April 19, 2011
by Brenna L. Roth
How much cash is in your wallet? In today’s economy, the answer is practically irrelevant. You probably pay for your purchases with PayPal, bank transfer, debit card, gift card, or one of a plethora of credit cards (that offer perks like free gas, airline credits, and the like). This wasn’t the case a generation ago, when the options consisted of cash, personal check, Visa, MasterCard, and American Express. Back then, purchasing power was roughly equivalent to cash on hand, while today you probably purchase using a myriad of payment methods.
This article is the second in a two-part series (Part I is here) that seeks to understand the many ways we pay for goods and services in our contemporary economy, most of which do not involve cash transactions. Our economy is in flux, defined and redefined by rapidly developing technologies and innovative strategies to transfer funds from your office or living room to places, either around the corner or halfway around the world, where you spend your money. The first article covered rapid advances toward a cashless economy in Japan, where RFID, smartcard, and cellphone technologies converged to transform the economic activity of many Japanese citizens.
This article, however, will outline the history of cashless payment in the United States. No doubt, the Internet has been a primary catalyst for the development of new financial products and services—such as PayPal and online banking—in recent years. But a closer inspection reveals that cashless payment predates the Internet by several decades, encompassing old standards such as the personal check. In fact, the progenitor of modern cashless payment is something that, unlike cash, you probably do have in your wallet: the credit card.
The first true credit card—a card both accepted by multiple retailers and tied to a revolving charge account—was the BankAmericard, issued by Bank of America in 1958. Previous financial products had offered one of these services. Diners Club and American Express had offered charge cards that were widely accepted, but the balance on these cards was payable at the end of every month. Many banks offered revolving charge accounts, in the form of lines of credit, to established customers. What set BankAmericard apart was the union of these two functions within one financial product.
The merger of revolving credit and mass acceptance revolutionized the way Americans of the 1960s paid for goods and services. For the first time, citizens could purchase consumer goods from multiple sources, total the sum of their purchases, and pay off the balance incrementally. To borrow a phrase that would be coined much later, it was the first time they could buy now and pay later. This new product was especially attractive to the growing number of travelers, enabled by the rise in automobile ownership; the credit card allowed them to forego the inconvenience of carrying large amounts of cash on the road.
Around the same time, Bank of America turned to automation in order to streamline the company’s bookkeeping. To that end, they commissioned the Stanford Research Institute to develop Electronic Recording Machine Accounting (ERMA), a breakthrough in the early development of computers. Several simultaneous developments made this technology feasible, including assigning a number to each bank account and preprinting that number on personal checks that could be processed by a magnetic reader. Today these features are taken for granted, but they were quite novel in the 1950s.
Bank of America introduced the BankAmericard and ERMA within months of each other, securing its position at the forefront of financial providers in the United States. In 1975, the BankAmericard would be rebranded as Visa; over the next decades, Visa, MasterCard (established in 1969 as Master Charge), Discover (established by Sears in 1985), and American Express (which began offering revolving credit in 1987) would emerge as the nation’s primary credit card providers.
The next major development in cashless payment was the debit card, which discarded the end-of-month billing of the credit card in favor of automatically deducting the cost of each purchase from the user’s checking account. Although first offered in 1978 by First National Bank in Seattle, the debit card would not become feasible for consumers nationwide until 1984, when Landmark created the first national debit-processing system built upon infrastructure already in place to service ATMs and process credit card transactions. Over time, the popularity of the debit card eclipsed the personal check and even the credit card, and banks began to issue one card to their customers for both ATM and debit transactions. Furthermore, the automatic deduction feature would change the way Americans bought as they entered the Internet age.
Thirty years after the credit card revolutionized payment, the landscape would seismically shift yet again. This time, the Internet boom was the catalyst that sparked new strategies to pay for goods and services online. Today, consumers can purchase virtually anything over the Internet; many companies have taken the plunge into ecommerce, selling direct to consumers online and cutting out the retailers. However, there was an unlikely driver behind the development of the infrastructure necessary to carry out these transactions: Internet pornography.
The year was 1997, and the dot-com bubble was growing. Some of the biggest names in ecommerce—Amazon.com, eBay, and Expedia, for example—were already operating in the digital marketplace. However, at that point ecommerce was markedly different from what it is today. Lacking an automated, real-time method of processing payments, retailers delayed shipments until they received proof of payment by personal check, debit, or credit card.
At that time, PayCom, an Internet billing company with many adult entertainment clients and headed by Christopher Mallick, developed software that allowed customers to input their Visa or MasterCard information directly into a form on the website, thus enabling payments to be processed automatically and in real time. This technology transformed ecommerce; overnight, the potential for Internet marketing was eclipsed by the potential for direct Internet sales. As subscribers started paying for adult website subscriptions online in droves, businesses in other sectors took notice. Before long, PayCom’s payment processing technology had become the industry standard for online sales.
While originally online billing operated along the same conceptual—if not technological—parameters as the credit card, another industry leader in ecommerce soon developed that was conceptually analogous to debit: PayPal. PayPal was formed by the merger of two companies, Confinity and X.com, which both started up in 1999 and joined together a year later. After experimenting with its own payment processing software, known as Billpoint, eBay purchased PayPal in 2002, installing it as the preferred payment method for online auctions on the site.
Broadly, PayPal operates as a kind of “online wallet.” As with the osaifu keitai—or mobile (cellphone) wallet—in Japan, users upload funds from their bank account, debit card, or credit card and transfer to retailers or other users as they see fit. Since this is a PayPal Developers’ blog, I see no need to explain the intricacies of this system any further in this space.
In summation, we live in exciting economic times. Companies and entrepreneurs are constantly developing innovative strategies and technologies to navigate the commercial possibilities of the Internet. Ecommerce is always evolving. Just think: 10 short years ago, the most prominent tools used by online retailers—online billing and PayPal—were still in their developing stages. Fifteen years ago, they did not exist. What advantages and innovations could the next crop of payment products hold? We’ll find out soon; new products like Google in-app billing and Apple iPhone–based payment methods are just over the horizon.
Each new generation of products has the potential to make a cashless future less pipe dream and more reality. In Japan, the predominance of keitai—or cellphone—culture logically positions the osaifu-keitai as a convenient and efficient cashless option. Likewise in the United States, the tech boom in late 1990s paved the way for entrepreneurs to take advantage of online possibilities to develop new ecommerce strategies and technologies, many of them cashless. Already, purchasing power rarely corresponds to the amount of money in your wallet, but rather is reflected in your bank account, credit limit, and online accounts, all of which can be accessed electronically. It may be only a matter of time before we enter a brave new world where all transactions occur through technological means—in short, a world without cash.