So many payment innovations - like paying by smartwatch or fingerprint - have become almost so self-evident today that it is all the more fascinating to look back through the history of innovation in payments and see what we can learn about its likely path in the near future and beyond.
As with any great innovation or invention, each stage of payment’s evolution has taken place when a solution to a problem of the incumbent approach is realized and addressed effectively – from barter to "invisible" payment in modern supermarkets.
All previous payment innovations have not only made the lives of consumers and merchants easier, but have also made new forms of trading possible. And with payments, we can still see examples of many of the great innovations of yesterday in action today - and of what the future of payment will look like.
Jump here to our infographic about "Payment Innovations - Yesterday and Tomorrow"
Payments innovations of the past: from the exchange of goods to e-money
Can you imagine that the seller of a new smartphone only offers it in exchange for a certain laptop? Today it’s unthinkable, but barter has long been the only option.
Strictly speaking, this is not an innovation, but the original form of trade. Bartering was the cornerstone of early transactions, enabling parties to exchange goods or services that both needed. A bag of corn seeds for next year’s harvest might be swapped for a chicken and the supply of eggs it would provide, for example.
This needs-based model of exchange centered on the idea that both parties would have a requirement for what the other would offer. There were no consistent or standardized valuation criteria and it was impossible to accrue wealth through the exchange of perishable goods.
- Representative currency
Initially, this phase of payments saw rare sea shells or set weights of bars and rings of gold or silver used in exchanges, before small pieces were cut from them for smaller transactions.
Before long, the scarcity of gold in particular drove the use of alternative, more readily available materials in its place. In several parts of Asia and the Middle East clay tokens were used to represent goods held in commodity warehouses owned by temples and palaces.
The shape of, or markings applied to, the tokens indicated either ownership of certain items in that warehouse or a proportion of the overall stock. Crucially, they were also used in payment to employees and traded in local markets.
The first coins evolved from representative currency. In China, rather than carrying the items themselves, traders started to make and trade bronze-cast miniature replicas. Eventually, these were substituted for rounded discs, making them easier to carry around in small amounts.
The first recognized denominations of coins are thought to have been made in 600BC in what is now known as Turkey. Pictures of commonly known creatures were added to the coins to tell them apart, and for the first time users would know that a vase would cost them two snakes and one lion, for example.
As we know, coins were not without their limitations, though. While the people might now be able to accrue money, transporting it was literally a heavy burden to bear. And making a purchase required the money to be provided at the point of exchange, so people had to carry money most of the time. And since there was a confusing number of "currencies" without any defined "conversion rates", cross-border trade was of course very difficult - unthinkable today.
- Promissory notes and paper money
Initially developed in China and written on pieces of leather that could be easily folded or rolled to transport, the promissory note also ushered in deferred payments. The notes detailed the value, an agreed payment schedule and the details of the parties involved.
On the one hand, it meant traders could carry a note back from their transaction to redeem at a large trading hub rather than carry coins across the country. But it also created the first formal loan agreements not entirely dissimilar to the mortgage deeds and interest free credit agreements we see today.
About 1000 years ago, paper money was pioneered in China too, and initially functioned as privately issued bills of credit or exchange notes, just as the earlier leather promissory notes.
Although Marco Polo would take the concept of promissory notes back to Europe in the 13th Century, the practice of using paper money wouldn’t begin in earnest in Europe until the end of the 17th century, when banknotes were first produced in Sweden – which was a simpler means of payment than the previously invented unwieldy copper plates with a mintage.
Banknotes themselves have evolved over time. They were originally seen as a form of I.O.U., wherein the bearer would receive an equivalent value of precious metal on production of the notes.
However, with the removal of precious metals from the monetary system (i.e. coins were no longer made of gold and silver but alloys) and the centralized and regulated production of currency, banknotes became fiat money.
- Electronic money - enabling e-commerce and online banking
The next major breakthrough in payments was to lessen our dependence on physical transactions in favor of the electronic exchange of money.
While early credit cards, introduced to the market in 1950, still relied on a manual imprinter to create a carbon copy of the details, behind the scenes electronic systems and processes were starting to play a key role between retailers, credit card companies and banks. At that time, contactless "tap and go" or even virtual credit cards in smartphones were of course out of the question.
Things got really interesting when the paying customers were exposed to the benefits of electronic money.
There were online cash machines from the early 1970s, enabling people to withdraw cash from their bank account without needing a bank clerk. Debit cards were introduced in the late 1980s, enabling people to pay instantly at the register for goods directly from their bank account without needing a checkbook, cash or relying on a credit card.
But the biggest disruption electronic money enabled was e-commerce. The ability to search and buy online quickly and securely is a given now, but that’s really quite remarkable when you consider that companies like Amazon (founded 1994), ebay (1995) and PayPal (1998) are still so young. Not to forget another milestone that was introduced in 1994 and is still very popular today: online banking.
Connectivity has been the major enabler. As internet penetration and speeds have increased, first computers then smartphones became more integral to the purchasing process.
Payment innovations of the present: more digital, secure and comfortable
- Digital payment methods
We’re now in the midst of the next iteration of the payments story, with more and easier ways of paying without using physical cash coming along all of the time. And consumers recognize the benefit of them right now.
The continued development and sophistication of smartphones and wearables has given rise to contactless payments at scale through services like Apple Pay and Google Pay. Now we don’t even need to take our card out with us to the store - we just use the phone we carry with us everywhere, or our smartwatch.
It’s also possible to pay through scanning a QR code. WeChat Pay and Alipay in China have become two of the leading proponents of this, because they enable sales without the infrastructure normally required, such as payment cards, networks and terminals or merchant accounts.
The biometric security used to authenticate payments, such as facial recognition and fingerprint readers, is now built into the device hardware of smartphones.
And the innovation on authentication doesn’t show any signs of slowing down. Alipay, affiliate of Alibaba, launched a ‘smile to pay’ authentication capability as part of its app back in 2017 and in July 2019 they added beauty filters to the mechanism too after users complained of not looking their best when posing to pay.
Furthermore, while they account for a small proportion of transactions at the moment, the boom in voice assistants like Siri, Google Home and Alexa over the last few years is starting to play a part in the purchasing journey. Users are becoming increasingly confident with the idea of using voice to buy.
- Seamless customer experience
In payment, the “Uber experience” has become a famous role model - where you do not even have to actively confirm payment after arriving at the desired location, but the payment process takes place completely invisibly in the background.
Retailers are playing a key role too. Amazon Go has been the leading light since 2016, but others are adapting how they address the customer need for a more seamless experience.
It puts their stores somewhere between a retail outlet and distribution center along the way, but it’s clear all aspects of the experience have to be seamless for the customer.
They are on the agenda, but we’re a long way from seeing them get anywhere close to mainstream adoption.
Bitcoin, Ethereum or most recently Facebook’s Libra are crypto currencies being talked about a lot by those in the know, but their shortcomings are currently too big and too many to start replacing established forms of currency.
There are a host of end user challenges that need to be addressed – not least a lack of awareness, understanding and trust of the tech amongst the general public. But we’ve argued before that Blockchain-based technology might have the potential to revolutionize global commodity trading, for example.
Payment innovations of the future
We are in the midst of the digital transformation of payments technology and there are exciting times ahead. While existing crypto currencies don’t capture the general public’s imagination, the Blockchain technology underpinning it looks set to form part of our future payments experience regardless.
The focus is shifting from virtual currencies to fully digitizing existing ones, and doing so in a way that makes sense for the consumer and provider alike.
We’ve looked back through some of the major innovations in payments over the past 8000 years, and at each stage it’s very clear that success came from resolving an issue with the incumbent approach. So, where is the demand yet to be met in payments and what direction are things going to head in?
The focus has to be on making the experience as seamless and secure as possible for the end user. In every walk of their lives, customers are experiencing richer, smoother services than ever before. They demand more from all of their providers and rising to that challenge is key for the payments industry.
Our vision of where the further evolution of payment is heading is clear – as innovative payment solutions, as in the past, will be geared to the needs of users:
If autonomous vehicles are going to become the norm, the process of refueling or recharging them can’t be a pain point.
If wearable tech continues to become more compact and sophisticated, payments tech has to do likewise.
If it is even easier, safer and more convenient to pay with biometric features such as fingerprints, voice or face, why should we need to have a physical device with us in the future at all?
Thanks to many technology-driven innovations, the exciting evolution of payment continues at a rapid pace. When cash and cards increasingly disappear from our lives thanks to intelligent digital innovations, the opportunities open up. And we’re only just starting.
Want to see the most important payment innovations of the past and the future at a glance? Klick here to read and download our infographic!