Retail trade and payment innovations in the digital era: a cross-industry and multi-country approach

Abstract

This article introduces a novel approach to payment innovations. It t identifies a cross-industry (retail trade and retail banking) and multi-country (USA, some Western European countries and Japan) approach to the interaction between these industries and the new retail payment systems from the 1970s to the mid 1990s. It documents and discusses the different trajectories that have been seen in the different competitive environments, particularly in regard to payment cards. It also analyses the involvement of bankers and retailers in the evolution of card payment systems and their contribution to the global adoption of bank cards. These processes have occurred within a framework in which sectoral boundaries have taken precedence over the payment alternatives associated with cross-industry solutions.

Keywords:

• Retail trade
• payments
• banking industry
• innovations
• Western Europe
• US
• Japan

Acknowledgements

The author acknowledges financial support from the Spanish Ministry of Economy and Competitiveness (MINECO), award number HAR2016-75375-R. He would also like to acknowledge comments from participants at the Second Workshop on the Evolution of the Retail Trade in the twentieth Century, Economic, Social and Political Perspectives, at Uppsala University – Uppsala Centre for Business History, 22-23 September 2016; and Nancy Lockkamper, archivist of the WSBI Archive. He would also like to express his appreciation to the editor and reviewers for the comments received in the refereeing process, which have improved the article. The usual caveats apply.

Notes

1. Cortada, The Digital Hand, Vol.1 and 2. See also Yates, Structuring the Information Age for insurance industry, and Maixé-Altés, "The Digitalisation of Banking" for savings banks industry.

2. All businesses that sell goods and services to customers fall under the umbrella of retailing.

3. A deposit accepting financial institution populating retail financial markets.

4. A theoretical approach in the seminal contribution by Rochet and Tirole, "Cooperation among competitors," and "Two-sided markets." See also the empirical approach by Evans, and Schmalensee, Paying with Plastic, and "Markets with Two-sided Platforms." Numerous empirical studies have emerged from these works with regard to the economy and the dynamics of interchange fees.

5. Rochet and Tirole, "Cooperation among competitors.".

6. Verdier, "Retail Payment Systems," and "Interchange Fees.".

7. Bátiz-Lazo and del Angel, The Dawn of the Plastic Jungle." This paper presents an accurate critical review of the literature on the topic of bank cards from an interdisciplinary perspective. They insist on a focus that goes beyond the economics of the interchange and card fees. They delve deeper into the business model and their international expansion, considering the "non-discrimination clauses" that distort the payment choices by consumers, by introducing a "toll" in the value transfer. See also the forthcoming article by Bátiz-Lazo and del Angel, "The Ascent of Plastic Money.".

8. See Stearns, Electronic Value Exchange, and Scott and Zachariadis, The Society for Worldwide.

9. Yates, Structuring the Information Age, 259–263.

10. Yoffie, ‘CHESS and Competing.’ Stearns, Electronic Value Exchange, 209–216.

11. A point of view originating from the strategy and technology studies, which to the best of our knowledge, has not been tested in historical studies.

12. Bátiz-Lazo, Wood, ‘A Historical Appraisal;" Stearns, Electronic Value Exchange; Maixé-Altés, "ICT the Nordic Way.".

13. Yates, Structuring the Information Age, 261–262.

14. Brynjolfsson and Lorin, "Beyond the productivity paradox.".

15. The International Savings Banks Institute (ISBI), created in 1924, now known as the WSBI, which since the 1950s has had an enormous impact on the savings banks industry. The WSBI developed an extensive network composed of representatives from national industry associations, individual banks, corporate executives, policy makers and experts connected with the banking, retail and computer industries.

16. A general overview of this topic can be found in the 3 volumes of Cortada's work, The Digital Hand.

17. Heide, Punched-Card Systems; Bátiz-Lazo, Maixé-Altés, Thomes, "In Digital We Trust’; Booth, The Management; Bátiz-Lazo, Wood, ‘A Historical Appraisal;".

18. Balodis and Opmane, "History of Data Centre Development.".

19. Maixé-Altés, "The Digitalisation of Banking;" Bátiz-Lazo, Karlsson, Thodenius, "The Origins." Cortada, The Digital Hand, Vol.1, 260–262.

20. Ibid., 260.

21. Commonly known as the bar code.

22. As indicated by Cortada in The Digital Hand, Vol.1, 261, computing already existed in this industry as early as in the 1950s and the 1960s.

23. Ibid.

24. Ibid. several years.

25. Cards issued by non-banks, indicating that the holder has been granted a line of credit. It enables the individual to make purchases but does not offer extended credit, requiring that the full amount of the debt incurred be settled at the end of a specified period. The holder is usually charge an annual fee, Stearns, Electronic Value Exchange,18–19.

26. Red Book, 1983. K-Mart and Fred Meyer did so, and Macy's accepted American Express to attract tourists. However, large stores like Sears, Montgomery Wards and JC Penney did not accept bank-issued credit cards (Stearns, Electronic Value Exchange, 188).

27. Ibid., 12.

28. Ibid., 149, 159. Bátiz-Lazo, Haigh and Stearns, "How the Future Shaped the Past.".

29. These systems initially involved several basic technical processes: access by merchants to small terminals at the POS, a sales draft (receipt/check or other paper-based procedure), and an online connection via phone lines to the computer centre. Each of these elements used alternative technological developments that evolved according to the strategies employed by the interested parties and the vendor offers. (ISBI Archive. J. McGill (Head of Automation Department of ISBI, Geneva), Point of sale (POS) banking, Proceedings of the 9th International Automation Conference: Automation - Signposts to the '80s, Rome, September 17–21, 1979.

30. Reports from the BIS on the USA insist strongly on the regulatory aspects.

31. Pullen and O'Connell, "Bank Credit Card." Stearns, Electronic Value Exchange, 18.

32. Ibid., 20.

33. Ibid., 25.

34. Ibid., 18 and Bátiz-Lazo and del Angel, "The Ascent of Plastic Money.".

35. Convenience credit is a credit for which there is no overt finance charge.

36. Several authors have dealt with these topics, particularly Stearns, in Electronic Value Exchange and quite recently, Bátiz-Lazo and del Angel in "The Ascent of Plastic Money.".

37. Stearns, Electronic Value Exchange.

38. Bátiz-Lazo and Maixé-Altés, "Managing Technological Change;" Bátiz-Lazo and del Angel, "Competitive collaboration," and "The Ascent of Plastic Money;" Maixé-Altés, "ICT the Nordic Way;" Bátiz-Lazo, Karlsson, Thodenius, "The Origins.".

39. For more details, see Stearns, Electronic Value Exchange, 188–191. Note that card payment systems through the intervention of networks such as VISA involve a series of relationships: (1) The first is between the user of the card and the issuer bank that provides the card; (2) the second is between the merchant and the acquirer bank that provided the POS terminal and manages its transactions, and (3) the third is between the participating banks and the networks. In short, it is what we have previously called a "four-party scheme.".

40. An interesting analysis on networks, boundaries and gateways in transactional networks (such as VISA) can be found in Ibid., 209–217.

41. See Wadhwani, "Organisational form.".

42. ISBI Archive. Study tour on card business in the United States, June 19–21, 1972 (Dept.III - Ad hoc meeting. Credit Cards and Statistics (1971–77), box 217).

43. Some small banks had experimented with the charge card model early on (no revolving credit); see Stearns, Electronic Value Exchange, 18.

44. Ibid., 25.

45. A store-branded credit card that can only be used at specific retailers (proprietary card).

46. ISBI Archive. POS Banking, Report on a study tour of point of sale banking installations in the USA. Business Organisation and Automation Committee, Geneva, 1977.

47. George Gordin, Senior Attorney of the JC Penney Co., summed up this attitude at the MINTS (Mutual Institutions National Transfer System Inc.) Conference. ISBI Archive. MINTS Strategic planning for EFTS: a CEO guide, Business Organisation and Automation Committee, Geneva, 1978.

48. Machine readable coding and electronic cash register (ECR) equipment with a laser-scanner to read the UPCs.

49. ISBI Archive. An evaluation of financial service delivery systems. MINTS Research Report 22 (11), 1976.Mutual Institutions National Transfer System Inc., New York (box 30).

50. Card enabling the holder to have purchases directly charged to funds in the account at a deposit-taking institution (may sometimes be combined with another function, eg that of a cash card or check guarantee card – a card issued as a part of a check guarantee system).

51. See Stearns, Electronic Value Exchange, 157, 212 and Bátiz-Lazo, Haigh and Stearns, "How the Future Shaped the Past.".

52. Ibid., 159 ff.

53. ISBI Archive. Report on US Retail Workshop, Washington, DC, March 2–3, 1976 (Studies on Payments Systems (1975–79), box 30). See also Sprague, ‘Electronic,’ 29–35.

54. ISBI Archive. MINTS Conference, Mutual Institutions National Transfer System Inc., New York, 1976.

55. Alexander and Akehurst, "Introduction”; Alexander et al., "The Co-Creation”; Schröter, "The Americanisation"; Maixé-Altés and Castro, "Structural Change.".

56. The number of accounts per inhabitant was higher than in the USA, as was the density of bank branches per capita (BIS, Red Book, several years).

57. See Sylla, "Financial Systems" and Berger, Demsetz and Strahan, ‘The Consolidation’.

58. A payment order made for the purpose of placing funds at the disposal of the beneficiary. Both the payment instructions and the funds described therein move from the bank of the payer/originator to the bank of the beneficiary, possibly via several other banks as intermediaries.

59. A pre-authorised debit on the payer's bank account initiated by the payee.

60. ISBI Archive. W. Starke (Managing Director of DeutscherSparkassen – und Giroverbande.V., Bonn), International aspects of credit cards, Proceedings of the 9th International Automation Conference: Automation – Signposts to the '80s, Rome, September 17–21, 1979.

61. See Bátiz-Lazo and del Angel, "The Ascent of Plastic Money".

62. Ibid. They report similar findings.

63. A system to guarantee checks, typically up to a specified amount, that have been validated by the merchant either on the basis of a card issued to the check writer or through a central database accessible to merchants. Validated checks are guaranteed by the issuer of the guarantee card, the drawee bank or the system operator (BIS glossary).

64. Bátiz-Lazo and del Angel, "The Ascent of Plastic Money".

65. As reflected by numerous presentations at the 9th International Automation Conference in Rome in 1979.

66. Bátiz-Lazo and del Angel, "The Ascent of Plastic Money." Barclays gradually incorporated more services with it card, including a credit card, check guarantee card, an EC card and a cash dispenser card in 1976 (ISBI Archive, Barclays Presentation (authorless), Business Administration Committee Meeting, 1976–6-15).

67. Ibid.

68. ISBI Archive. Retailer services and associated card in Europe. Present position of member countries. Business Organisation and Automation Committee, December, 14, 1987.

69. Recently, Paju and Haigh, in "IBM rebuilds Europe," have offered a Pan-European approach to IBM's business in Europe, indicating a transnational and European approach to computer technologies.

70. ISBI Archive. W. Starke, International aspects of credit cards, Proceedings of the 9th International Automation Conference: Automation – Signposts to the '80s, Rome, September 17–21, 1979.

71. Maixé-Altés, Innovación y Compromiso Social, 214.

72. Around 100 POS terminals were installed with the participation of gas stations, pharmacies, furniture stores, tailors, supermarkets and hypermarkets (ISBI Archive. J. McGill, Point of sale (POS) banking, Proceedings of the 9th International Automation Conference: Automation – Signposts to the '80s, Rome, September 17–21, 1979).

73. Ibid.

74. European savings banks performed active work in this field, thanks to their shared computer centres (especially in Germany, Austria and Sweden) and savings bank-clearing-house systems, backed by their central savings banks as wholesalers of retail finance (the IPACRI in Italy and the SICA system in Spain). ISBI Archive: German Papers of the 5th Conference on Automation, Vienna, November 9–10, 1971; Minutes of the 11th Meeting of the Business Organisation and Automation Committee, Bonn, April 17–18, 1975; and Minutes of the Meeting of the Business Administration Committee, Geneva, April 20, 1983. Also Maixé-Altés, ‘The technological option," and "The Digitalisation of Banking;" Martin, "Britain's First Computer Centre;" Balodis, Opmane, "History of Data Centre.".

75. European Central Bank (ECB), Bluebook, Payment and Securities Settlement Systems in the European Union, 1995.

76. ISBI Archive. W. Starke, International aspects of credit cards, Proceedings of the 9th International Automation Conference: Automation – Signposts to the '80s, Rome, September 17–21, 1979.

77. Among the institutional participants were the food retail organisation CIES, and the International Association of Department Stores (IADS), and the list of companies and professionals participating included a thought-provoking sample that represented most of the countries in western Europe.

78. ISBI Archive. Report on the European Retail Workshop. Frankfurt am Main, April 6–7, 1976 (box 30. Studies on Payments Systems, 1975–1979).

79. ISBI Archive, World-Wide Investigation of Attitudes Toward Payment. Methods and Forecast of Demand for New Payment Systems, Battelle Institute E.V. (Bank Research Unit), Frankfurt, June 1976.

80. The use of asynchronous computer systems and batch processing (non-real-time processes), Bátiz-Lazo et al., “The origins,’ 100–137.

81. POS terminals were connected online in real time to the shopping centre’s minicomputer, which transferred the data to the bank data centre every day via magnetic tape (off-line). Each shop paid $200–300 per month for the services on a single register, with a small incremental fee for additional registers. These services included information reports, cash register control, register balancing, sales audit, inquiries, and inventory control.

82. ISBI Archive. Nagata-Battelle, Japan Report. Battelle Payment System Study and Mitsubishi Research Institute, Tokyo, 1975 (Studies on Payments Systems, 1975–1979, box 30). For similar developments in Europe, see Maixé-Altés, ‘The technological option.’.

83. BIS, Red Book, 1980.

84. The following information comes from the following sources: ACB, Progress in Branch Office systems in Japan, 1965–1995 (Box 49-Informática). ISBI Archive, Nagata-Battelle Report. ISBI Archive, Tadao Kodamo and Yuzo Hirayama, Data Telecommunication Systems of all Banks in Japan, Mitsubishi Bank Ltd. and Bankers Association of Japan (Business Administration Committee-43, 1972–11-30).

85. The Zengin System, managed by the Bankers' Association of Tokyo, in collaboration with the NTTC.

86. The Japanese Ministry of Finance, Statistics, Tokyo, 1974.

87. BIS, Red Book, 1980, 1985, 1992.

88. Ibid., 1985

89. The banks that provided support to the card companies expanded their payment networks, connecting their cash dispenser and card networks (these companies quickly made strong inroads into the retail market, especially in the Tokyo and Osaka areas), ISBI Archive, Tadao Kodamo and Yuzo Hirayama, Data Telecommunication Systems of all Banks in Japan.

90. Around 4% of the rest belonged to indeterminate businesses. The Japanese Ministry of Finance, Statistics, Tokyo, 1974.

91. ISBI Archive. Nagata-Battelle, Japan Report.

92. Mitsunari Yamada started what would become Japan's first and largest consumer credit company.

93. In 1969, NS was associated with MasterCard International; in 1981, NS and the BankAmerica Group established a joint venture (International Factoring Co.), and in 1988, the company founded the International Credit Card Business Association to promote MasterCard and VISA credit cards (NS Corporate website).

94. ISBI Archive. Nagata-Battelle, Japan Report.

95. BIS, Red Book, 1993.

96. Likewise, the available evidence does not allow us to draw any conclusions about co-evolutionary processes in card payment systems technologies.

97. These circumstances lend credit to the elements pointed out by Bátiz-Lazo and del Angel in "The Ascent of Plastic Money, in which they suggest there are three factors related to a set of participants that determine the level of internationalisation of the American model: critical mass (all participants), capacity to implement new technological solutions and ability to collaborate across national borders.