May 1728 was one of the historical data that changed the financial industry by bringing a new product to the market when a merchant from Edinburgh, Mr. William Hog achieved an agreement with his bank to make his operational capital stabilized, so to avoid any potential drops in payments as he expected regular payments coming to his account. By this agreement, Hog received the possibility to get cash from his account in advance, waiting couple of days until he receives his payments. Thus, he became the first person in the world who was allowed to utilize an old version of overdraft on his account.

It was a case of number of merchants, struggling with this problem even today. Hog was facing payment from both sides, those ones he had to pay and those incoming ones. However, sometimes it occurred that he had to pay more in advance and receive little later because of the undesired order of payments. As he had to handle his bills first, but he needed also money for living, he was interested in a deal made with his bank.

As the older banks were not interested in coming up with new features, bearing the risk by themselves, Hog was successful in a new bank established, the Royal Bank of Scotland (RBS). It was in 1728, when the RBS kept still much of the cash from shareholders, looking for investment opportunities. This new feature seemed to be interesting for the bank to introduce it to the market as the RBS could receive interests while providing cash to its customers.

Therefore, Mr. Hog was not the only one and soon, large number of entrepreneurs took advantage of this new feature. In particular, the new businesses were in need of capital available for them until they receive their earnings back.

For this purpose, RBS eased the requirements for warranty. Instead of securities as in case of loans, the Scottish bank ordered the businessmen to provide bond of the applicant and at least two mean vouching for such person. As the community of businessmen in Edinburgh was not that large, the bank was able to monitor its risks by supervising the individuals in the area.

Thus, the capital reached even those businessmen, who would suffer in other regions due to the lack of capital, albeit their business was successful. This helped the city to grow and to keep the top position in Scotland. One of the famous Scots using this service was the famous philosopher David Hume (1711-1776). He was known as not supporting the banking industry much, but he called the overdraft as “one of the most ingenious ideas that has been executed in commerce”.

Later, the overdraft possibility helped the Scotland to develop its business community, mainly during the industrial revolution when the demand for capital rose to extreme numbers. Here, the ancestor of modern overdraft facility helped the country to become one of the top economies in Europe and boosting entrepreneurs to start new business and not to be concerned about each penny arriving on time.

Top image: https://www.rbs.com

Sources:

  1. https://www.rbs.com/heritage/rbs-history-in-100-objects/history-in-100-themes/serving-our-customers/overdraft-authorisation-1978.html
  2. https://en.wikipedia.org/wiki/Overdraft
  3. https://targetstudy.com/qna/which-is-the-first-bank-in-the-world-to-offer-an-overdraft-facility.html
  4. The New Financial Architecture: Banking Regulation in the 21st Century
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About Author

Marek Bocanek

After finishing law and economic studies, Marek launched his career in Brno, Czech Republic in the financial sector, specializing in capital markets and related legal issues. After 6 years of experience in the industry he moved back to Bratislava, Slovakia, where he worked as an analyst in the forex market for another 3 years. Simultaneously he was a trader focused on the major forex pairs and oil futures.

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