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From Cash to Cybermoney

By Bank of Canada    |   Monday, 1 December 2008

Financial innovation is permitting people to access the money they hold in the form of deposits in new ways. Fifty years ago, besides cash, cheques were the most common form of payment used by consumers and businesses. Today, retail payment instruments include credit and debit cards and stored-valued cards. In 2006, the credit card was the most popular payment method in Canada for large items, accounting for roughly 45 per cent of all transactions by value, with debit cards and cash accounting for approximately 30 per cent and 20 per cent of transactions, respectively. But cash continues to account for more than half of all transactions by number. Indeed, the value of bank notes and coins in circulation continues to grow at about 5 per cent per year. The continued popularity of cash largely reflects its convenience, its anonymity, its ready acceptability, and its status as legal tender. Although money remains the central pillar of the National Currency Collection, its curators have begun to add examples of alternative payment instruments, consistent with the mission to acquire material that reflects Canada's numismatic and economic heritage.

Proprietary charge cards became popular in North America during the first half of the 20th century. Issued by department stores and oil companies, these cards (typically made of paper, cardboard, or celluloid) enabled customers to buy products on credit. These differed from today's cards in two respects: holders had to pay balances in full, and the cards could be used only to purchase products from the issuer.

The first travel and entertainment charge card was introduced in the United States in 1950 by the Diners Club. Initially targeted at travelling salesmen, the cards could be used to purchase goods and services on credit at participating restaurants and stores. In the late 1950s, American Express and Carte Blanche entered the business, along with a number of banks that introduced the concept of customers repaying funds owed on a revolving basis, with interest charged on unpaid balances.

Hampered by a lack of a national and international network, it was not until 1966 that the credit card industry started to expand rapidly, following the decision by the Bank of America to license its BankAmericard to other banks. The card was introduced in Canada in 1968 by a number of chartered banks under the name Chargex. Will that be cash or Chargex? became a well-known advertising jingle. In 1977, the card began to be marketed under the internationally known Visa brand. MasterCard was also launched in 1966 by a group of California-based banks in competition with the Bank of America. It was subsequently introduced to Canada under the name Master Charge, the Interbank Card.

Client cards, which allowed holders to electronically access funds in chequing and savings accounts, were introduced in the 1970s. In 1984, a group of chartered banks formed the Interac Association to develop a national system that would allow cardholders to access funds from members' automated teller machines. Starting in 1990, Interac Direct Payment, which permitted cardholders to electronically pay for goods and services at retail outlets, was rolled out across Canada. Such debit cards quickly became a popular means of payment, mainly at the expense of cheques, the closest paper equivalent. Canadians are among the most active users of debit cards.

Financial innovation continues. Although credit cards account for the bulk of Internet purchases, new payments networks, such as PayPal, which permit users to transfer funds electronically without divulging bank account or credit card information to the vendor, are growing in acceptance. Although currently used infrequently in Canada, mobile payments, using a cellphone, are also increasing in popularity in many countries.

This article represents a portion of the publication Beads to Bytes - Canada's National Currency Collection from the Bank of Canada.

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