil’s competitors also issued cards. It is, therefore, safe to assume that during this period nearly every single American with an automobile had a credit card that would allow them to buy oil and services from the gas station during the course of a month, receive one bill, and to pay that bill without any interest at the end of the month.
Unlike retailers, oil companies did not need to worry about customer’s having bad credit as frequently. In early 1900s, merely having an automobile was a sign of wealth and good credit. Since everyone who drove to a gas station to buy gasoline owned an automobile, the oil companies simply issued a card to every single customer without having to worry about payments.
By 1930, however, even oil card programs had become subject to fraud. A article titled “Oil Men Jumpy over Credit Cards” in a November 1929 issue of BusinessWeek told a story of a man who began earning a living by carrying passengers between New York and California for less than bus fare. He spent more than $500 (nearly $10,000 in 2017 dollars) on his oil card before the oil company caught on to his fraud. By then, however, he had been jailed for a separate crime and the oil company was not able to recover its loss.
The next major change in payment cards happened in Boston, of course.
In 1928, Farrington Manufacturing Company of Boston began distributing charge-plates. These charge-plates, unlike the earlier paper cards, were very difficult to fraudulently duplicate. They looked like military ID badges embossed on a metal plate.
More importantly, these charge plates removed the need for a credit office in stores. At the point of sale, a cashier could simply take the customer’s charge-plate, insert into a machine called an imprinter, and stamp the charge-plate’s information (such as the account number and the customer’s name) onto the sales slip. This sales slip could then at the end of the day be batched with all the other sales slips and sent to a central credit office as opposed to having to be run to the store’s own credit office during every purchase to seek approval of the sale.
By the mid-1930s, many retailers having such charge-plate programs had banded together so that each retailer would accept any charge-plate from any other retailer in the same group. The largest of such groups was the Retail Service Bureau of Seattle which by 1936 had signed up more than a thousand retailers to its joint charge-plate program.
By 1947, virtually all the major department stores in New York had joined together in a similar program. A customer with a charge-plate from Saks could spend money at Arnold Constable, Bloomingdale’s, Gimbel’s, and Franklin Simon.
While these cooperative charge-plate programs were useful, they were not universal. One could not simply walk into a corner store and buy something using a Saks charge-plate.
Charg-It
The world’s first universal card program was launched without much fanfare in Flatbush in 1947. Flatbush was a
prominently working class neighborhood in the borough of Brooklyn in New York City. Its residents were mostly Irish-Americans, Italian-Americans and Jewish-Americans. They were not the rich businessmen of Manhattan. They didn’t cheer for Joe DiMaggio and the Yankees. They cheered for Duke Snider, the “Duke of Flatbush”, who was the Brooklyn Dodger’s centerfielder. They didn’t have summer homes like the rich families of Manhattan and they didn’t frequently find themselves outside Brooklyn.
It was in this neighborhood that John Biggins launched Charg-It. Charg-It was a credit card with every major feature of today’s credit cards. It was not a retail card. It was a card backed by the full faith and credit of Flatbush National Bank of Brooklyn. It was accepted nearly everywhere in Flatbush and it was used by nearly everyone who banked at Flatbush National Bank, which in 1947 was the primary bank for everyone in Flatbush.