A brief history of VISA and MasterCard
The card networks(VISA/MasterCard) started out as non-profit associations helping their member banks to generate profits. Today, they are hugely profitable publicly traded companies — A fact that would have astonished anybody in the 80s. How did this come to be? Read further
The rise of Checking Accounts
It’d be a stretch to say that the card networks might not exist today had the Federal Reserve Bank not mandated the banks to accept checks for deposit at par. But, this certainly took away the profits banks would have otherwise made by charging check deposits. The Checking account is by far the oldest payment system in the US. Back in the day, banks were faced with the problem of clearing checks presented by customers. A messenger carried bags of checks to other banks, received funds and brought it back for deposit. This led to the creation of Clearing houses where reps from banks came together, cleared & settled their checks every day. It made checking efficient & with Federal Reserve Bank imposing a restriction on banks from charging customers for deposits checking adoption accelerated.
ACH — Innovation and Automation
Naturally banks tried to find other ways to further optimize this process. Innovation led to the introduction of check sorters and MICR readers to automate this largely manual process. Unlike the usual rapid incremental path innovation takes, this one forked into two paths. While one group thought exchanging MICR data & electronic processing is more efficient than transporting physical checks & running them through MICR, other group progressed towards imaging checks to eliminate handling paper checks altogether. The MICR based electronic replacement for paper checks came to be known as ACH(Automatic Clearing House). ACH is managed by Non-profit NACHA(National ACH Association). Where do you use ACH today? Mostly online bill pay, payroll, eCommerce & account to account(P2P) transfers. Although ACH is pervasive, NACHA plays a limited role cos banks don’t pay NACHA & hence it doesn’t have the resources to innovate & expand. Also, the reason why ACH does not have fancy branding like the card networks. There is not much monetary value for participating banks.
