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CoverStory

Image capture and processing technologies, introduced which billed them monthly for charges accumulated for
in the 1990s, eliminated the need to physically transport telegrams and fund transfers. Department stores soon
checks for clearing between banks, and the Check Clear- started offering customers charge accounts, too.
ing for the 21st Century Act (or Check 21 Act) effectively
transformed the check payment system into a mostly elec- Diners Club took the concept to the next level in 1905,
tronic mechanism. Check 21, which took effect in 2004, when it offered charge accounts for travel and entertain-
authorized banks to truncate paper checks and exchange ment expenses. This marked the first time a charge ac-
electronic images of those check deposits in lieu of the pa- count could be used for purchases other than at the com-
per items. pany holding the account. It also opened the door to what
today is known as merchant acquiring. Merchants had to
Before long, the technology evolved and banks realized set up accounts with Diners Club and pay a fee for each
customers could capture check images using available transaction charged using a Diners Club account.
check scanning equipment (in the case of business cus-
tomers) and desktop scanners (available to consumers). American Express entered the arena with a similar three-
Eventually smartphone-based scanning became an op- party charge account scheme in the late 1950s, and became
tion, giving birth to mobile remote deposit capture. the first to issue embossed plastic charge cards. At about
the same time, Bank of America launched BankAmeri-
Today, better than 99 percent of all checks clear between card, with an initial drop of 60,000 cards to its best cus-
banks as electronic images, according to the Fed. Merca- tomers, and incentive pricing to entice merchants to accept
tor Advisory Group estimates 25 percent of consumers the cards for payment.
use mobile deposit. John Leekley, founder and CEO of
RemoteDepositCapture.com, believes mobile check de- Eventually, BofA franchised the program to other large
posit is even more entrenched. "Some of our own research banks around the country (there was no interstate bank-
indicates many financial institutions are now seeing 50 ing at the time), and a separate group of banks formed a
percent or more of their consumer deposits coming from competing program, called MasterCharge. What eventu-
mobile deposit," he said. ally became known as the bank-owned companies Visa
and Mastercard built sophisticated communications net-
ACH as check replacement? works to support the authorization, processing and settle-
In the 1970s, faced with the prospect that mounting num- ment of credit card payments. Mastercard shed its bank
bers of check payments could soon overwhelm the bank- ownership, becoming a publicly traded company, in 2006;
ing system, the Fed and banking industry set about to cre- Visa followed in 2008.
ate the automated clearing house (ACH) as an electronic Electronic authorization and debit
alternative to check payments.
The1980s were a turning point for electronic payments,
"It was also seen as a cheap way to move money outside of as the card brands began actively migrating to electronic
Fedwire," said Bill Moroney. Moroney was the first presi- point-of-sale (POS) terminals that could help authorize
dent and CEO of NACHA, the ACH rules group, a position and route card payments through their networks.
he held from 1984 to 1988. "In the mid-1980s, we were re-
ally focused on getting everyone on the bandwagon with "To spur rapid terminal deployment, the card associations
direct deposit," he noted, adding that using the ACH for dramatically reduced interchange rates, explaining that
automated payments then "kicked off." on-line transactions were cheaper and faster to process,"
said Paul Martaus, a now retired industry consultant.
The ACH in the early years was a semi-electronic payment They also began pricing interchange to account for the
system. Banks would truck magnetic tapes and computer unique risks posed by different categories of merchants.
disks containing instructions for ACH payments to lo- "Thus was born the convoluted and incomprehensible
cal Federal Reserve Bank offices or correspondent banks, pricing structure that persists today," he added.
which would process the transactions; final settlement
generally lagged initiation by one to three days. The move The 1980s also marked the beginning of the rise of ATM
to a fully electronic ACH began in the 1990s, with a Fed networks and debit cards. This was driven largely by "an
edict that all financial institutions have online connec- explosion in bandwidth," explained Moroney, who served
tions with their Reserve Banks. In recent years, same-day as president and CEO of the ETF Association from 1981 to
ACH has helped to further compress the clearing cycle. 1984.

The birth of cards ATMs had existed for about 10 years but were used pri-
Charge cards, the predecessors to bankcards, began with marily as branch extensions. Regional ATM networks al-
Western Union. What Western Union introduced in 1914 lowed consumers to access cash from their bank accounts
weren't exactly cards; they were paper documents iden- regardless of time or place. "Debit cards made a lot of
tifying customers who had accounts with the company, sense," Moroney noted.

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