The Evolution of Payments

Bob Legters
Chief Data Officer of Banking and Payments
Posted on August 21, 2013

Examine the history of payments with a focus on how we pay for the things we buy, and two things stand out. First, when it comes to paying for things we buy, we clearly prefer convenience over everything else. The driver behind the evolution of new payment methods- at least over the last century- has been the desire not to be bound by the need to carry cash with us. Second, despite a convenience-driven evolutionary path that has carried mankind from the bartering system of our ancestors through early coin currencies to paper money to checking accounts, and from there, to credit and debit cards, and on through to today’s e-wallets, the nature of payments has always been transactional.

However, the transactional nature of payments has always featured a few constants. For example, ever since 1946, when Brooklyn-based banker John Biggins introduced the ‘Charg-It’ credit card, the payment transaction has always featured some sort of authentication process that allowed merchants to verify the identity and financial viability of consumers. In those early days, this was a manual, administrative process that sometimes took weeks. Today, the authentication process happens electronically in real-time and, despite whatever other future changes manifest in the payment process, that authentication requirement is not likely to go away.

Another constant is the payment system’s need for a workable infrastructure. In the old days- and by this, we mean 50 years ago or less- the proliferation of paper payment systems worked fine- until the number of transactions banks and other financial organizations were required to process grew too vast to be facilitated by these paper systems. Thankfully, the concurrent rise of Information Technology provided a solution, electronic payments, although it was years before it ascended to its current place as the preferred payment system worldwide.

Despite the presence of these constants, payment systems continue to evolve, particularly in the development of alternative channels through which transactions can be conducted. Today, every trend points to mobile as the next evolutionary step in payments. The march toward mobile payment systems is stalled only by the requirement for adequate infrastructure on the part of both merchants and issuers, but these obstacles are only temporary impediments.

In the end, every payment system that existed before mobile had one arbiter that determined both its success and longevity: The Consumer’s Experience. Even the adoption of the mobile payment channel rides on this key concept. Every step of the evolutionary path from barter to e-payments has been driven by the consumer’s need to find an easier, better, and more secure way to pay for the things he or she buys. The card system of payments freed consumers from the requirement to carry cash with them at all times while introducing ‘swipe and sign’ payment processing. The move from card to mobile is driven by this same idea. We are witnessing now the education of a society on mobile payments. Both the consumer and the retailer are learning how to make mobile payments, less of a deliberate act and more second nature. Like the transition from cash to credit and debit cards, this is a process that takes time.

Consumers using mobile today still carry the cards in their wallets, the true measure of mobile success will be when cards are not carried at all. That will be hard because the alternative is nothing. When you find a merchant that doesn’t take cash, you can always go to an ATM, in the mobile world, if you don’t carry a card and you get to a merchant who doesn’t take mobile, you don’t get your purchase, consumers aren’t ready to hold that against the merchant just yet, but they are ready to frequent those who have mobile.

In the 2011 study of U. S. consumer attitudes toward a mobile system of payments that revealed two telling facts: the first is that only 26% of those surveyed viewed mobile payments as more convenient that other payment systems; and the second is that only 29% of those surveyed actually look forward to the day when most payments are made over mobile devices. That number has no doubt changed since 2011, but hurdles like training a workforce still exist. Additionally, getting retailers to invest in the technology at a time when they are facing additional requirements around EMV is also a challenge.

Although, unlike the move from cash to electronic payments, mobile already has the infrastructure; just changing the POS system to accept mobile inputs and trigger the transaction network in place makes this change iteratively faster.

Although history shows us that making this type of behavioral change is never easy, it can be done. All it takes is a potent combination of perseverance, technological advancement, and the willingness of pioneers to hold true to their vision of what can- and should- be.

Leave a Reply

Bob Legters
Chief Data Officer of Banking and Payments

For the past two decades, Bob has focused on products and services support for clients. He has spent 17 of those years in a leadership role with groups ranging from 5 to 200 employees. Bob’s unique experience allows him to efficiently operate at a level that exceeds the normal executive role of understanding and recognizing client and consumer needs in the payments space.