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Payment Services

Background

In early times, payment transactions were in the form of bartering, in which people exchanged services for goods and vice versa. For example, they may have traded tools or even cows or sheep for items needed either for their homes or to perform their trade. Coins were later used for payment, with gold and silver dollars becoming popular currency in the United States by the 1800s. After a severe banking panic in the late 1800s and early 1900s, it became clear that the U.S. needed a stable monetary and financial system, which is why the Federal Reserve System was established by Congress in 1913. As described on the Federal Reserve’s Web site, “the system is composed of a central, independent governmental agency…in Washington, D.C., and 12 regional Federal Reserve Banks, located in major cities throughout the nation. Today, the Federal Reserve sets the nation’s monetary policy, supervises and regulates banking institutions, maintains the stability of the financial system, and provides financial services to depository institutions, the U.S. government, and foreign official institutions.”

Credit cards were first introduced in the 1950s as a payment option for consumers. Prior to this, merchants extended credit to the customers they knew to be loyal and frequent shoppers of their products and services. Universal credit cards, however, were created to allow people to make purchases from a variety of merchants. Diners Club is believed to be the first universal credit card, introduced to the general public in 1950. Frank McNamara, the founder of Diners Club Inc., invented the card with the purpose of using it to pay for meals at restaurants. Like other credit cards that were soon to follow, such as Visa and Master Charge (later Mastercard), these first cards required card holders to pay the full balance each month, so they realistically were charge cards more than credit cards. BankAmericard, introduced by Bank of America, was the first card that enabled revolving credit, giving consumers short-term loans with a flexible repayment schedule that included interest.

Today, all credit cards offer revolving credit, and American Express is the only issuer of charge cards, requiring the balance be paid in full each month. People can now pay for everything, from groceries to restaurant meals, gas, utility bills, car insurance, and more, with credit cards. As described in a Forbes article on the history of credit cards, “This broad acceptance is partly because most credit card issuers now operate under Visa (which grew out of the original BankAmericard) and Mastercard (born as MasterCharge). These massive payment networks work out acceptance agreements with merchants so that issuers don’t have to do it individually. They also set interchange rates, which are more affordable for merchants than they used to be.” Interchange rates, which were up to 7% in the past, now range from 2% to 3%. Diners Club, which is now operated by Mastercard, is accepted at more than 38 million Mastercard merchant locations around the world.

Money transfer services have evolved since the early days of Western Union, which was established in 1872 for the purpose of transmitting messages and “wiring” money from one location to another via a telegraph network. By the 1980s, people could use Western Union to pay their auto bills, mortgages, and other bills, and today, the company offers online bill payment and money transfer services. The growth of personal computers and the Internet in the 1990s and early 2000s, has also given rise to money transfer companies such as PayPal (originally Confinity) and Square. The money services sector has grown in recent years and now many different companies offer these and other services, including PayPal, Square, Western Union, Remitly, Transferwise, WorldRemit, Venmo, and Xoom, to name only a few.