The Evolution of the Electronic Payment System Until 2020

As the rise of the internet popularized online shopping and other types of ecommerce, electronic payments have evolved from a technological novelty to one of the leading payment options currently available. The technology required to support the massive volume of electronic payments that now occur forms a diverse payments infrastructure of cloud, legacy, and hybrid systems. These payment systems have both influenced and been influenced by the evolution of bank debit card and credit card processing, resulting in the modern payments industry and payments systems we know today.

In this post, we’re going to look at the history and evolution of electronic payment systems, focusing on how payment methods developed over time, progressing from electronic to digital, mobile, and beyond. We’ve come a long way since telegrams and charge cards, but as quickly as technology changes, modern payment systems are far from finished evolving.

The First Electronic Payment System

For centuries, physical payment at the point of sale was typically required to complete a purchase. That changed in a groundbreaking way in 1871 when Western Union (then the Western Union Telegraph Company) launched electronic fund transfers (EFTs) as a payment method for exchanging funds. Otherwise known as “wiring,” EFTs became popular as quick and easy ways to send money without requiring a physical exchange of cash between the sending and receiving parties. Not long after the turn of the century, the Federal Reserve was transferring money via telegram, and Western Union’s primary area of business became money transfers.

Western Union further revolutionized payments in 1914 when it introduced charge accounts that could be used at a variety of businesses—whereas previous iterations had been restricted to the individual stores that provided them. These accounts were linked to cards that customers could then use to purchase items on credit, which would then have to be repaid to the issuer. Known as a “charge card,” this early form of credit was a common electronic payment system throughout the first half of the 20th century.

The Evolution of Electronic Payment Systems since the 1940s

As popular as charge cards and accounts were, their limitations led to further innovation in the 1950s, which saw the advent of credit cards. Diners Club introduced the first “general purpose” charge card in 1950, and it was soon followed by similar cards from Carte Blanche and American Express. These early innovators set the foundation for the coming credit card revolution via their pioneering usage of charge cards.

The primary difference between charge cards and credit cards as we know them today is that charge cards required balances to be completely paid off at a predetermined interval, whereas credit cards allowed for the extension of credit—usually with additional interest fees—enabling balances to be carried over from a previous pay period. This form of payment is known as “revolving credit,” and it was used by Bank of America in 1958 to create the first modern-day credit card.

The Credit Card’s History

Dubbed the BankAmericard—now known as Visa—Bank of America’s credit card succeeded where others hadn’t. Its savvy issuing strategy involved sending the card to residents of an area where the majority of homeowners were Bank of America customers, quickly building a base of cardholders to increase the likelihood of merchants accepting the cards.

However, Bank of America and those who followed still faced many holdouts to the widespread adoption of credit cards. This was partly because the process for using them was much more complicated than it is today. Before the eventual digitization of credit card information in the early ’70s, customers paying with a credit card required the merchant to call the issuing bank, which then called the credit card company, where an employee would manually verify the customer’s name and credit balance to approve the transaction.

Because of this cumbersome process, many merchants began accepting unverified transactions if they trusted the customer or the cost was below a certain value. This greatly increased the risk of credit card fraud and made merchants vulnerable to chargebacks and other penalties. Still, many merchants chose to take on this risk for the sake of quicker, simpler transactions.

The Internet and Payment Processing

With the arrival of the internet, the evolution of electronic payment systems advanced even further. This era introduced ecommerce as a faster, more efficient form of card-not-present transactions, which previously existed in the form of mail orders, telephone orders, and other similar types of transactions. This came on the heels of electronic verification systems that quickly verified and authorized digital payments from a variety of channels. Soon after, mobile devices emerged as popular payment methods, allowing customers to perform mobile payments via mobile wallets, such as Apple Pay and Google Pay.

What is to Be Expected for the Future of the Evolution of Electronic Payment Systems?

Digital payments continue to increase in popularity, rewarding forward-thinking organizations for meeting the demands of technologically-advanced customers and pushing laggards to modernize in order to remain competitive. Examples of the further evolution of electronic payment systems include the digital transformation of point-of-sale systems and omnichannel acceptance for payment processors. These industry initiatives improve the ease and efficiency of accepting and processing transactions and allow for the collection of useful business data—which can lead to greater profits for merchants and higher rates of adoption for payment service providers.

However, this constant advancement also increases risk, creating a need for data protection to match the rate of technological change. Technologies such as tokenization can help meet security and compliance concerns while preserving the business utility of sensitive data and driving digital transformation via cloud deployment.