Full faith and credit

My father seems to have acquired a Barclaycard soon after credit cards were first issued. His advice was simple: credit cards were extremely useful, provided that you paid the entire bill at the end of every month. Never carry a balance and never pay interest.

It remains some of the best financial advice I have ever received, and although credit-card companies might not erect a statue to him, I have generally followed it for the last 60 years.

Barclaycard was launched in Britain in 1966, the year that England won the World Cup. It was based on the American BankAmericard system, which eventually became Visa. The rival Access card arrived in Britain in 1972 and later became associated with Mastercard.

At first, the credit card was essentially an improved way of paying in shops and restaurants. The merchant put the card into a little mechanical machine, placed several sheets of carbon paper on top and pulled a handle across it with an impressive clatter. The embossed numbers were transferred to the receipt, which the customer signed. The shop did not necessarily know whether you had sufficient credit, and the card company might not learn of the purchase for several days after the merchant deposited the top copy at the local bank.

For all its mechanical simplicity, the credit card transformed travel. Before internationally accepted cards, going overseas involved deciding how much money you might need and carrying it in some combination of cash and traveler’s cheques. Cash could be stolen and was gone forever. Traveler’s cheques were safer because they could theoretically be replaced, but using them involved finding somewhere willing to accept or cash them.

This was especially awkward in the United States. Banks were not always willing to cash anything for someone who did not have an account with them. A foreign traveler might therefore depend on a large hotel, an American Express office, a currency exchange or a merchant accustomed to accepting traveller’s cheques. Sometimes you could buy something inexpensive with a large check and receive the change in cash. The system worked, sort of, but it could involve identification, countersignatures, suspicious clerks and a queue behind three people applying for mortgages.

The credit card removed much of this inconvenience. You no longer needed to estimate the cost of an entire trip before leaving home or spend the morning looking for a bank. A hotel room, restaurant meal or emergency purchase could be charged to a piece of plastic pretty much anywhere.

Then came the ATM and the debit card. Instead of visiting a bank on Friday afternoon to cash a paycheck and obtain enough money for the weekend, people could withdraw cash whenever they needed it. They could also buy groceries or gasoline directly from the money in their bank accounts.

The pay packet itself disappeared. Wages and pensions began arriving by direct deposit. Direct debits and standing orders took care of regular bills, while paper cheques began their long retreat towards extinction.

None of these developments eliminated paper money and coins, but they eliminated much of the physical and clerical labour required to move it.

The arrival of the internet gave the credit card an entirely new lease on life. It provided a ready-made method of paying someone you had never met, in a shop that might not possess a door, a counter or even a country that you could confidently identify.

Air travel was one of the clearest examples. Once, buying an airline ticket meant visiting a travel agent, choosing from the flights available on the agent’s screen and paying for a paper ticket weeks before departure. With the internet and a credit card, you could compare flights, buy a ticket at midnight and receive confirmation within seconds.

If necessary, you could spread the cost over two or three monthly credit-card bills, although this violated my father’s rule and usually meant paying interest. It was nevertheless more flexible than writing a check for the entire fare several weeks before travelling. Credit cards also offered protections that a cash payment did not, including the possibility of disputing a charge when a merchant failed to provide what had been purchased.

Each innovation initially appeared to make the previous one unnecessary, but the older methods rarely vanished completely. Cash survived the check. Credit cards survived debit cards. Banks survived PayPal. The result is that we now have more ways of paying than ever, occasionally including four different methods that fail at the same supermarket checkout.

Living in Cuenca provides a good illustration of how far the process has advanced. I can pay my rent and most regular household bills through my local banking app without leaving my sofa. What once required a visit to a bank, a utility office or both can now be completed in a few minutes. There is no queue, no numbered ticket and no discovery, after forty minutes of waiting, that I have come to the wrong window.

Services such as Deuna or Sipy take the process a stage further. A customer can scan a QR code and authorize a payment through an app without handing a merchant a Visa or Mastercard. The important change is not the appearance of the QR code. It is that the card networks no longer need to stand in the middle of every transaction collecting a toll fee.

Brazil has gone further with Pix, the instant-payment infrastructure operated by its Central Bank. Pix is not a new currency and it is not merely another phone app. It allows money held in ordinary accounts to move between individuals and businesses within seconds, around the clock, generally at little or no cost.

For small businesses, that matters quite a lot. A restaurant owner who makes a card sale on Friday may not receive the money until the following week. With an instant-payment system, the money can arrive before the customer is served his dessert.

Pix has become enormously popular in Brazil, and Ecuador’s Central Bank now says it is developing an instant system with similar functions, adapted to the safeguards required by a dollarized economy. If it works properly and different banks, cooperatives and payment services can all use it, it could be more consequential than the launch of another bank app. The real value lies in interoperability: I should be able to pay you instantly even if we do not use the same financial institution.

This raises an uncomfortable question for Visa and Mastercard. How long can companies that charge merchants for moving electronic instructions remain as dominant as they are today when central banks and fin-tech companies can move the same money almost instantly and much more cheaply?

American Express already offers a warning. It can provide worthwhile rewards and services to its customers, but merchants often dislike its higher charges, and it is less widely accepted than Visa or Mastercard. A payment card is not very useful when a sign on the counter tells you that the shop does not want it.

Visa and Mastercard are unlikely to disappear soon. They offer worldwide acceptance, credit, fraud detection, chargebacks and a remarkably reliable network connecting banks and merchants across borders. Pix and the proposed Ecuadorian system primarily move money domestically from accounts that already contain it. They do not automatically replace the ability to borrow, reserve a rental car, guarantee a hotel booking or dispute a fraudulent international purchase.

But their position may change. The card networks could cease to be the automatic route for everyday domestic payments and become premium services used when credit, international acceptance or additional consumer protection is required. We may use instant bank payments for rent, utilities, groceries and lunch, while keeping a credit card for travel and purchases where its protections are valuable.

That would bring the story back to my father’s original advice. The credit card would once again be a useful tool rather than an expensive way of borrowing money. Use it when it gives you something you need, pay the bill in full, and do not confuse the convenience of paying with the ability to afford what you are buying.

From the pay packet to the cheque, from the cheque to the plastic card, and from the card to an invisible transfer between two telephones, the history of payment has been a history of technology steadily removing inconvenience. The next step may remove some of the middlemen as well.