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October 14, 2019 • Issue 19:10:01

A brief history of modern payments

Fedwire. Previously, settlement of interbank payments was
typically done with the physical exchange of cash and gold.
Evolution of the check from paper to electronics
The Federal Reserve Act also paved the way for a national
clearing house for check payments. Before that, interbank
check clearing was handled exclusively through bank-
owned clearing houses. The most well-known of these was
the New York Clearing House (today known as The Clear-
ing House, or TCH). Banks would dispatch clerks with file
boxes full of paper checks and cash to a local clearing house
each day where they literally exchanged cash for checks
drawn on their respective banks.

The check payment system got its first technology upgrade
in the late 1950s with the introduction of machine-readable
By Patti Murphy magnetic ink character recognition (MICR). The American
Bankers Association published standards for adding MICR
his month, both established payments enter- lines to checks in 1958, based on technology developed by
prises and upstarts jockeying for position in the the Stanford Research Institute and General Electric Com-
burgeoning sphere are gathering in Las Vegas for puter Laboratory.
T Money 20/20. This yearly gathering has become
a seminal event in the payments space, offering a look Scanning devices read MICR lines to ascertain bank and
into what the future holds for electronic payments. In the customer account information for check clearing and post-
lead up to Money 20/20, we thought it would be helpful to ing. Even with this automation, however, banks continued
examine how payments have evolved over the past 100- exchanging paper checks, typically shuttling sacks of paper
plus years. to and from clearing houses or Federal Reserve Banks for
clearing and settlement
The first electronic payments date back to the late 19th cen-
tury, when Western Union Co. introduced the concept of
wiring money, which leveraged the infrastructure used for
its core business at the time, transmitting telegrams. These Contributed articles inside by:
electronic fund transfers predated by 34 years the Federal
Reserve's introduction of a government-backed wire trans- Brandes Elitch ........................................................................................18
fer system. Nick Starai................................................................................................19
Dee and Emily Karawadra .................................................................32
The Federal Reserve Board and the Federal Reserve Bank Dinesh Saparamadu ............................................................................36
System were created by Congress in 1913 as the nation's
central bank in the wake of the Financial Panic of 1907. By Cory Capoccia ........................................................................................38
1915 the Reserve Banks had begun moving funds electroni- Eddie Johnson .......................................................................................40
cally, and in 1918 they built a proprietary telecommunica-
tions system to process fund transfers, known today as TOC on page 3

Continued on page 30