How the digitalization of payments sets the scene for a cashless society

[Original Bátiz-Lazo, B. (2021) “How the digitalization of payments sets the scene for a cashless society”, ADP ReThink Now (June 1, 2021).]

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[1], 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.

[1] (accessed 07/May/2021)

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About bbatiz

I have edited NEP-HIS since 1999 and its blog in 2010. My background is economics and business history. I am currently at Northumbria University (Newcastle) and my research interests are broadly in applications of computer technology, retail banking and the cashless society.

1 thought on “How the digitalization of payments sets the scene for a cashless society

  1. Pingback: Counting On Currency's Cash Per Diem - July 2021 Links | Counting On Currency

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