[This articule was orginally posted in ReThink Quarterly (15 October 2021) .Verbatim copy under creative commons licence.]
After payroll went digital, people still needed cash, mobbing bank branches on paydays. In the 1970s, banks started making big investments in a new innovation: the Automated Teller Machine.
By Dr. Bernardo Bátiz-Lazo
When companies and banks began automating payroll in the 20th century, it was the first step towards the mostly cashless world we live in today. During the 1950s, bankers in Europe and North America realised that one of the best ways to persuade people to open a bank account was to pay them through the banking system. But even as direct deposits of wages into personal bank accounts became standard, it would be many years before getting money out of those accounts was just as easy.
Things shifted around 1980 . The share of wages paid in cash in the U.K. fell from 58% in 1976 to 42% in 1981. Meanwhile, direct-to-account paycheck deposits via giro credit grew from 26% to 38% while salaries paid by check grew marginally from 12% to 15%. In that same period, the share of Britons aged 25 to 35 with a current account had grown from under 55% to 75%; for those aged 65 or older, that increased from less than 30% to 45%.
For the most part, people still paid for everyday purchases in cash, which meant travelling to a bank branch to withdraw bills and coins. In the mid-20th century, cashing paychecks was a headache for banks. The queues on paydays were so long that they often extended into the street. Banks had to hire extra cashiers to deal with the rush, exacerbated because banks were closed on the weekends. Many people who were “unbanked,” with no current account or savings account of any kind, would cash their paycheck in full on payday. Others who had bank accounts simply emptied the balance upon being paid.
The solution was the robot-cashier, auto-teller, cash machine or automated teller machine — the ATM. In 1961, trailblazer Citibank tested a branch lobby device in New York City developed by Luther Simjian’s Reflectone company. Like much of Simjian’s work, the Bankograph used photographic technology to issue customers a receipt of whatever combination of check, banknote and coins was left inside. The device was of no commercial consequence, but its patents became central to further developments towards what we now know as an ATM.
By the end of the 1960s, all large banks in the U.K., U.S. and many other countries across the world had started to implement plans to completely computerize their activities. But they didn’t yet have a way to connect retail branches with existing computer centers, or a way to give customers easy access to their money at the point of sale. Some bankers and HR professionals questioned whether direct-to-account payments were cost effective and worth the hassle.
The self-service revolution in retail banking was kickstarted with devices deployed in the U.K., Sweden, Japan and the U.S. between 1967 and 1969. Engineers had to solve significant challenges such as building electronic equipment to withstand inclement weather, developing encryption and PIN technology for authentication, and moving a flimsy banknote through a machine. Initially, these machines were clunky and difficult to operate by customers and bank staff. They were not connected to any computer network and were prone to failure.
Banks had to invest significant time and money to help customers overcome their skepticism of self-service technology. Customers were often distrustful of the devices. A common anecdote I’ve heard over many years from engineers in Mexico, South Africa and Russia is that users withdrawing money would do it by accessing the ATM three times. First using it to check their balance and print a receipt, then once again to withdraw money, and then a third time to print a second receipt with the new balance.
In Spain, la Caixa, now CaixaBank , took a unique approach to helping its customers. It was redesigning its branches around 1984 and hoping to convince customers to use its Fujitsu-made self-service ATM. The bank decided that hostesses in branches would be security enough, and customers could use an ATM simply with their payment card or passbook.
The bank argued that the PIN was just another barrier in the adoption of self-service and that it was more interested in securing adoption than in limiting potential losses. The bank later reported that losses during the no-PIN operation period of its ATMs had been insignificant. When customers had become comfortable with self-service banking, the bank then introduced a PIN for its passbooks and plastic cards.
But in sharp contrast to the success of the ATM, many other banking innovations from this era are hardly remembered today. One short-lived method was known as the “Hinky Dinky,” named after the grocery store chain. Deployed by savings banks in the U.S. in the mid-1970s, a person operated a rudimentary terminal in a dedicated booth to help cash checks in retail spaces.
Predecessors of internet banking appeared in the U.S. and France around 1980 in the form of terminals attached to telephones. Called “home banking” in the U.S., it was demonstrated to President Jimmy Carter at the White House, but was abandoned by the mid-1980s as telephone banking took over in the U.S. In France, millions of Minitel terminals were given away to telephone subscribers to encourage using the online banking and directory tools, but the internet overshadowed the service in the 1990s.
Interestingly, during the 1970s, the country with the largest number of cash machines was Japan. Yet, for reasons that are unclear, its domestic manufacturers didn’t rack up significant international sales. As European and North American banks continued to invest in auto-teller technology, the interest attracted manufacturers such as IBM, Diebold, Nixdorf and NCR, who were able to connect ATMs to a larger computer network.
In Europe and Latin America, the ATM’s effectiveness in helping large banks handle cash distribution and congestion at branches was central to its success. But in the U.S., the motivation was a bit different. Laws enacted during the Great Depression restricted most banks from operating in more than one state. Reminicent of Simjian’s Bankograph, the biggest use for ATMs in American suburbia was capturing deposits in the form of paper checks or cash enclosed in envelopes available in a box next to the machines.
The pivotal year was 1981, when banks in the U.S., Germany and the U.K. adopted ATMs in large numbers IBM’s 3614/3624 models sold like ice cream on a hot summer day. Big banks such as Barclays abandoned their first-generation machines for new models from NCR. In the U.S., a recession pushed more banks to prioritize automation, and savings banks began to offer current accounts and placed ATMs in areas lacking physical branches. The apparent success in Europe and North America gave confidence to banks elsewhere, and following their lead they deployed thousands of ATMs in the following two decades.
Today there are as many as 3.5 million ATMs in operation worldwide. They are the backbone of cash distribution infrastructure, distributing up to 90% of banknotes in developed countries. They give people access to their paychecks regardless of whether they are in Paris, Buenos Aires, Cape Town or en route to Mount Everest, Easter Island or even on an aircraft carrier.
By easing congestion at bricks-and-mortar branches, the ATM made life easier for bankers, but also for payroll professionals who wanted to encourage the uptake of direct-to-account deposits. Yet, until very recently, most mid- to low-value retail transactions happened in cash. Could plastic payment cards hold the answer? Perhaps, but these are solutions to discuss in greater detail in the near future.
The source for this paragraph was
‘The Revolution in Retail Banking’, The Economist, 4 December 1982: 90–1
Translated from the French by the author with Deep L
Senior Lecturer HDR, History, Economic History, Université Paris Nanterre – Université Paris Lumières
Declaration of interest
Patrice Baubeau has received funding from the Comue UPL for a research project on the social uses of money and the “money of the poor” for the period 2019-2021.
Université Paris Nanterre provides funding as a founding member of The Conversation FR.
A short detour through history allows us to place the question of the three functions of money traditionally identified: standard of value, intermediary of exchanges and reserve of value, in a broader framework. This perspective reveals a fourth fundamental function, identification, which denotes the common, political and social origin of the monetary fact.
Emerging monetary tools, such as bitcoin, state cryptocurrencies, or virtual currencies used in video games, give particular weight to this function of identification and to the political and social consequences that are attached to it.
The question of identification appears alongside Aristotle’s analyses of money, in The Politics and The Nicomachean Ethics, works that focus mainly on the Polis, its limits, its organization, its justice. He thus develops, following Plato, a political and civic reflection that associates the limits of the Polis with the birth of money, whose misuse can conflict with the rules of the ideal State: 1) by making the gain of foreign trade take precedence over the solidarity of internal exchanges; 2) by pricing the exchange value over the use value; 3) by opening the infinite space of desires and speculations over the limited domain of needs.
In short, such a currency, freed from its civic dimensions, tends to become its own end, feeding inequalities and discord within the Polis. This is why money, a political artefact, is also a marker of citizenship: its use inserts the user into a political, social and ethical community and identifies him/her with it.
This function of identification through currency possession or use has not remained the prerogative of the Greek city-states: a constant feature of currencies is the concern of issuers – unless they are counterfeiters – to identify the origin of their currencies, usually territorial or political, by marks indicating the place of production, the issuer or the date.
The multiplication of social and complementary currencies since the 1970s corresponds moreover most often to a “territorial” project consisting in constituting a limited-size monetary space of solidarity. In this way, the use of money can become not only a militant act (sustainable, alternative, ecological economy…) but also support or manifest an identity – this is notably the case with the Basque currency eusko.
Cash is not synonymous with anonymity
This fourth function, this function of identification, is largely neglected in economics – historians and especially numismatists are, on the contrary, very attentive to it. However, taking it into account leads to two important contributions.
First, it reverses the usual perspective on anonymity. Anonymity no longer appears as a property of cash, but becomes one of the modalities of identification by money, which allows a much more graduated approach.
Indeed, as we wrote in a research article in 2016, there is no “one” anonymity: anonymity is always, in fact, an anonymity with respect to a person or an institution. Consequently, it is susceptible to various configurations, which are therefore part of a general function of identification.
Thus, the usual payment in cash to a merchant that one knows does not, of course, entail any anonymity of the payer with respect to the merchant. On the other hand, it does guarantee the anonymity of the merchant’s customers with respect to their banker or tax collector.
Similarly, the use of a contactless payment card results in almost complete anonymity of the customer towards the merchant, as the payment receipt does not include any exploitable element of identity, but precisely identifies the customer to the bank issuing the payment card or to the bank holding the merchant’s accounts.
In general, a process of “nationalization” of money has progressively made the limits of the modern state coincide with those of the monetary spaces of which these states have become the masters.
At the same time, the state assumes another function that is crucial for the proper functioning of civic and social life, beyond payment systems alone: the identification of individuals. This function has grown considerably since the 19th century with the development of various forms of civil status and social security, as well as the rise of enfranchisement and personal ballot.
Consequently, in a State governed by the rule of law, not only do individuals have a right to an identity that the State cannot deny them, but the methods of identification fall within the domain of the law, with the legal guarantees that surround it.
Monetary innovations change the game
Today, new monetary innovations remind us of the importance of this fourth identification function. A first model, already old, consisted in delimiting virtual spaces within which specific monetary forms are employed: massively multiplayer “game” platforms generally provide techniques for accumulating symbols of wealth in order to attach objects, services or skills to avatars.
Already in this case, the watertightness between virtual and real is imperfect, since player “farms” have developed with a view to acquiring objects or abilities in the virtual universe that are then resold in real currency to players who wish to perform. In a way, this amounts to exchanging virtual currency for real currency via virtual goods and services.
In this context, identification takes place within the closed universe of the platform in question, since the “identities” of the avatars are entirely controlled by the provider. The latter also determines the conditions of issue and use of “its” currency. We find again, but limited to a closed and virtual universe, the model of control of money and identities that territorial States carry out.
The second model, which is much more recent, stems from the innovation represented by the blockchain. The blockchain includes an identification device that validates the transaction between a seller and a buyer and makes the record of this validation available to other participants in the payment system.
On the one hand, the identification of transactions makes it essential to identify the users who carry out exchanges. But on the other hand, this identity corresponds to the one declared within the virtual monetary space, and not to an identity as recognized by a State. Moreover, nothing prevents an economic agent from creating a different avatar for each of the existing cryptocurrencies, or even from associating different IP addresses (those that characterize the machines that access the Internet). It is no coincidence that Bitcoin has quickly become the preferred currency of cybercriminals.
This is where Facebook’s diem (ex-libra) virtual currency project makes sense. Users have an identity, guaranteed by the platform and to which, more and more, rights and duties are attached, concerning freedom of expression, the integrity of the “profile”, and even the post-mortem destiny of accounts.
The risk of a lucrative and selective form of identity
Facebook is therefore able to identify its users very precisely. This is the core of its business model: selling the individual characteristics of these profiles. If a currency of its own, or almost, such as the diem, is associated with the Facebook ecosystem, the company or, more likely, the constellation of lucrative interests of which Facebook is the heart, will be able to simultaneously manage its own monetary assets and the proofs of identity related to their use.
However, leaving money in entirely private hands is not always a good idea, even if the management of money by States has also led to disasters, such as the hyperinflationary episodes in Germany in 1923, in Hungary in 1946 or in Zimbabwe since 2000. Leaving the identification of human beings in private hands is even worse: what would happen to a human being whose only proof of existence is a private act, possibly transferable and of which third parties cannot become aware?
Thus, abandoning to the highest bidder these two key elements of the construction of the ancient Polis or of the modern State, which are money and identity, announces the worst of all worlds.
Solutions exist, old and new. Central bank digital currencies (CBDCs), being tested in Asia and Europe, bear witness to this. They limit the risk of substituting a lucrative form of identity for the civic form on which our rights depend, by subjecting payment to identification rather than the reverse.
In a world where the issuance of monetary assets, the creation of identities and the management of the corresponding profiles are no longer the sole responsibility of States, it is indeed becoming urgent to reflect on the articulation of these different dimensions. Only then may we preserve the benefits of the innovations brought about by the rise of the Internet without losing our rights, our goods and our beings. And therefore we must take into account the fourth function of money: identification.
Bernardo Bátiz-Lazo (Newcastle Business School, Northumbria University, UK), and Ignacio González-Correa (Department of Economics, Universidad de Santiago, Chile)
We initiated a project to explore the barriers women face to become fintech entrepreneurs in Latin America. Microfinance and then fintech start-ups have focused and helped women “at the base of the pyramid” (by reducing frictions and increasing financial inclusion), but what is the situation of others and particularly towards the “top of the pyramid”?
We believe this is an important research question because, as a growing sector within the region and other parts of the world, the fintech industry should offer gender-neutral opportunities for development and self-fulfilment. Cristina Junqueira, Co-Founder of Nubank in Brazil in 2013, the most successful fintech start-up in the region to date, suggests these opportunities are real and can be handsomely rewarded. At the same time, however, anecdotal evidence suggests there are important gender disparities in finance and engineering. Does this mean that the case of Junqueira is a fluke? We therefore asked a group of men and women who were either employed in or had established a fintech start-up across the region to help us identify the barriers women have to wrestle.
An initial challenge was to establish industry boundaries. There is no consistent use of the term fintech. Some root the process to the 19th century while the adoption of electromechanical devices and computer technology came about throughout the 20th century. By the mid-80s, we see the appearance of its acronym (FinTech, Fintech or fintech) encompassing the business and financial impact of technological change internationally. Yet, it was not until 2012 when the concept takes off and is associated with newcomers using applications of information and communication technologies to contest retail financial services.
Since then, the creation of fintech start-ups has been particularly active in Brazil, Mexico, Colombia, Argentina, and Chile. By 2018, there were more than 1,000 fintech companies in Latin America and the Caribbean where Nubank, Mercado Pago (the payments subsidiary of Mercado Libre), Ualá, C6 Bank, and Prisma stand out as the largest and most successful by any measure. Meanwhile, according to Statista.com, in 2020, $1,977 million dollars of venture capital were invested in Brazil, $567 in Mexico, $210 in Uruguay, and $187 in Colombia.
There is evidence by IDB et al. (2018) and FinteChile& EY (2021) to suggest that in Latin America women represent 30% of the workforce in fintech companies while only 1 in 10 fintech companies have achieved gender parity. Further, 80% of all fintechs have at least one woman on their payroll while in Colombia and Argentina, 16% and 12% of the fintech start-ups, respectively, have at least 50% of women on their payroll. Likewise, 20% of start-ups included women in their founder team in Chile (35% for all the region). Colombia, Mexico, Peru, and Uruguay were the countries with the highest proportion of fintech enterprises with at least one woman on the founding team. Moreover, women founders tend to have more inclusive and diverse teams and seek financial inclusion.
The gender gap, however, widened when considering teams that included women establishing a start-up as these received 15% less funding than men-only teams, while 45% of women-only start-ups did not receive external financing at all. These figures stand out when compared with the performance of fintech start-ups in the rest of the world, where enterprises with at least one woman as founder obtained results that were 63% more positive than those established by male-only teams.
With the previous evidence in mind, we asked a group of men and women who were either employed or had established a fintech start-up across the region to help us identify the barriers women have to contend to become founders. Our initial query evolved around the importance of communities and external networks for the success of start-up founders. On the one hand, male interviewees articulated the importance of having both formal and informal communities prior to and during the early stages of the start-up. They argued that making use of their community was key to sharing resources, information and gaining critical support. On the other hand, female interviewees often saw no value in forming a community prior to start-up. They would engage with other women only after having been active in fintech events. Reasons for this were not altogether clear and something we plan to investigate further. However, some did mention giving priority to family commitments for their use of spare time.
A notable result was that most male respondents in our sample saw no significant barriers or hurdles in the way for women to enter fintech either as founders or employees. To the contrary, female interviewees were quite articulate in their description of a “glass wall”, “maze” or “labyrinth” in the way for them to access and fill spaces which have been typically dominated by men. For instance, even though there are no formal barriers for women to pursue a career in economics, finance, technology or engineering, few actually choose this path. Then recruitment advisors often find it difficult to appoint women to senior positions as they are seldom given opportunities to develop and demonstrate abilities to overcome challenges early on.
It is also the case that throughout the 20th century in Latin America, self-employment has been move comment amongst women in lower income strata than the educated (see the work of Escobar Andrae). This trend seems to remain the case as a 2016 survey in OECD economies, reported that one in ten employed women was self- employed, almost half the rate of self-employed men (18%). In other words, there are simply too few women owned businesses or public companies where women have reach the top positions.
There is thus a vicious cycle. Few women pursue a career in economics, finance, technology or engineering. Few educated women become self-employed. And for those handful that do follow this path, a lack of opportunities prevents them developing a track record showing an ability to sort out challenges and expertise, thus closing many doors to senior positions or having the skills and track record to become fintech founders. In turn, this results in a very small pool of female directors that can signal positive opportunities for development to or actually mentor young people.
These results led us to believe that our future research should explore in greater depth the importance of “soft skills” such as networking and community building for the establishment of fintech start-ups. This will also entail looking at how training opportunities and women-focused support networks can help towards making fintech entrepreneurship more accessible and equitable. We also are to query the socio-economic norms and barriers which disincentivise middle class educated women to become self-employed.
About 50 years ago, companies started embracing direct deposit for employees’ wages, laying the foundation for today’s digital payments.
By Dr. Bernardo Bátiz Lazo
Let’s go back to the early 20th century, a time where cash was king and most people worked in agriculture or manufacturing. Only a handful of individuals had access to a current bank account and personal checks. Most of the labour force was paid on weekly installments, often according to the hours of manual labour they had contributed that week.
But after World War I, we began to see early commercial applications of computers. These devices encompassed punchcard electromechanical tabulators in the 1920s and 1930s, analog devices in the 1950s (such as the NCR Post Tronic of 1962), and the widely adopted IBM 360 of the late 1960s. Manual banking and payroll processes were being integrated with co-existing technologies with widely varying capabilities.
Today, making and receiving digital payments is as natural to us as breathing. But, as I documented with my colleagues, the idea of a cashless society first emerged with the adoption of computer technology in banking during the mid-1950s in the U.S., and the concept was popularised in the press on both sides of the Atlantic in the late 1960s and early 1970s. The digitalization of payroll was at the center of this evolution.
In dawn of the automation age, accounting functions and payroll were usually among the first activities to be mechanised. Management perceived the tasks to be repetitive, and the information collected there was also crucial for decisionmaking. Regulatory changes regarding financial institutions in the midcentury also played a role. Savings banks, previously excluded from check clearing, were allowed to start offering current accounts. This opened up checking account capabilities to their many existing working- and middle-class customers. Not wanting to be left behind, commercial banks started offering companies expanded services for their employees.
For example, Westminster Bank in England (today part of the NatWest Group), started replacing hand-written passbooks with machine-prepared statements in 1929. In 1948, the Trustee Savings Bank of Belfast in Northern Ireland deployed a new system of mechanised accounting, which included electromechanical ledger posting machines. Females were hired in ever larger numbers as staff to become the main operators of these devices and perform repetitive tasks such as payroll. It was until the 1950s that large and medium-sized Spanish banks began to introduce mechanical accounting machines. In France, Crédit industriel d’Alsace-Lorraine imported the first three IBM Proof 803 machines to Europe in 1950. These supplemented the mechanical devices already in place to keep track of client accounts, cash in hand, and interest to be paid for on-demand and savings accounts, and expanded in 1955 to the payroll and the equity departments. In 1962, the Texas National Bank of Houston chose the NCR 315 computer system to expand their offerings, which included a bureau service where companies in the region could process payrolls on the bank’s computer. That same year the First Bank of Cincinnati chose a similar system to expedite its own payroll processing.
In Mexico, the federal government installed large computers in the mid-1960s, including an IBM 704 at the Mexican Social Security Institution and two CDC 604s at the finance ministry, to centralize the federal employee payroll. In 1965, the largest and oldest university, UNAM, shifted its focus from technical and scientific computing to administrative work with an IBM 1440 handling payroll and accounting.
In a similar vein, the successful civil engineering firm Ingenieros Civiles Asociados installed an IBM 1130 in 1966 and shifted its use from engineering to administration, particularly cost accounting and payroll. However, programming the payroll application from scratch proved to be a challenge. The 1130 had no COBOL compiler to support the programming language used for business, so the system had to be designed in FORTRAN, an older programming language primarily used for scientific applications. FORTRAN used a floating-point arithmetic that was obviously unsuited for accounting purposes. So the programmers had to use adding and multiplying subroutines to ensure an accurate accounting record of pesos and cents.
After winning a major external engineering contract in 1968 to build the Mexico City subway, the firm ordered a larger CDC 3300 unit as the foundation for an ambitious computer services business. Its first task was to handle the payroll of the more than 10,000 labourers and engineers involved in the construction of the first two lines of the Metro system.
In 1960s, administrative automation started making it possible for employers to pay wages by bank transfer instead of in cash, and Sweden led the way. The decades that following World War II were marked by economic growth, increased affluence and expansion of the welfare state in Sweden. Around 1959, Skandinaviska Banken invested in its first mainframe computer, and Svenska Handelsbanken and Sparbankernas Bank followed suit two years later. These computers were initially used to handle the time-consuming task of calculating interest on savings accounts.
This problem grew as more people got direct payroll payments and opened current accounts alongside savings accounts, increasing the number of transactions the banks had to handle. Handelsbanken and other commercial banks convinced their contacts at manufacturers to sign up their companies for direct payroll deposit services. Initially hesitant, the Swedish saving banks followed suit, using their contacts with labor unions to help convince individuals to opt for direct-to-account payment at their savings bank.
For these direct-to-account payments, banks required employers to provide the relevant information via punched cards, paper tape and eventually magnetic tapes. These were prepared on-site and then taken physically and securely to the bank’s computer centre. But it also created a larger banking ecosystem, as we saw happen in the Netherlands. Large companies and the Dutch government saw an opportunity to save money on the labour-intensive and expensive weekly or monthly exercise of payroll. Banks were interested because the Nordic countries had found that direct-deposit salary payments had a positive effect on account holders’ average bank balances. In 1966, the banking sector introduced current accounts for private households after the Dutch government led the way on developing a system for standing orders and direct debits.
Digitalizing payroll took more than just installing a new computer; it required a reshaped regulatory landscape. In the U.K., legislation from the end of the 19th and start of the 20th centuries, intended to stop abusive practices by employers, required payroll to be paid out in cash. After about a decade of lobbying in Parliament, direct payroll services in the U.K. were born in 1958 after regulatory changes allowed clearing banks to offer payment by checks or bank credit to any worker who wanted it.
The number of direct payroll accounts rising so rapidly created issues itself. For instance, the number of accounts in the Netherlands receiving direct payroll payments grew by nearly a factor of 10 from 165,000 in 1968 to 1,340,000 in 1973.
Digitalizing payroll, however, had only solved one part of the journey. Early computer systems lived alongside manual processes that captured even the most basic changes in circumstances on paper. Cohorts of administrative staff first validated these changes and then typist fed them into the system (first through punched cards and later through remote terminals). The computing power and memory space of a mini or mainframe computer of the 1970s and 1980s was well below one of today’s smart phones. As mentioned, systems often ran on COBOL and therefore were limited to sequential access and fixed size data records. This meant that the file with the payroll had to be sorted and resorted to implement certain types of changes, making the whole process of preparing payrolls long (taking days for companies with thousands of employees), cumbersome, and subject to error. As result, not even the most adventurous futurist could anticipate or speculate on robotic process automation.
But of greater challenge was that people still had to pay for everyday purchases in cash. Customer congestion at branches became a problem, particularly on payday. To address these issues the 1970s and 1980s brought about a number of banking innovations to get money out of accounts electronically . Solutions which we will discuss in greater detail in the near future.
Bernardo is Professor of FinTech History and Global Trade at Northumbria University (Newcastle upon Tyne). He is a Fellow of the Royal Historical Society (2010) and the Academy of Social Sciences (2020). He read economics (at ITAM, Mexico and Autónoma de Barcelona, Spain), history (Oxford) and received a doctorate in business administration (Alliance Manchester Business School). He has been studying financial markets and institutions since 1988. He joined Northumbria after appointments at Bangor, Leicester, Open University and Queen´s Belfast.
His most memorable paycheck: the moment he gave his first proper job check to his mom.
Abstract – In this article we describe the trials and tribulations in the early stages to introduce cashless retail payments in the USA. We compare efforts by financial service firms and retailers. We then document the ephemeral life of one of these innovations, colloquially known as “Hinky Dinky”. We conclude with a brief reflection on the lessons these historical developments offer to the future of digital payments.
JEL – E42, L81, N2, N8,
Let’s go back to the last quarter of the 20th century. This was a time when high economic growth in the USA that followed the end of World War II was coming to an end, replaced by economic crisis and high inflation. It was a time where cash was king, and close to 23% of Americans worked in manufacturing. A time when the suburbs – to which Americans had increasingly flocked after 1945 escaping city centres – were starting to change. Opportunities for greater mobility were offered by automobiles, commercial airlines, buses, and the extant railway infrastructure.
This was the period that witnessed the dawn of the digital era in the United States, as information and communication technologies began to emerge and grow. The potential of digitalisation provided the context in which an evocative idea, the idea of a cashless society first began to emerge. This idea was associated primarily with the elimination of paper forms of payment (primarily personal checks) and the adoption of computer technology in banking during the mid-1950s (Bátiz-Lazo et al., 2014). Here it is worth noting that, although there is some disagreement as to the exact figure, the volume of paper checks cleared within the U.S. had at least doubled between 1939 and 1955, and the expectation was, that this would continue to rise. This spectacular rise in check volume, with no corresponding increase in the value of deposits, placed a severe strain on the U.S. banking system and lead to a number of industry-specific innovations emerging from the 1950s such as the so-called ERMA and electronic ink characters (Bátiz-Lazo and Wood, 2002).
The concept of the cashless, checkless society became popularised in the press on both sides of the Atlantic in the late 1960s and early 1970s. Very soon the idea grew to include paper money. At the core of this imagined state was the digitalization of payments at the point of sale, a payment method that involved both competition and co-operation between retailers and banks (Maixé-Altés, 2020 and 2021).
In the banking and financial industry new, transformative technologies thus began to be trialled and developed in order to make this a reality (Maixé-Altés, 2019). Financial institutions accepting retail deposits had been at the forefront of the adoption of commercial applications of computer technology (Bátiz-Lazo et al., 2011). Early forms of such technical devices mainly focused on improving “back office” operations and encompassed punch card electromechanical tabulators in the 1920s and 1930s; later, in the 1950s, analogue devices (such as the NCR Post Tronic of 1962) were introduced, and, in the late 1960s the IBM 360 became widely adopted. But at the same time, regulation curtailed diversification of products and geography (limiting the service banks could provide their customers). These regulatory restrictions help to explain ongoing experiments with a number of devices which involved a significant degree of consumer interaction including credit cards (Stearns, 2011), the use of pneumatic tubes and CCTV in drive through lanes, home banking, and Automated Teller Machines (ATMs), which despite being first introduced in the late 1960s and early 1970s, would ultimately not gain acceptance until the early 1980s (Bátiz-Lazo, 2018).
Like the banking and financial industry, the retail industry, with its very real interest in point of sale digitalization, was exposed to the rise of digital technology in the last quarter of the 20th Century. The digitalisation of retailing occurred later than in other industries in the American economy (for a European account see Maixé-Altés and Castro Balguer, 2015). Once it arrived, however, the adoption of a range of digital technologies including Point of Sale (POS) related innovations such as optical scanning, and the universal product code (UPC), were extensive and transformed the industry (Cortada, 2003). From the perspective of historical investigation, the chronological place of such innovation, beginning in the mid-1970s, is associated with a remarkable period of rapid technological change in U.S. retailing (Basker, 2012; Bucklin 1980). Along with rapid technological change, shifts in the structure of retail markets, in particular the decline of single “mom and pop stores” and the ascent of retail chains also became more pronounced in the 1970s (Jarmin, Klimek and Miranda, 2009). Two decades later, such large, retail firms would account for more than 50% of the total investment in all information technology by U.S. retailers (Doms, Jarmin and Kilmek, 2004).
What connects the transformative technological changes that occurred in both the banking industry and the retail industry during this period, is that both sought to utilise Electronic Funds Transfer Systems, or EFTS, a way to reduce frictions for retail payments at the point of sale. During the 1970s and 1980s, the term EFTS was used in a number of ways. Somewhat confusingly, it was applied indistinctively to specific devices or ensembles, value exchange networks, and what today we denominate as infrastructures and platforms. While referring to it as a systems technology for payments it was defined as one:
“in which the processing and communications necessary to effect economic exchange and the processing and communications necessary for the production and distribution of services incidental to economic exchange are dependent wholly or in large part on the use of electronics” (National Commission on Electronic Funds Transfer, 1977, 1).
Ultimately EFTS would come to be extended to the point of sale and embodied in terminals which allowed for automatic, digital, seamless transfer of money from the buyer’s current account to the retailer’s, known as the Electronic Funds Transfer at the Point of Sale, or EFTS-POS (Dictionary of Business and Management: 2016).
One of the factors that initially held back the adoption of early EFTS and the equipment that utilities it, was the lack of infrastructure that would connect the user, the retailer, and the bank (or wherever the user’s funds were stored). As Bátiz-Lazo et al. (2014) note the idea of a cashless economy that would provide this infrastructure was highly appealing… but implementing its actual configuration was highly problematic. Indeed, in contrast to developments in Europe, some lawmakers in Congress considered the idea of sharing infrastructure by banks as a competitive anathema (Sprague, 1977). Large retailers such as Sears had a national presence and were able to consider implementing their own solution to the infrastructure problem. Small banks looked at proposals by the likes of Citibank with scepticism while they feared it may pivot the dominance of large banks. George W. Mitchell (1904-1997), a member of the Board of the Federal Reserve, and management consultant John Diebold (1926-2005), were outspoken promoters of the adoption of cashless solutions but their lobbying of public and private spheres was not always successful. Perhaps the biggest chasm between banks and retailers though, resulted from the capital-intensive nature of the potential network and infrastructure that any form of EFTS required.
Amongst the alternative solutions that were trialled by banks and retailers, there were a number of successes, such as ATMs (Bátiz-Lazo, 2018) and credit cards (Ritzer, 2001; Stearns, 2011). Both bankers and retailers were quick to see a potential connection between the machine-readable cards and the rapid spread of new bank-issued credit cards under the new Interbank Association (i.e., the genesis of Mastercard) and the Bankamericard licensing system (i.e., the genesis of Visa), both of which began in 1966, just as the vision of the cashless society was winning acceptance. Surveys from the time indicate that at least 70 percent of bankers believed that credit cards were the first step toward the cashless society and that they were entering that business in order to be prepared for what they saw as an inevitable future (Bátiz-Lazo et al., 2014).
There were also a number of less successful attempts that, far from being relegated to the ignominy of the business archives, offer an important insight into the implementation of a cashless economy which is worth preserving for future generations of managers and scholars. Chief amongst these is a system widely deployed by the alliance of U.S. savings and loans (S&L) with mid-sized retailers under the sobriquet “Hinky Dinky”. Interestingly, Maixé-Altés (2012, 213-214) offers an account of a similar, independent, and contemporary experiment in, a very different context, Spain. The Hinky Dinky moniker was derived from an experiment by the Nebraskan First Federal Savings and Loan Association, which in 1974 located computer terminals into stores of the Hinky Dinky grocery chain – which at its apex operated some 50 stores across Iowa and Nebraska. The Hinky Dinky chain was seen by the First Federal Savings and Loan Association as the perfect retail partner for this experiment owing to the supermarket’s popularity with local customers; an appeal that would be beneficial to this new technology. The popularity of Hinky Dinky was particularly valuable, as the move by First Federal Savings and Loans, to establish an offsite transfer system challenged, but did not break banking law at that time (Ritzer, 1984).
At the heart of the technical EFT system initiated by First Federal, formally known as Transmatic Money Service, was a rudimentary, easy-to-install package featuring a point-of- service machine, with limited accessory equipment in the form of a keypad and magnetic character reader. The terminal housed in a dedicated booth within the store and was operated by store employees (making a further point of the separation between bank and retailer). The terminal enabled the verification and recording of transactions as well as the instant updating of accounts. The deployment of the terminals in Hinky Dinky stores shocked the financial industry because it made the Nebraska S&L appear to be engaging in banking activities, while the terminals themselves provided banking services to customers in a location that was not a licensed bank branch!
From its origins in a mid-sized retail chain in the Midwest, some 160 “Hinky Dinky” networks appeared across the USA between 1974 and 1982, before S&Ls abandoned them in favour of ATMs and credit cards. These deployments included a roll out in 1980 by the largest savings banks by assets in the USA at the time, the Philadelphia Savings Fund Society or the PSFS. Rather than commit to the large capital investment that ATMs necessitated, without guarantees of its viability or a secure return on investment, the PSFS pivoted the “Hinky Dinky” terminals as part of the rolled out of its negotiable order of withdrawal (NOW) accounts (commercialised as “Act One”).
The NOW accounts were launched in the early 1970s by the Consumer Savings Bank, based in Worcester, MA (today part of USBank), as way to circumvent the ban on interest payment and current account deposits imposed on S&Ls by Depression era regulation. Between 1974 and 1980, Congress took incremental steps to allow NOW accounts nationwide, something the PSFS wanted to take advantage of. Consequently, in February 1979, the PSFS signed an agreement with the Great Atlantic and Pacific Tea Company (A&P) to install Transmatic Money Service devices in 12 supermarket locations. This was part of the PSFS wider strategy “to provide alternative means for delivering banking services to the public” (Hagley Archives: PSFS Collection).
These terminals did not, however, allow for the direct transfer of funds from the customer’s accounts to the retailers. Rather the terminals, which were operated by A&P employees, were activated by a PSFS plastic card that the society issued to customers, and enabled PSFS customers with a Payment and Savings account to make withdrawals and deposits. The terminals also allowed PSFS cardholders and A&P customers to cash cheques.
The equipment used by PSFS, the Hinky Dinky devices, therefore represent an interesting middle ground which improved transaction convenience for consumers, was low risk for the retailer and was relatively less costly for banks and financial institutions than ATMs (Benaroch & Kauffman, 2000).
One of the most interesting features of the Hinky Dinky terminals as they were deployed by the PSFS and First Federal Savings, was that they represent co-operative initiatives between retail organisations and financial institutions. As mentioned before, this was not necessarily the norm at the time. As the legal counsel to the National Retail Merchants Association (a voluntary non-profit trade association representing department, speciality and variety chain stores) wrote in 1972: “Major retailers… have not been EFTS laggards. However, their efforts have not necessarily or even particularly been channelled toward co-operative ventures with banks,” (Schuman, 1976, 828). These sentiments were echoed by more neutral commentators who similarly highlighted the lack of dialogue between retailers and financial institutions on the topic of EFTS (Sprague, 1974). The extent to which retailers provided financial services to their customers had long been a competitive issue in the retail industry: the ability of chain stores, such as A&P in groceries and F.W. Woolworth in general merchandise, to offer low prices and better value owed much to their elimination of credit and deliveries (Lebhar, 1952). With the advent of EFT retail organisation’s provision of financial services raised the prospect of this becoming a competitive issue between these two industries.
The prospect of a clash between retailers and banks was increased moreover, as there had always been other voices, other retailers, who had been willing to offer credit (Calder, 1999). In the early years of the 20th century, consumer demand for retailers to provide credit grew. This caused tension with the cash only policies of department store such as A.T. Stewart and Macy’s, and the mail order firms Sears Roebuck and Montgomery Ward (Howard, 2015). Nevertheless, it was hard to ignore such demand as evidenced by Sears decision to begin selling goods on instalment around 1911 (Emmet and Jeuck, 1950, 265). Twenty years later, in 1931, the company went a stage further by offering insurance products to consumers through the All State Insurance Company. Other large retail institutions, however, resisted the pressure to offer credit until much later (J.C. Penney for instance would not introduce credit until 1958). Credit activities by large retailers, nonetheless, were determinant for banks to explore their own credit cards as early as the 1940s while leading to the successes of Bankamericacard and the Interbank Association in the 1960s (Bátiz-Lazo and del Angel, 2018; Wolters, 2000).
The barriers between banks and financial institutions on the one hand, and retailers on the other, continued to remain fairly robust. Signs that this was beginning to change began to emerge in the 1980s, when retailers, such as Sears began to offer more complex financial products (Christiansen, 1987; Ghemawat, 1984; Raff and Temin, 1997). Yet, the more concerted activity by retailers to diversify into financial services, would ultimately be stimulated by food retailers (Martinelli and Sparks, 1999; Colgate and Alexander, 2002). The Hinky Dinky System however shows that a co-operative not just a competitive solution was a very real possibility.
In 2021 we are witnessing an extreme extension and intensification of these trends. Throughout the ongoing Covid-19 pandemic, the use of cash has greatly declined as more and more people switch to digital payments. In the retail industry, even before the pandemic, POS innovations were becoming increasingly digital (Reinartz and Imschloβ, 2017) as retailers shifted toward a concierge model of helping customers rather than simply focusing on processing transactions and delivering products (Brynjolfsson et al., 2013). Consequently, the retail-customer interface was already starting to shift away from one that prioritised the minimisation of transaction and information costs toward an interface which prioritised customer engagement and experience (Reinartz et al., 2019).
A second feature of the pandemic has been the massive increase in interest in crypto currencies, in its many different forms, around the world. This is most apparent in the volatility and fluctuations in price of Bitcoin, but is also evident in the increased prominence of alternative fiat currencies (such as Ether). Indeed, even central banks in Europe and North America are discussing digital currencies, the government of El Salvador has made Bitcoin legal tender, while the People’s Bank of China have launched their own digital currency in China. A further manifestation of the momentum crypto currencies are gaining include the private initiatives of big tech (such as Facebook’s Diem, formerly Libra). Yet, in spite of all of this latent promise, transactions at point of sale with crypto currencies are still minuscule and time and again, surveys by central banks on payment preferences consistently report people want paper money to continue to play its historic role.
It thus remains too early to forecast with any degree of certainty what the actual long-run effects of the virus, social distancing and lockdowns will have on the use of cash, how consumers acquire products and services, and what these products and services are. It is also uncertain whether and if greater use of crypto currencies will lead to a decentralised management of monetary policy (and if so, the rate at which this will take place). It is though almost certain that consumer’s behaviours, expectations and habits will have been altered by their personal experiences of Covid. In this context the story behind “Hinky Dinky” reminds us to be sober at a time of environmental turbulence and wary of extrapolating trends, to better understand the motivation driving the adoption of new payment technology as some of these trends, like “Hinky Dinky”, might look to have wide acceptance but to result in a short-term phenomenon.
We appreciate helpful comments from Jeffry Yorst, Amanda Wick and J. Carles Maixé-Altés. As per usual, all shortcomings remain responsibilities of the authors.
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For a long time, one of the pillars of the cashless economy has been the advent of bank-sponsored credit cards (at the time called universal payment cards). There are several books about it as well as academic papers, of these my favourite is that by Dave Stearns. You can also see a video by Lana Swartz discussing her book which touches on the genesis of Diner’s Club.
Today (18.Sep.2020), David Birch reminds of the genesis of this payment medium in his column while celebrating the 58th anniversary to what was to become VISA. Throughout his writings, Birch has had a preference for the insight story by Joe Nocera’s “A Piece of the Action “(which, of course, Dave and Lana considered in their work).
However, I had to somewhat disagree with Birch’s version of events. For one I think he is giving too much credit to Diner’s, which was a travel and entertainment card. He is also downplaying the role of large retailers, which offered credit to customers and the main competitors for the banks.
Another point of departure is whether the “combination of regulation and technology” sorted all the problems. In terms of technology, the magnetic stripe was necessary. But at a more fundamental level were the computer systems that enabled to process the large volume of payments within deadlines.
There has been a lot of emphasis on how credit cards were posted indiscriminately for their adoption. We wrote on the UK experience of Barclaycard. However, banks in the USA had been attempting to offer an alternative to store credit since at least the 1940s. Geographic restrictions at the time in the USA led to the development of a business model that enabled users to cross state lines (something difficult to do with personal cheques or the yet to develop ATM network). I think that was part of the key to explaining the success of VISA (and shortly after what was to become Mastercard, launched by Illinois banks which at the time was a single branch state). So a model in which banks were able to network on creating a platform is the argument that Evans and Schmalensee used in their seminal work on two-sided markets.
However, in a paper with Gustavo del Angel, we argued that American banks made their proposition superior to that of single retailers thanks to their financial muscle and contacts with diverse retailers. It was also the case that the international network built thanks to “monopoly” positions of large incumbent banks in different countries, which eventually became and remain the biggest acquirers in their territory.
Here the non-discrimination clause (where paying by cash was not to be less expensive than paying plastic) was a critical achievement in the marketing of the card by banks amongst retailers. Retailers accepted the cards (and pay banks a commission when customers used the card), based on market studies showing customers with cards would purchase more. The one issue was that these studies prepared by the banks or credit card companies themselves.
It was also the case that many international licences achieved positive cash flows much earlier than expected. Hence the risk of reading too much on developments in the US, where banks were much smaller in terms of branches and customers than in Europe, Japan and large Latin American countries.
In short, I agree with Birtch that:
That the evolutionary trajectory of credit cards was not a simple, straight, onwards-and-upwards hockey-stick to glory and to gross margins that merchants can only dream of.
But the story has perhaps more twists and turns than most people give credit.
My formert teacher and mentor, Ismail Ertuirk, nails it on the head with this brief post on the challenges of FinTech startups to really challege established providers. He clearly mentiones the issue of core capabilities to be a credible competitor and how Ant Group business model looks like big retailers today (ie shops withind shops) as opposed to the integrated model of established banks.
From the author (in Likenedin) #wirecard scandal is more than a failure of audit and regulation. It is also a failure of #fintech policy in the EU. German and the E.U. authorities’ response to #wirecard scandal is narrow-minded ignoring the lessons from contemporaneous global trends in #fintech, especially the transformation of Ant Group from being largely a payment #fintech to a #fintech group that consists of financial services platform business and complementary joint ventures with the likes of #vanguard for retail banking products. This new business model in financial services is expected to make Ant Group, after the expected IPO, more or less the third largest bank in the world by market capitalisation, bigger than the likes of Citigroup and HSBC. #fintech in the EU can only be truly successful to disrupt the existing dysfunctional European banks if the EU creates a genuine single market in financial services to support its open banking reforms. See my opinion piece for Radix ThinkTank .
The use of cash fell substantially in the early days of the Covid-19 pandemic with the acceleration in online shopping and contactless payments – but cash usage has bounced back as lockdown has eased. Long-term prospects for retail payments remain uncertain.
It is still too early to tell whether Covid-19 and the public health interventions implemented in response will have permanent effects on retail payments in the UK.
Initially, the hoarding of cash was overshadowed by an acceleration in e-commerce and contactless payments, an increase in the use of mobile payment apps and – some speculated – the possibility of cryptocurrencies becoming mainstream. This happened while bank branches closed (some for good), as many as 9,000 ATMs (15% of the total) remained idle and the media falsely reported a high risk of transmission through banknotes.
But despite these apocalyptic messages and the initial negative shock leading to a severe contraction in the use of cash, transactions using banknotes and coins began to recover even before lockdown eased, as Figure 1 suggests, while cash usage increased by two-thirds after lockdown measures eased.
Figure 1. UK transaction volume in the LINK ATM network, 2018-2020 (millions)
Note: These figures include balance enquiries and rejected transactions made through the LINK network, but do not include transactions made by customers at their own banks’ or building societies’ ATMs.
Before Covid-19 struck, digital retail transactions in the UK were on the rise, as Figure 2 indicates. Ten years ago, cash was used in six out of 10 payments. As late as 2016, cash accounted for 40% of all payments and 44% of all payments made by consumers in the UK.
The adoption of contactless payments in public transport networks, increasing e-commerce, widespread use of plastic cards and digital payment applications – for example, Apple Pay, Samsung Pay, PayPal and iZettle – as well as the increase in ‘tap and go’ payment limits, boosted digital payments.
Industry group UK Finance reported that the proportion of cash transactions was 28% in 2018 with an expectation of it dropping to 9% by 2028 (UK Finance, 2019). The long-term downward trend in the use of banknotes and personal cheques indicates that neither will dominate on-the-spot transactions ever again.
Figure 2. UK payment volumes, 2009-2019 (millions)
But it is too early to tell whether the trend of declining use of cash and personal cheques accelerated in the context of Covid-19. The acceleration implies a long-term structural change within retail payments rather than on other parts of the transaction economy (namely online versus bricks-and-mortar, financial inclusion, bank facilities – ATMs, branches, self-service, etc.).
Recent attempts to rush the UK economy to rely solely on contactless and digital payments have highlighted deep-rooted inequalities and the need for access to cash by some communities (including vulnerable consumers). Anecdotal and mass media reports suggested that joblessness associated with the Covid-19 pandemic might have increased the demand for cash by people in the lowest income strata and those living in rural areas.
These trends, in turn, point to the following major issues:
A need for a better understanding of why some consumer groups remain in a cash economy (Ceeney et al, 2018; Alabi, 2020).
The importance of a resilient back-up within the retail payments infrastructure.
Finding ways to achieve an orderly resizing of the UK cash distribution cycle (Bank of England, 2020).
What does the evidence from economic research tell us?
Short-term impact: a shock to the system
An initial hoarding of cash (Ashworth and Goodhart, 2020) and an unprecedented surge in the demand for gold as a store of value (Lepecq, 2020a).
The possibility of viral transmission through banknotes and coins. But laboratory studies (including one by the European Central Bank) suggest a higher chance of transmission through stainless steel and plastic surfaces than cash (Bank of International Settlements, 2020).
In the UK, over 80% of banknotes are distributed through ATMs. Precautionary steps had to be taken by central banks and financial institutions to supplement their cash inventories as retail bank branches closed while some ATMs became idle (for example, at airports and casinos) and others experienced intensified use (for example, in supermarkets).
But the cash distribution infrastructure (for example, the number of ATMs, security vans, retail bank branches, clearing centres, etc.) was designed to fit a bygone era and is currently thought to be ‘oversized’ as it faces declining demand. It is deemed not fit for purpose in the UK (Bank of England, 2020).
Innovations in retail banking systems are incremental (Bátiz-Lazo and Wood, 2002; Bátiz-Lazo, 2018). Not surprisingly, during the past few months, no single digital payment solution has been tremendously disruptive or become a clear ‘winner’. Indeed, it is to be expected that some solutions will be adopted, some discarded, and some changes will only be transitory.
The fortuitous and incidental innovative nature of cryptocurrencies is evident as they remain invisible within the high street, while most of their volume emerges from speculative market trading (Hu et al, 2019).
The recent demise of Wirecard, the German fintech champion, raises questions about whether an accelerated shift to digital payments exacerbates participants’ risks in terms of both compliance and costs (Krahnen and Langenbucher, 2020).
Through their dominance of e-commerce, social media, messaging, taxi-hailing and other platform services, Asian apps – such as QQ and WeChat in China or Go-Jek and Grab in Indonesia – provide a simple solution to connect their mass market users with their respective mobile wallet products – Ali Pay, WeChatPay, GoPay, GrabPay, respectively (Aveni and Roest, 2017; Yunus and Pamungkas, 2018). The Asian cashless experiences have yet to be replicated in Europe and North America as indigenous platforms – Uber, Amazon, Netflix, Facebook, Skype, etc. – rely on plastic cards for payment.
Global supply chains have been disrupted causing a contraction in cross-border payments – for example, a purchase in Amazon.co.uk being billed through Ireland or Luxemburg.
Long-term impact: potential structural changes
There is and will be greater competition among individual providers of credit and debit cards, or between payment cards and digital solutions, than between any of these and cash (for example, Brown et al, 2020).
As a single, independent payment solution, the volume of transactions with banknotes will continue to outpace any other single provider for settling on-the-spot transactions and small value payments.
The Visa-Mastercard duopoly position as chief clearing platforms for domestic and cross-border retail payments will remain unassailable (pending the success of national initiatives such as those in China, India, Russia and the European Processor Initiative).
Consumer surveys sponsored by central banks consistently suggest that over 70% of respondents and particularly those currently using banknotes in retail transactions have no plans to go cashless (for example, Cleland, 2017; Chen et al, 2020), prompting questions about whether the needs of vulnerable sectors of the population with a strong preference for cash can be accommodated.
It has been argued, while not empirically supported, that cash hoarding by financial institutions prevents a deeply negative interest rate policy as well as reducing corruption and tax avoidance in the ‘shadow economy’ (Rogoff, 2016). Steps aimed at preventing illegal transactions and diminishing the size of the informal economy (while aiming to improve countries’ fiscal positions) could thus lead governments to support and encourage cashless payments in a way that they have not done before (for an opposite view, see McAndrews, 2020).
Applications of technology can help to increase financial inclusion (Demirgüç-Kunt et al, 2018; World Economic Forum, 2011). The role of state actors is critical in the genesis and dissemination of these technologies (Batiz-Lazo et al, 2020). But increasing evidence of financial inclusion leading to over-indebtedness among people living in poverty (Anderloni and Vandone, 2008) and the apparent superiority of direct cash transfers to the economically vulnerable raise questions about financial inclusion as a goal and its effectiveness as a policy tool (Duvandack and Mader, 2019).
How reliable is the evidence?
Although there were calls to replace notes and coins with paper cheques as early as in 19th century France (Baubeau, 2014 and 2016) and Edward Bellamy proposed a credit card in his 1888 utopian novel (Bellamy, 1888), the modern idea of a cashless economy emerged in the United States during the 1950s, as banks adopted computers and faced the rising cost of processing paper cheques (Batiz-Lazo et al, 2014).
Despite this long history, there are no systematic studies of changes in means of payment during pandemics or health crises. Nonetheless, the evidence cited above emerged predominantly from peer-reviewed journals and reports from national and supra-national institutions with responsibilities for oversight of financial markets and institutions accumulated over the past 30 years and during the early months of the current pandemic.
As countries begin to exit lockdown and with the threat of a second wave of infections, it will take a while until we can confidently assess the effects of the global pandemic on the public’s long-term use of cash.
UK Finance provides readily market information but it is only available to members. LINK, the single operator of ATMs, provides regular, freely accessible information on cash distribution volumes. Central banks have scheduled surveys of consumer demand and payment preferences for the autumn of 2020 and mid-2021.
What else do we need to know?
Short-term: ascertaining the force of the shock to the system
Previous economic crises, including that of 2008/09, were associated with a strong ‘unexplained’ increase in the demand for cash, leading to suggestions that such a shift could be related to increased uncertainty (Jobst and Stix, 2017). Rising unemployment has the potential for individuals to lose access to credit facilities and even bank accounts. These individuals might turn to cash as the ultimate budget management tool.
What will be the impact of Covid-19 on the profitability of Independent ATM Deployers (IAD) and, in turn, the location of free-to-use ATMs? In this regard, a consultation was underway before lockdown (see Payment Systems Regulator, 2019). It is unclear how recent events will modify the recommendations of that consultation.
Policy concerns about the reduction in the number of bank branches and ATMs in the UK pre-dated lockdown (for example, Bank of England, 2020; Payment System Regulator, 2019). There is a potential to increase the number of ‘underbanked’ users and unbanked communities if Covid-19 further reduces transaction volume at physical bank branches and ATMs by accelerating a move towards cashless payments, e-commerce and online banking services. It remains to be seen how non-banking intermediaries, participants in ‘shadow banking’, and fintech start-ups respond to the challenge (see Lepecq, 2020b).
At a time of major economic contraction, investors’ appetite to continue funding fintech start-ups remains to be seen.
Consumers ultimately have no clarity as to the cost of using alternative means of payment. This involves both pecuniary costs (for example, commissions) and non-pecuniary costs (for example, traceability of transactions, loss of anonymity and fraud). Research is mostly mute on these topics.
Innovations in digital retail payments have been mostly incremental while bank-based systems (such as contactless mobile payments, digital wallets or card-based e-commerce) will continue to dominate the trend towards digital transactions. In other words, it is unlikely that a shock like Covid-19 and lockdown will by itself originate a payment innovation.
It is unclear whether there will be a political appetite for an accelerated move towards a cashless economy considering some of the socio-economic groups it would potentially put at a disadvantage in terms of accessibility, financial inclusion and financial literacy. All of these issues cross lines of age and gender, income and wealth levels, race and ethnicity, and the urban/regional divide (in particular the case of London and the south of England versus other parts of the UK).
The regulatory landscape
Other than General Data Protection Regulation, there is no framework for determining access to and exploitation of digital transactions. National and local policy-makers have relied on aggregate card usage data as a high-frequency proxy for economic performance to understand the extreme shifts in consumer expenditures caused by the pandemic and lockdown, and to design targeted policies to support the most affected sectors.
Systematic studies based on credit and debit card transactions are beginning to emerge, such as one for France by Bouine et al (2020) and one for Mexico by Campos-Vázquez and Esquivel (2000). But questions remain about privacy, particularly in countries without a robust regulatory framework protecting users’ personal information.
As a large and complex infrastructure, it is unclear the extent to which the payments system complies with United Nations sustainability goals (other than those relating to financial inclusion and gender). It should also be subject to a climate-resilience stress test.
Counting On Currency’s Cash Per Diem is the blog of Daniel Littman (formerly of the Federal Reserve Bank of Cleveland) where he comments on news and stories on currency and payments from around the world.
Consultant and industry practitioner David Birch‘s 15Mb blog offers on-the-edge takes on digital financial services.
Graham Mott‘s LinkedIn updates provide his insights as strategy lead for Link on the use of cash and the ATM market in the UK.
The hype around the success of mobile money in Kenya has been growing as mobile payments develop both there and worldwide. This week’s Economist cites a figure that 43% of Kenyan GDP is being channelled through M-Pesa each year, attributing the statistic to Safaricom itself. The figure has been rising from 31% last year, which was cited by both The Economist and the Financial Times. In August 2013, GSM Association released an infographic on “The Kenyan Journey to Digital Financial Inclusion”, which also used the 31% figure. The World Bank, CGAP, AFI and others have also used or cited such measures of progress in this field.
A brief introduction contextualised the discussion by enumerating the deployment and use prior to the crisis of ATMs, mobile and internet banking as well as some data on Point of Sale (POS) terminals in this small, open economy (where tourism is one of the main sectors of economic activity). The interaction between these elements of the payment ecosystem is even more clear when considering new technologies. For instance, Leonidas and Sophia note:
1) The only bank which offers a Contactless visa card is the Bank of Cyprus. Their 18-25 Youth card is the first card in Cyprus with contact-less technology and can be used for transactions below 20 euros, without having to insert a PIN in front of the POS. For transactions above 20 euros, you can keep the card in front of the POS, but you have to input your pin.
2) There are approximately 1460 enterprises across the island with contactless technology. Some of these enterprises include cafes such as Costa Coffee and Starbucks, pharmacies, bakeries, supermarkets, petrol stations and shops in malls.
3) JCC, the main payment system provider in Cyprus, is currently running a campaign at Nicosia cafes. All contactless transactions that take place at Nicosia cafes are eligible to participate in three monthly draws for 3 IPAD minis.
Essential to the 15 day closure of the banking system in March 2013 (similar only to the US in 1933 and Argentina in 2002), was that all electronic transactions and money transfers were frozen with the exception of credit/debit cards and ATM withdrawals. Leonidas and Sophia adopt a ‘sequence of events’ method to discuss an intensification in the use of cash during this period as ‘people can sustain themselves only by queuing at the long lines of ATMs to withdraw cash, or stay cashless and use their credit cards.’ Interestingly, during their research, they were unable to provide evidence to support rumours that ‘IOU’ notes replaced cash and cards as means of payments during Cypriot banking crisis.
Shortly after the central banks’ announcement that that banks will remain closed, long queues begin to form in front of the cash machines (18-III-2013)
In spite the Central Bank of Cyrpus’s instructions to banks that they should keep re-supplying the ATMs with money several times, by March 22nd (seven days into the crisis) long queues have formed at almost every one of the bank’s ATMs island wide. This was partly a result of panic and partly a result of the rejection of card payments by merchants. In other words (and like was the case in New York during Huracain Catrina), the payments ecosystem suffered a massive blow ‘as every card transaction directs the retailers’ money into a bank account. With a bank system under the threat of bankruptcy, or levy as the best option, most retailers prefer to turn down customers rather than accept their cards.’
In summary, the paper of Leonidas and Sophia offers a detail reach account of the Cypriot banking crisis, with a focus on the effects on the retail payment system but without loosing its connection with institutional stakeholders and macroeconomic developments. This narrative is enriched when the authors compare and contrast with developments in the US and Argentina, as it enables to ascertain the unique features of the crisis in Cyprus.