The emergence of digital payments has changed the definition of making and accepting payments. The frictionless and convenient experience of the digital payment ecosystem makes it an irreplaceable part of the modern-day lifestyle. Apart from banks, fintech companies, tech giants, and e-commerce platforms are part of the digital payment solution providers’ club that has made point-of-sale transactions much simpler.
Digital payment solutions have witnessed exponential growth and a great technological shift since the invention of electronic payments through internet banking until mobile payments became a necessity during the Covid-19 pandemic. The global transaction value in the digital payments sector is projected to reach $14.79 trillion by 2027, observing a CAGR of 11.79% between 2023 and 2027.
Because of the evolution in digital payments, companies efficiently perform massive transactions, like payroll payments and refunds, through bulk payment solutions. End users have also benefitted equally from this evolution as they can access various financial and non-financial services under one roof through online booking and bill payment solutions.
Let’s understand the history of digital payments and their evolution over time to get an idea of this industry’s contribution to the future of payments.
The Timeline of Digital Payment Evolution
Following is the timeline of remarkable events in the history and evolution of digital payments:
- 1994: First online payment in history when Dan Kohn created a website and sold a CD of Sting's "Ten Summoner's Tales"
- 1997: Coca-Cola launches the first mobile payment system where customers can pay for their soft drinks via SMS
- 1997: Mobil offers the first contactless payment system, “Speedpass”, for gas station customers
- 1999: Confinity (which would later merge with X.com to be called PayPal eventually) launches PayPal as an online payment and money transfer service
- 2004: E-commerce giant Alibaba Group establishes one of the first third-party mobile and online payment platforms, Alipay, in China
- 2007: Kenya-based M-PESA creates first mobile phone-based money transfer service, payments, and micro-financing service to kick-off in developing world
- 2008: Bitcoin was invented, which began to be used in 2009 when it was released as an open-source software
- 2009: Venmo is launched with features like peer-to-peer payments and buy now, pay later schemes
- 2013: WeChat Pay, a digital wallet service, is rolled into the popular messaging app
- 2011-2015: Google, Apple, and Samsung Pay enter the market
The History and Evolution of Digital Payments through 10 Major Milestones
The Early Era of Electronic Payments
The roots of electronic payments lay in 1871 when Wester Union debuted the electronic fund transfer (EFT). Since then, people have been fascinated with sending money to pay for goods and services without necessarily being present at the point of sale. This technology has been the driving factor for the upcoming payment transformations.
In the 1910s, the Federal Reserve of America began to use the telegraph for money transfers. In 1950, the first independent credit card company was established by the Diner’s Club, soon followed by the Bank of America introducing the first modern-day bank credit card in 1958. As people became more reliant on computers for buying, the Automated Clearing House (ACH) was invented in 1972 to batch process large volumes of transactions.
The Birth of Online Payment System
It was not until 1969 that the U.S. Advanced Research Projects Agency Network (ARPANET) was first used for academic and research purposes. This computer network laid the foundation for the internet, paving the way for online payment methods. The Stanford Federal Credit Union is known as the first financial institution to offer its customers an online payment system for banking services in 1994. These first online payment transactions were anything but user-friendly. Users were required to have specific encryption knowledge and the usage of data transfer protocols.
E-Commerce Playing a Pivotal Role
The evolution of the World Wide Web and the eventual invention of Web 2.0 set the stage for e-commerce websites. One of the pioneers of e-commerce, Amazon was founded in 1994 along with a slew of other websites. Since then, e-commerce payment systems have evolved tremendously, and now merchants can accept payments via credit/debit cards and digital wallets through wireless communications over payment networks.
In the early days of electronic payments, special equipment, and software was a prerequisite for making online payments for goods. Now, digital payment solution providers integrate bulk payment solutions and payment switches into e-commerce for increased convenience. Consumers and merchants, big and small, can accept and make payments via websites, mobile platforms, and point-of-sale devices with higher scalability.
The Rise in Mobile Payments
The first patent that exclusively defined the mobile payment system was filed in 2000. PayPal was one of the first organizations to allow customers to pay via mobile apps using their email addresses. Since then, many financial institutions, credit card companies, internet companies, mobile network operators, and multinationals have implemented mobile payment solutions.
A simple mobile web payment system may have an integrated credit card flow allowing consumers to enter their card details to make purchases. The innovative and modern bill payment solutions don’t require card details or pre-registration at an online payment system. These fast, convenient, and secure payments can be made using a QR code, one-time password, two-factor authentication, contactless near-field communication, and cloud-based mobile wallets.
Digital Wallets Gaining Popularity
Although very different from the modern-day e-wallets, around 95 million mobile phone users had used a mobile device to purchase by 2003. Soon, mobile devices became the primary means to buy travel and movie tickets, order food, and make hotel bookings. Google became the first tech company to launch a digital wallet in 2011 that would allow consumers to pay, earn loyalty points, and redeem coupons. Although initially, it was used only on one phone model and was accepted by a handful of merchants, it became very popular.
Two years before Apple Pay was launched, Apple introduced Passbook app in 2012 that could be used for boarding passes, tickets, and coupons. Fast forward to 2023, digital payment solution providers are the major contributors to the development of super apps that are believed to dominate the world in the upcoming years. Super apps are the enhanced version of e-wallets that are all-encompassing and self-contained commerce and communication platforms.
Contactless Payment Methods
Contactless payment is a frictionless method for consumers to buy goods and services using credit, debit, smart card, app, or another payment interface using Radio Frequency Identification (RFID) technology or NFC. This method works by tapping the card or a device near a point-of-sale terminal equipped with payment technology.
One of the world's first contactless payment systems was offered in Seoul by South Korea's transit authority. This system that came to be known as UPass offered riders a quick and easy way to pay for bus trips using prepaid cards. Digital wallets remain the most widely used contactless payment method, as over half of the world's population is expected to adopt e-wallets by 2025.
The Push from Buy Now, Pay Later
The increasing popularity of digital payments can be credited to the customer-centric services that it enables, such as Buy Now, Pay Later (BNPL) schemes. Younger generations like Gen Z and millennials seek value-rich benefits, like personalization, sustainability, and security, while engaging in various purchases. BNPL represents a significant component of embedded finance that is set to reshape the payment ecosystem. This digital lending and transparent credit solution facilitate affordability through fixed installments, making it the fastest-growing online payment method in many economies worldwide.
The Invention of Cryptocurrency
From the first time cryptocurrency Bitcoin was used for a transaction in 2010 till today, the journey of cryptocurrency has been nothing short of a roller-coaster ride. This peer-to-peer electronic cash system based on blockchain technology was used to buy two large pizzas in exchange for 10,000 Bitcoins in its initial days. The same Bitcoin hit the value of $69,000 in November 2021.
This new asset class has forged its way into the portfolios and minds of investors of all ages. As the global markets became crypto-curious, many different crypto exchanges were introduced by tech-based innovators to bridge the gap between supply and demand. El Salvador and Central African Republic (CAR) are the only countries where Bitcoin functions as a legal currency. However, central banks worldwide are rolling up their sleeves to build the capacity to harness Central Bank Digital Currencies (CBDCs) as legitimate digital money.
Constant Innovations in Instant/Real-time Payment Systems
Organizations responsible for operating payments and settlements worldwide are constantly innovating in the area of peer-to-peer, person-to-merchant, and interbank financial transactions to develop instant real-time payment systems. UPI (Unified Payment Interface) by NPCI and Global Payments Innovations (GPI) by SWIFT are two improved digital payment services that offer significantly simplified transactions compared to popular options, such as EFT and RTGS. These payment systems are all set to disrupt cross-border payments even easier through international collaborations.
The Metaverse
The metaverse is being touted as ‘the next internet’ as it aims to bring real-life and virtual reality together. The most common way to make payments in the metaverse is via blockchain and digital currencies. As of now, most of the metaverse platforms are closed systems with their own native currency. Mostly, these virtual economies are powered by blockchain, smart contracts, and cryptocurrencies. The metaverse is believed to revolutionize digital payments further in the future as Non-fungible Tokens (NFTs), Decentralized Finance (DeFi), and cryptocurrency become as much a part of our lives as social media today.
Stay on Top of Your Digital Payments Game with MobiFin
Several decades ago, developed economies had implemented cashless payment infrastructure primarily based on credit cards. However, these legacy structures became a burden in recent years as they could no longer satisfy the requirements of the modern lifestyles of the digital era. Thanks to digital payment solution providers accelerating e-wallet innovations and the use of digital payments that today, even the underbanked population from growing economies can access secure and seamless transactions. Thus, it has become imperative for businesses to adopt digital payments to help establish a more inclusive and sustainable cashless infrastructure.
Panamax’s MobiFin is a global transaction hub that helps corporate customers and government agencies roll out a range of flexible and convenient services to the masses with its super-secure and innovative offerings, like bulk payment solutions, mobile money, and bill payment solution.
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