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Ask Hoot-E: A Journey Through Payments History

By Hoot-E posted 07-12-2024 16:34

  

Special thanks to @Emily Nelson, AAP, APRP, NCP, Manager, Payments Education for helping me write this blog!

It has been one full year since the July 2023 launch of the FedNow® Service, and as expected, so much has happened since last year’s launch. The FedNow® Service currently sits at close to 900 participants and counting. Considering the Federal Reserve originally launched with 35 early-adopting banks and credit unions, the service has certainly come a long way.

In honor of the FedNow® Services' one year anniversary, let’s crack open the history books to see how far we’ve come in the payments world.

The United States banking system got its start at the end of the 18th century. For history buffs or theatre fans, you may know Alexander Hamilton played a significant role in our banking system's creation. One of our nation’s founding fathers saw the need for economic growth built on a new constitution and a banking system.  His vision was grand for the time, and although it had support, it failed a few times before taking off.

Hamilton’s vision for the banking system would be viewed as a public-private banking system. The government would have about $2 million in assets, whereas the private investors would own a larger portion. This idea emerged from the need for economic growth and recovery after the Revolutionary War when funds and avenues for funds were largely exasperated. One version of this was implemented in December 1791 with the establishment of the First Bank of the United States, which held a charter for 20 years. The Second Bank of the United States was established in 1816 and failed by 1836. Another attempt at a national bank occurred in 1907 and then in 1913, the Federal Reserve System was established. Though the Federal Reserve System’s goals have slightly changed over the years, the basis of a centralized system is still in effect today.

Now that we know how the U.S. banking systems came to be, let’s look at the evolution of our payment systems. It may come as little shock, but the payment options of Hamilton’s time are very similar to today’s options.

  • During the late 17th century, they had checks, but prior to this, they were issued as IOUs.

  • In the late 18th century, bank notes were exchanged as paper money.

  • Wire transfers were sent during the 19th century by utilizing a well-known telegraph network, Western Union.

    Payments of yesteryear included electronic payments and these payment options are still in use today! However, how we utilize and process them is slightly different. We probably haven’t seen an IOU accepted as payment in many years,

    and if we had, the response would likely be far more expressive than what would have been seen during the 17th century.

       

    Let’s flash forward to a more recent history with payment options.

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    • Charge card creation began with the Diner’s Club in 1953.
    • Usage of debit cards began in 1966 with the Bank of Delaware.
    • In 1972 we saw the development of the Automated Clearing House, more commonly known as ACH. This payment system was largely built on what we learned about check processing just in an electronic format.
    • In November of 2017, The Clearing House launched Real-Time Payments, RTP®. This was the first instant payment option offered to financial institutions.
    • On July 20, 2023, we saw the Federal Reserve’s instant payment system launch of the FedNow® Service.

    The FedNow® Service, like other payment systems of the past, is a representation of economic need as well as a payments evolution. The Federal Reserve launched this payment option to meet the need for a faster settlement option. Settling IOUs could take years, whereas an instant payment via the FedNow® Service takes less than 20 seconds. The FedNow® Service allows institutions to manage their cash flow more efficiently. With credit push payments, an institution can determine what risk mitigation tools to use upfront before sending a payment into the network. The network itself offers fraud mitigation tools that can be used in conjunction with those employed by an institution. The FedNow® Service has seen massive growth in adoption in its first year, and it will continue to see growth throughout the years serving a need for fast and convenient payments.

    Now that our journey back in time is complete, it is apparent that the payment options of yesteryear and today are very similar. They revolve around the people making the payments and their needs, including the need for speed. If Hamilton were here today, I imagine he would be proud of the tenacity of the people and their growth. He would likely be intrigued by the possibilities of the FedNow® Service, and he certainly wouldn’t feel like he threw away his shot! (Alexa, cue the music.)

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