By Pamela Reich, Content Strategist

From the earliest barter system for the exchange of goods and services thousands of years ago and the advent of coins and paper money centuries later to today’s sophisticated digital solutions, the evolution of payments reflects important changes in societies and economics. The evolution of technology continues to accelerate how people and businesses transact.

As increasingly innovative methods to transmit and process transactions continue to improve the speed and security of payments, financial institutions – and the growing number of non-bank financial service providers – need to leverage these capabilities to stay competitive.

A Brief Timeline

A look back at some of the ways money and payments have evolved over time puts the more recent rapid advancements and behavioral changes into perspective.

As early as 6,000 BC

People exchanged goods and services for other goods and services. Intrinsic value was placed on some objects like shells and stones for payments. These were primitive currencies; they were portable and considered valuable.

7th century BC

After centuries of expanding trade routes and economic developments, but few advancements in payments, the first known gold and silver coins were invented in the ancient kingdom of Lydia in what is now Turkey.

7th century AD

Paper money, first used in China, represented the first significant innovation in how payments were made after a long period that saw major cultural and economic diversity. Paper money was a way to standardize value for large transactions more conveniently than handling heavy coins.

18th century

Fast forward past the Middle Ages, believed to represent a lack of scientific and cultural advancement, to the 1700s. Checks were first introduced in England and remain an actively used (though diminishing) form of payment.

1950s

Diners Club introduced the first credit card, giving consumers the ability to pay at multiple restaurants in New York City; the first general “travel and entertainment” (T&E) card was from American Express. Bank of America introduced its BankAmericard in 1958, as the first card to offer revolving credit; it was rebranded as Visa in the ’70s.

1960s

A group of 14 banks formed an interchange, creating what is now Mastercard. All credit card transactions were processed manually, first by calling the bank, then using what was known as the “knuckle buster” to imprint the embossed card number onto a slip which was then mailed to the customer’s bank.

1970s

Point of sale terminals at merchant locations sped up the processing of credit card transactions, as magnetic stripes that stored payment and account information became standard on all credit cards. Bank-specific ATM cards were issued for customers to access cash at the growing number of ATMs throughout the U.S.

Bank marketers embraced the challenge of introducing ATMs, many giving ATMs friendly names like “Tillie the All Time Teller” and “Annie the Anytime Teller” to counter customer reluctance to replace their bank tellers with a machine. In an attempt to “train” customers to transact at ATMs, banks launched campaigns to promote their usage, including mailing customers checks that could be redeemed by depositing them at in-network ATMs.

1980s

Shared ATM networks like New York’s New York Cash Exchange (“NYCE”) gave customers access to more machines beyond their own bank’s network.

The first debit card was introduced in 1987, positioned as a way to get cash and pay for purchases at merchant locations with a PIN – without incurring debt or paying interest on balances. Networks were built by Visa and Mastercard to process millions of transactions securely and conveniently.

1990s

Debit cards were accepted at merchant locations and processed like credit card transactions, quickly and efficiently, with funds deducted directly from consumers’ accounts. E-commerce sites like Amazon and eBay started an explosion of online shopping and payments that continues to impact the retail landscape.

2000s

The U.S. saw the rollout of chip cards, which store customer and account data in an embedded computer chip, generating a different token for each transaction. Compared to the magnetic stripe, where the information skimmed doesn’t change, chip cards are exponentially more secure. From the customer’s point of view, introducing “dipping” vs. “swiping” also changed the physical act of paying.

Contactless payments for cards and digital wallets were enabled through NFC (near-field communication) and RFID (radio frequency identification) technology. As merchant terminals were upgraded and contactless cards became standard, consumers utilized contactless “tap and go” payments for faster and more convenient transactions. Because the card doesn’t leave the user’s hand, security is greatly enhanced.

Most broadly, increasing internet usage led to growing availability and adoption of online and mobile banking and online bill pay services.  Banks began to aggressively promote online/mobile banking, offering anytime, anywhere access to account information, ability to transfer between accounts, and other financial management tools. Online bill payments replaced the task of writing and mailing checks, giving customers control to schedule and initiate payments quickly and conveniently. Coupled with e-bills and paperless statements, online banking and bill pay set the stage for widespread acceptance of digital banking.

2010s

Online payments gained momentum as more transactions were processed digitally. P2P methods such as Venmo, PayPal, Zelle® and digital wallets allowed users to transfer money, pay bills and make purchases online or through mobile devices. They offered convenience, security and efficiency, making them a preferred choice for many consumers and businesses.

Card issuers and payment processors introduced advanced security features, including multi-factor verification and new encryption techniques, which further bolstered the safety of payments and transactions.

Same-day ACH and RTP (real-time payments) were adopted in the United States, representing a new payment rail that sped up the secure transfer of money. These technologies signaled a sea change in how payments were processed (from batch to real time) along with a corresponding change in how banks migrated away from the extended payment lifecycle.

Cryptocurrency also emerged as a new form of digital payment (not to mention as an asset and form of currency), stored in dedicated crypto or digital wallets. Enabling peer-to-peer transactions run on independent computer systems, Bitcoin is the most commonly traded of thousands of cryptocurrencies in the marketplace. Crypto continues to spark controversy in terms of its legality and lack of regulation.

2020s

Use of mobile wallets like Apple Pay, Google Pay and Samsung Pay for all consumer payments becomes ubiquitous and seamlessly integrated with debit and credit cards. This cloud technology has built-in security, safe data storage and enhanced data processing, enabling faster digital electronic payments anywhere in the world.

In 2023, the U.S. Federal Reserve introduced FedNow, a real-time payment system designed to enable financial institutions to offer instant payment services to their customers and integrate with banks’ existing systems. FedNow is part of the RTP network and aims to modernize payment processing in the United States.

A growing number of banks and credit unions began participating in Paze, offering customers the ability to make secure online purchases without the need to enter card information and without a separate app.

Opportunities for Bankers

Technology advancements and enhancements in payment processing are advantageous to financial institutions in different ways. Operationally, the benefits include lower costs due to automation, lower digital processing fees and reduced fraud risk. Moreover, these advancements provide many opportunities for banks to leverage technology as a differentiator to gain a competitive advantage and grow market share.

Stay on top of current advancements: Be at the forefront of changing technologies, especially the ones that directly impact your current and prospective customers. Marketing and operations must partner to understand what’s available and to develop specific payment services to market to businesses and consumers. Even if these services are not unique to your bank, you can establish a reputation as a market leader through targeted marketing initiatives. Digital tools like aggregators and personal financial management solutions can enhance the value of your online and mobile banking services.

Gain confidence through education: Keep your employees and your customers well informed about new payment options. Host webinars, offer informative training sessions and embrace a customer-first strategy. It’s the role of marketing to turn technology into a customer advantage and build customer loyalty by adopting a “we’re here to help” position.

Maintain brand awareness: Debit cards continue to be the card of choice for consumers under 40 years old.¹ However, as these cards are increasingly hidden behind the digital wallet brand, it becomes a challenge for banks to maintain brand presence. Consumers may associate the ease of use and positive connotations with the wallet provider, such as Apple.² Card issuers must be deliberate about reinforcing their bank’s brand through loyalty programs and other value-added strategies, including taking the opportunity to brand the space on mobile screens that digital cards occupy.

Continue competitive rewards programs: Interchange fees charged to banks for debit card usage saw the elimination of most rewards programs for debit cards. However, a robust mix of cash back and other rewards offered to credit cardholders is essential to remain competitive in the crowded credit card marketplace.

Introduce mobile app enhancements: Banks will need to enhance the features of their mobile banking apps to offer a range of financial services beyond just payments. Budgeting tools, financial management solutions and other value-added benefits are now baseline for building and retaining customer relationships, and they ultimately serve as a market differentiator allowing banks to grow and maintain brand awareness.

Employ data-driven strategies: Analyze customer data to identify and target customers and prospects most likely to increase card usage and to use digital wallets, Zelle and online bill pay. Banks and other payment providers can and should use machine learning and AI to uncover patterns in customer usage and transactions to make better predictions and fine-tune marketing strategies to support growth and earnings objectives.

Customer expectations are evolving to demand seamless, personalized digital experiences. At the same time, rapid technological advancements and changing regulatory frameworks require innovation and adaptability from financial institutions. By definition, payment services are transactional, but they can also be foundational in terms of helping banks build long-lasting, profitable relationships with customers.

MKP communications inc. is a New York-based marketing communications agency specializing in merger/change communications for the financial services industry.

¹ J.D. Power 2024 Debit Card Satisfaction Study

² J.D. Power in July 2024 BAI Banking Strategies report, “Modernizing Payment Methods”