History of payments (1/5) | The past (part I)
"In this new blog series, we dive into the history of payments. From the first form of payments, to today’s next generation point of sales."
The introduction of officially minted coins, believed to date back to 600 BC, established the precedent of using tokens to purchase goods and services. Since then, cash has largely dominated the world of commerce. But over the past 70 years we have experienced an unstoppable market toward non-cash payments that make it easier and more convenient for merchants and consumers to engage in mutually beneficent transactions.
"Study the past if you would define the future"
1950 – 1980 Where cashless payment started: modern credit/debit cards
The multi-purpose payment card dates back to 1950, when the Diners Club card (printed on cardboard) was introduced. In 1958, American Express leveraged its Travelers Cheque heritage to introduce a plastic credit card for travel and entertainment purchases. That same year, Bank of America introduced its BankAmericard for state-wide use in California.
In 1966, Bank of America began licensing its card to other banks across the U.S. That same year, a group of reginal banks established the member-governed Interbank Card Association in a rival effort aimed at fostering national acceptance of separately issued Master Charge bank cards. Ultimately, BankAmericard transformed into the VISA payment network and Interbank into the MasterCard International network. In Europe, banks in various countries allied around the Eurocard payment network, while Barclays led the UK effort with its own branded card.
These developments marked the introduction of the 4-party, or open, payment card model in which the card issuing bank can be separate from the merchant payment acquiring bank–interacting with each other and merchants and consumers through a central facility that ensured the transfer of funds between merchant and consumer. American Express, and later Discover Card, continued to function as both card issuer and payment acquirer and maintaining their own 3-party, or closed, card payment.
Also around 1966, the Bank of Delaware introduced the debit card, which allowed for payment to be transferred from a consumer’s checking account, hence the early use of the term “check card.”
1980 – 2000: End of the ‘Knuckle-buster’
Despite the emergence of multiple non-cash payment cards, usage remained spotty until well into the 1980s. To accept a payment, merchants generally had to create a paper imprint of a consumer’s card by running it through a manual processing device commonly known as a knuckle-buster. Merchants often had to telephone call centers for approval of transactions or review printed account directories that listed inactive or fraudulent card numbers to ensure the card would not be rejected.
The introduction of plastic cards with magnetic stripes that could be encoded with digital data enabled banks to provide consumer access to automated teller machines and ultimately equip merchants with electronic transaction processing hardware that could transmit data over telephone lines to central mainframe computer systems.
VISA introduced the first electronic payment terminal in 1979 and, subsequently, independent hardware vendors developed more compact systems and the mass production capabilities to ensure ready availability at the point of sale (POS) around the world.
Initially, major banks operated their own processing hubs that would communicate with the VISA or MasterCard networks, and direct sales teams to sell card swipe devices and acquiring services to merchants. As competition for payment volume drove down processing margins, many banks sold off or spun out their processing units, while outsourcing the marketing and sales of card processing devices and services to independent sales organizations (ISOs).
ISOs dramatically increased the ability of acquirers to sign up larger numbers of small to medium-sized businesses, including merchants and other points of sale, such as dentists, spas, and auto repair shops, among others.
To be continued…. Stay tuned for Part II of the “Past of Payments”.