The advent of technology has brought about transformative changes to society. These changes, over the years, have meandered their way into every part of society from the health sector to government and today’s topic – payments systems. As the world advanced and systems changed, so did the methods of making payments. While these changes mostly came along with world-changing occurrences (such as the most recent Coronavirus pandemic), others came to replace the rather obsolete methods of making payments.
Paying for things is a part of human life and although today we have rather sophisticated and convenient ways to pay for whatever we want, things haven’t always been like this. The current payment options, like their predecessors, will still undergo some form of upgrading to fit into the future. Payments are important because they indicate the completion of a transaction and signal the change of ownership of an item. With the continually accelerating technology making impacts on the payments systems, it is evident that change has happened and will continue to happen. Money is what is used for payments and over time, it has evolved. There is a direct correlation between money and payments systems, therefore, as money evolved so did payments systems and/or options.
To examine how payments have evolved, we need to look at the idea of money, how it started and how it developed into what is today.
The idea of money and how the payments systems evolved
When asked to define money, the average answer would be that money is what is given in exchange for a good or service; what is used to make payments for what we need. The idea of money sprung up as a solution to the prevalent barter system that was rather inconvenient and characterized by quite a plethora of challenges. The barter system involved exchanging an item for another. For example, if I wanted an item, I’d have to exchange an item I have for it and the other party must want what I’m willing to exchange for what I want from them. This system had so many challenges such as; the double coincidence of wants, there was no standard for measurement of the value of items, the indivisibility of certain items, the impossibility of storing value, the inability to make deferred payments, etc.
The barter system dates back to the Neolithic period, a time where agriculture was everything. Soon enough, the use of coins for payment of goods and services emerged in approximately 680 to 560 BC in what is known as modern day Turkey. The use of coins was highly embraced as it was a useful solution to the problems associated with the barter system. Although the use of coins went on for a long time, like the barter system, it had a major shortcoming – coins were really heavy to carry around especially in situations that required a large amount of money.
Paper money and banknotes came after coins to address their shortcomings. They first appeared in China in the 7th century but became official for use in 1812. Bank notes and paper money were easy to carry around but they had to be issued by a country’s government and backed by specific amounts of gold. This system is still in use today and has been severally revamped to serve the needs of a country and stay relevant to the times.
Bills of exchange and cheques are another means of payment still in use today. While bills of exchange emerged in Italy during the 12th century, they are documents that guarantee that a debtor would make payment to a creditor. Cheques date back to the 18th century and were first used by the British monarchy.
The use of cards for payments followed suit. Although not as sophisticated as we have it today and not exactly for making payments as we have it today, they brought in a breath of fresh air. The first credit cards emerged in 1914. The Western Union company created a loyalty card for its most elite customers; this card gave them access to a line of credit without surcharges, and it wasn’t until 1958 that banks started handing out cards to customers as a payment option.
These systems continued to thrive and evolve but when the internet came, there was a huge shift in the payments systems. The internet brought in a completely different system for making payments, purchasing goods and services, etc. The era of the internet is associated with a long list of features such as convenience, ‘cashlessness’, card payments, digital payments, access to loan facilities
The era of the internet and its wave of digital payments
The world Wide Web (www) and the Internet changed everything! The internet-powered sales through its communication channels. As sales through the channel progressed, so did payments. Buyers and sellers had to come up with new and convenient ways of making payments as well as validating them. Making payments over the internet involved bank transfers which later evolved to using cards to make payments through payment gateways and application programming interface (API), which allow data and functionality to be exchanged securely and easily. Other technologies that power payments today involve mobile banking, USSD banking, etc. These new technologies make it possible to make payment from your phone, laptop, using your debit or credit card, etc., without having to leave the comfort of your home or office to visit a bank.
Payments continue to get better as time goes on. A newly introduced system called the Buy Now, Pay Later system is changing the world of payment. This system allows people to purchase goods (and sometimes services) and pay for them at a later date. The beauty of this system is that they are free from interest and repayments can be made in instalments – freeing people from the burden of outrageous interests and giving them purchasing power.
Remember when we said money has been the major reason for the evolvement of payments? Today we have what we know as digital currencies – subdivided majorly into cryptocurrencies and central bank digital currencies (CBDCs). While CBDCs are issued, controlled and regulated by a country’s apex bank, cryptocurrencies thrive on the idea of a decentralized system. Cryptocurrencies (and CBDCs) have taken their place in the financial scene and found their way into payments. Companies around the world have begun to accept cryptocurrencies as a means of payment for their goods and services. There are even crypto credit and debit cards with which people can withdraw cash from designated ATM machines and make payments.
The future of digital payments
While digital payments have grown to become a standard practice globally, this is just the beginning. Digital payments are becoming bigger and better. In the future, they’d be designed to be more convenient, secure, faster and safer. Digital payments will drastically reduce or completely eradicate the need for carrying physical cash. Even physical cards may become obsolete. Although they still have poor adoption, virtual cards are taking over and have the same effect as physical cards when used for payment. In the future, thanks to digital payments, there could be a truly cashless society. Digital payments and their providers known as neo or challenger banks will help to increase the access to financial services by a whole lot. The number of ‘unbanked’ will continue to reduce. The use of mobile payments will increase and in the future, they’d be designed to be seamless and more secure.
As more digital payments systems continue to appear, so will the options of payments for businesses and customers. This will promote convenience, efficiency and transparency. These systems would also reduce the cost associated with issuing physical cash and will, in their own way, stimulate economic growth and make the processes of reconciliation seamless.
Thanks to digital payment systems, there’d be lesser reasons to carry hard cash about and anyone with a smartphone would be able to make payment for goods and services irrespective of the time and their location.
With every next step in the evolution of money comes a complementary advancement of the existing payment system. This goes to say that the payment systems adjust to reflect how money has changed. For example, cryptocurrencies are not in any way associated with cash or backed by gold, but still, they have value and continue to thrive as an option of making payments and as a means of storing value or wealth. Who knows what could take over cryptocurrencies in the future but whatever it is, there will always be a complementary payment system for it. Payments systems in the future, however, will continue to be characterized by convenience, security, ‘cashlessness’, ease of transfer, online and mobile banking, etc.