American Express (estb. in 1850), as the name suggests, was a small time express freight carrier. It also had a small financial arm which carried the Money Order and competed with the US Posts.
Sometime between 1888 and 1890, J.C. Fargo took a trip to Europe and returned frustrated and infuriated. Despite the fact that he was president of American Express and that he carried with him traditional letters of credit, he found it difficult to obtain cash anywhere except in major cities. Mr. Fargo went to Marcellus Flemming Berry and asked him to create a better solution than the traditional letter of credit. Mr. Berry created the American Express Travelers Cheque which was launched in 1891 in denominations of $10, $20, $50, and $100. (source)
After this there was no turning back. American Express soon grow into a bank and is now one of the leading financial giants. It is a fortune 74th Company and its stock is one of the 30 stocks that is used to compute Dow Jones Industrial Average. Hence I would say, every problem is a multi million dollar business opportunity.
For those of you who are wondering what is so great about this financial instrument, here is the explanation:
The efficiency and the competitive advantage of the Traveler’s Cheques come from better inventory management. In order to sell foreign currency, the forex merchant has to hold USD. Now this is disadvantageous for him on 2 counts.
1) His working capital gets blocked in a piece of paper.
2) He is exposing himself to the currency fluctuations.
Which means that suppose he is keeping 1000 USD in his shop, he is effectively blocking 41,000/- INR and say if USD dollar is devaluing he is bleeding money on that too.
However, Traveler’s Cheques is just piece of paper. Since he pays for it only at the time of sale at the exchange rate he is offering to his customer, the risks gets greatly reduced. This also enables him to offer better exchange rate to his customers making him happier 🙂
For the issuing bank, traveler’s cheques is like any other Demand Draft. The payment is made upfront, but the actual purchase happens much later. So the bank can raise some working capital at little/no cost. The bank gains through brokerage (difference between buying and selling), a tiny percent of them which might never be encashed, and through the extra fees they charge when the customer reports them to be missing. So even though it is offering a service to its customer, it never has to explicitly charge for it.
For the traveler, it is a signature protected piece of document. So if it gets stolen during travel (traveler’s nightmare) he can still report it and recover the funds. Plus as earlier explained, he also get a marginally better exchange rate.