April 2014 is National Financial Literacy Month, and perhaps in that spirit, a brief history lesson might be appropriate.
The human ability to innovate and take advantage of technology has led to, among other wonderful inventions, many changes throughout history in how we pay for things. Each stage in the evolution of world payment systems has been driven inevitably by two key factors — a desire for more convenience and safety in how we make that payment. These historic trends will continue to exert a powerful influence on how the credit union movement services its membership.
Bartering To Commodity Money
Payments began with bartering. Almost every ancient culture bartered for food, tea, weapons and spices. In the pre-money era, bartering made trade and commerce possible. But bartering also had significant drawbacks. Bartered objects had no set worth, so transactions often involved long negotiations. Bartering also had geographic and timing limitations. Moving highly valued cattle or other livestock could be challenging and dangerous. Also, bartered goods were often perishable and value dropped with every passing day.
A number of cultures experimented with hybrid bartering. Exchanges could be "evened up" by agreeing to a set value with certain bartered items. For example, a trade in the Aztec empire might be a basket of corn for a rope of chilies and 10 cacao beans. Consumable commodities such as beans, salt and spices were used for payments because they were transportable and easily quantified. Ultimately metals, especially gold and silver ingots, emerged as preferred commodity money for large transactions. But ingots were not a practical solution for smaller consumer payments. The world soon embraced another revolutionary change in payment convenience.
Coins To Paper Money
Coins made their first appearance in what is now Turkey in 630 B.C. The King stamped precious metal slugs of uniform size and weight forming the familiar coin shape. Now value could be determined by simply counting coins. From Turkey, coins spread around the world to become the first global money system. With coins as a standardized medium of exchange, merchants and consumers traded freely for the daily necessities of life.
As coins began to circulate widely, fraud once again became an issue. One counterfeiting practice was called "clipping." The edges of coins were trimmed allowing the collection of silver or gold from the shavings. Naturally, the original coin lost value in the process. Early Italian bankers became experts with the scale, carefully weighing coins in order to confirm their real value. Another downside was that in bulk coins were heavy and difficult to transport. Currency needed to evolve.
The explorer Marco Polo amazed the Western world when he reported on the first use of paper money in Kublai Khan's China. Stamped with the seal of the Emperor, these paper bills carried the full value of gold or silver. Paper money started to take hold in Europe and their colonies at the beginning of the 18th century. While consumer confidence in the value of paper money ebbed and flowed for decades, cash was still king well into the 20th century.
Credit And Early Online Payments
After World War II, consumers embraced the automobile and took to the roads. The freedom of travel for business and pleasure drove a desire for a payment tool that was safer and more convenient than carrying large quantities of cash. Oil companies began issuing "charge cards" that travelers could use to pay for fuel, repairs and lodging. The convenience and value of the cash-free card became apparent to many other merchants as well. In 1950 the first universal payment card, the Diners Club Card, was introduced.
Credit cards had a life-style altering impact on consumer payments. Purchases of need or simply of want could be made without the requirement of ready cash. Credit cards were also safer for the consumer since the card company largely took on the responsibility for any fraudulent charges. The well-known downside of credit cards was the increase in consumer debt.
The 1980s and 1990s saw explosive growth in the use of credit cards. Soon billions of credit card transactions were occurring annually. Debit cards began to take hold during this period as well. By 1998, debit transactions outnumbered checks for the first time.
And yet, even this wasn't as convenient as consumers would soon be demanding.
Over the last two decades networks and computing technology have improved at exponential rates. E-commerce was born during this time and its rise in the world of payment transactions is unparalleled. After the Social Security Administration offered automatic electronic deposit of money into bank accounts in 1975, people became more comfortable with the idea of money being added to their accounts without ever holding the cash. Slowly but surely people started paying bills, transferring money, and sending money electronically. The growing worldwide acceptance of the Internet made electronic currency more important than ever before. Companies such as Amazon and e-Bay turned retail markets into virtual markets.
Creating new and improved ways to pay for goods and services is central to how we interact with each other. Like many innovations, change in the way consumers conduct their financial lives is motivated by the desire to have something better, more efficient and safer. As credit unions enter the next era of financial transactions, the only thing we can be certain of is that the way our members want to make payments will continue to change.
Samantha Paxson is vice president, marketing, for CO-OP Financial Services and can be reached at (800) 782-9042, ext. 2570, and
