Since China first issued currency notes during the Tang Dynasty (618 A.D. to 907 A.D.), cash has been the medium of choice for business transactions across the globe. After the fall of the Roman Empire, silver and coins were used to facilitate most transactions for centuries. In the early Middle Ages, Venetian merchants began to use silver bars to conduct trade, then they switched to written paper notes to bankers, instructing them to make transfers from their accounts. As time marched on, some type of coin or paper currency was used almost exclusively to make purchases around the world.
In fact, for centuries, most consumers couldn't even imagine conducting business without the use of physical currency. That changed in the mid-20th century, when a New York businessman made the unfortunate mistake of forgetting his wallet when taking clients out to dinner. Little did the diners in the restaurant that night know that the first salvo in the war on cash had just been fired.
The first credit card
In 1949 a local businessman, Frank McNamara, took clients out to eat at the Majors Cabin Grill in New York City -- and panicked when he realized he had left his wallet in another suit jacket. Fortunately for McNamara, embarrassment was averted because his wife had enough to cover the bill. But the incident caused the wheels to begin turning inside McNamara's head. He suspected there was a better way to deal with payment for travel and entertainment than requiring consumers to have enough cash on hand to pay for them.
After consulting with a few business partners, McNamara had the answer. The next year, he returned to the same restaurant, but this time, he paid with a small cardboard charge card, the first Diners Club card. This incident would later be called the "First Supper" within the industry, as it was the first time in modern history a customer purchased what he could afford, not what he had enough cash on hand for.
McNamara began by offering the card to family members and friends for a small annual fee, and by convincing 27 local restaurants to agree to accept the card as payment. By 1951, however, the card platform had taken off: Membership had swelled to 42,000, merchants in the entertainment and travel industries clamored to be a part of it, and acceptance was broadened to major U.S. cities. By 1955 the card was accepted across North America, Europe, Asia, and the Middle East, and before the decade was out, more than 1 million members would be a part of Diners Club.
In 1957, American Express saw the potential in the charge card business; it issued 250,000 cards before its official launch date in 1958 because demand was so high. Amex's cards were seen as complementary to the company's traveler checks, to be used at hotels, airlines, and other travel and entertainment industry establishments.
Soon competition came from all sides, relegating Diners Club to a minor role in the war on cash, and today, Diners Club operates as a small part of Discover Financial Services. But Frank McNamara's humble idea, spurred by a near-embarrassing dinner outing, would gain steam around the world and begin to change how the world conducts business.
How credit card companies began
With few exceptions, until the conception of the Diners Club, customers who wanted to use credit to make purchases had to do it on a merchant-by-merchant basis, which made the process of using credit clunky, tedious, and risky for merchants. A 1990s-era Washington Post article, describing the state of credit in late 1950s America, paints this picture: "Many Americans by then had a dozen or more different forms of credit: a gasoline card from an oil company, five or six department store charge plates, airline charge accounts if they traveled, installment loans for autos and refrigerators and maybe a loan or two from a finance company."
Most of these retail accounts were charge accounts, meaning they had to be paid off at the end of each month. The idea of allowing credit charges to roll over to the next month with interest had not yet entered the American mind. That would all change in 1958, when Bank of America (NYSE:BAC) representatives mailed 60,000 unsolicited BankAmericards, the first modern-day credit cards, to residents of Fresno, California. Mind you, these were not applications for the card. These were cards that were already open, registered, and ready to use, with a $300 credit limit for all cardholders. This first test went smoothly enough, so Bank of America began "dropping" -- the term given for cold-mailing these cards to unsuspecting consumers -- cards across California. By October 1959, more than 2 million credit cards had been issued, and BankAmericard was accepted by 20,000 merchants.
The rapid ramping up in card issuing, however, initially led to several problems. Credit card fraud was rampant, and more than 22% of all BankAmericard accounts were delinquent. Bank of America lost a lot of money -- some estimate as much as $20 million -- with this introduction of the credit card. But the bank quickly cleaned up its act by instituting financial controls on its new product.
Mastercard and Visa's duopoly
By the mid-1960s, demand for BankAmericard was so great that Bank of America began signing licensing agreements with other banks to issue cards that could be used on the same network. hen other banks licensed the product, the card assumed different names in countries and markets around the world, including Chargex (Canada), Carte Bleu (France), and Barclaycard (U.K.).
Other banks, including Wells Fargo (NYSE:WFC), had a similar idea and launched the Interbank Card Association (ICA) in 1966. The association of banks would soon release Master Charge: The Interbank Card. In 1979, Master Charge became Mastercard. The single branding of the Master Charge card, along with its not being associated with a single bank, seemed to help it gain acceptance. Similarly, Bank of America gave up control of BankAmericard, and in 1976 the card network assumed the Visa name and branding.
In 1981, American Airlines launched the first reward program for frequent fliers. Credit card issuers quickly caught on and began offering different rewards to account members. In 1986, Discover Financial introduced the first cash back program, rewarding customers for spending more. These incentives helped American consumers get used to the idea of buying things on credit even quicker, and the popularity of credit cards exploded. But electronic and digital forms of payment wouldn't begin to displace cash in earnest until another booming technological trend arrived.
How banks drove the war on cash
While credit card accounts exploded in the 1960s and '70s, another salvo was fired on cash from a different direction: the banks.
In the early 1970s banks were drowning in checks; they simply could not handle the massive volume of paper they were receiving. A group of California bankers resolved to do something about it and formed the California Automated Clearing House Network in 1972. This is a network from which money can be transferred between two participating financial institutions, almost like an electronic check. Soon regional automated clearing house (ACH) networks began sprouting across the country. These networks soon joined forces to form the National ACH Association, or NACHA. By 1974, U.S. Air Force members could receive their paychecks via direct deposit rather than a physical check, and by 1978 every single bank in the country could transfer money electronically across the network.
The ACH network would go on to revolutionize the banking system, allowing everyone with a bank account to set up such things as automatic bill payments, eliminating the need for most checks, and equipping consumers to avoid late and missed payments.
How e-commerce drove the war on cash
In the mid-1990s, Pierre Omidyar began receiving envelopes full of cash, checks, and even loose change. He had just started charging users to use his auction website, appropriately named AuctionWeb, when the money started pouring in. He even had to hire part-time help to open the envelopes and help deposit the checks. As his auction website grew, it was renamed eBay (NASDAQ:EBAY), and it quickly became apparent that e-commerce would never thrive while purchases were facilitated by cash and checks. After unsuccessfully trying a number of in-house options, eBay acquired PayPal (NASDAQ:PYPL) in the summer of 2002 for $1.5 billion.
Under the leadership of Silicon Valley luminaries such as Peter Thiel and Elon Musk, PayPal had taken over eBay's site, the digital platform being popular with buyers and sellers. At the time of the acquisition, about 70% of all eBay transactions accepted PayPal as a method of payment, and 25% were closed using PayPal. PayPal quickly became the platform of choice for those wanting to make online purchases, or, through PayPal's P2P payment function, just to send money to friends or family.
Because of cash and personal checks' inherent unsuitability for online purchases, and the increased popularity of digital shopping, e-commerce has been a boon to electronic and digital payments over the past two decades. As Visa (NYSE:V) CFO Vasant Prabhu explained at the 2017 UBS Global Technology Conference (as transcribed by S&P Global Market Intelligence), online purchases gave credit card companies a huge boost:
Simple numbers. E-commerce is growing 5x as fast as face-to-face transactions. And in an e-commerce transaction, the propensity to use a Visa card is twice as high as a face-to-face transaction. So something growing 5x as fast where your propensity to be used is twice what it might have been. That's phenomenal.
E-commerce continues to gain on traditional retail sales in terms of popularity, a trend that doesn't look likely to end any time soon. In 2018, e-commerce sales within the United States rose to $513.6 billion, a 14.2% increase over 2017's total, good for about 10% of total sales, while total domestic retail sales grew only 4.8%. This unequal growth is a trend that has remained consistent for several years.
How cryptocurrencies drove the war on cash
According to venture capitalist Tim Draper, "In five years, you are going to try to go buy coffee with fiat currency and they're going to laugh at you because you're not using crypto."
Though it has been in existence for just a little more than a decade, bitcoin's history is full of twists and turns. In 2008 the financial world was crumbling, and in September of that year, Lehman Brothers Holdings, one of the largest banks in the world at the time, filed for bankruptcy protection. In the midst of this financial crisis, the domain bitcoin.org was registered by a programmer, or group of programmers, using the pseudonym Satoshi Nakamoto. In January 2009, the first bitcoin was mined and sent from Nakamoto to Hal Finney, a cryptography expert. The true identity of Nakamoto is still not known, and the person (or people) using the pseudonym backed out of the bitcoin project in 2011 and has not been publicly heard from since.
In bitcoin's early days, it held very little real purchasing power. Few respectable retail establishments would accept the currency, but it soon found a niche in the underworld. In 2011 Ross Ulbricht, using the pseudonym Dread Pirate Roberts, opened an online black market called Silk Road. While the site was created under libertarian principles, it soon became little more than a drug trafficking haven, where nearly any substance could be purchased behind the cloak of anonymity that bitcoin provided.
Ulbricht was found and arrested at a San Francisco public library in 2013, but not before 1.2 million transactions had been facilitated on the site for 9.5 million BTC. While Silk Road was soon shut down after Ulbricht was apprehended, the pattern had been set, and cryptocurrency was soon the standard form of currency used in black market transactions. People now use Bitcoin to buy all manner of items, from guns to real estate to travel packages.
Since the first bitcoin was mined, many different cryptocurrencies -- most of which digitally record transactions on a decentralized ledger powered by blockchain technology -- have appeared, with recent counts putting the number well above 2,500.While the number of cryptocurrencies has exponentially increased, the ones most likely to succeed and endure were launched to solve specific, real-world problems, such as cross-border payments or supply chain inefficiencies.
Why the war on cash matters
These developments, including the rise of mobile payments and financial technology, or fintech, are far more than an interesting history of a niche financial industry. The war on cash has increased financial inclusion, encouraged commerce, and made transactions safer for consumers.
In 2017 the World Bank reported that 3.8 billion people, or about 69% of the world's adult population, had an account at a bank, something the institution calls "a crucial step in escaping poverty." That figure was up from just 51% of adults in 2011. Access to basic financial services, such as bank accounts, lines of credit, and the ability to make electronic payments, means people can save for family needs, borrow money to start a business, and make payments safely and securely.
World Bank president Jim Yong Kim directly attributed the increase in financial inclusion to the technological gains in mobile and internet connectivity, saying, "Having access to financial services is a critical step toward reducing both poverty and inequality, and new data on mobile phone ownership and internet access show unprecedented opportunities to use technology to achieve universal financial inclusion."
Electronic and digital payments also make it safer for consumers to make transactions. In the U.S., for instance, consumers are offered legal protection and cannot be held liable for more than $50 of fraudulent charges on their credit cards, whereas personal checks can expose you to fraud and stolen cash with no chance of recovery by the victim.
The war on cash is a trend that is unlikely to be reversed soon, though it very well could continue to take unexpected twists and turns in the future. Consumers have spoken, finding that digital and electronic payments offer convenience and security that physical forms of currency simply cannot match. The technology that has enabled the war on cash to continue has also lowered the price of basic financial services, democratizing access to credit and banking services, thus allowing more people to participate in the global economy.