How Payments Have Evolved: An Abbreviated History

Innovation | October 3, 2018 | 4 min read

Advent of Payments, Credit Cards

In the early 1900s, “credit cards” came into being, but were more like glorified restaurant, hotel, and department store tabs that allowed customers to make a purchase without needing enough cash to cover the purchase in the moment. These cards, often in the form of cardboard, were exclusively for use with a single merchant, so consumers had to carry a stack of them for them to be useful—or only spend money with the same few merchants.

The first bank card was introduced in 1946, followed by the first bank credit card five years later—both could only be used with a limited number of merchants. In 1950, the Diner’s Club card was founded, allowing its customers to make restaurant and travel purchases all over the world. It also ushered in the concept of a closed-loop network for the first time—that is, one in which the Diner’s Club was both the card issuer and the credit card association. And, it was still made of actual cardboard.

Plastic cards and revolving balances were introduced shortly thereafter, eventually leading to what we now know as the modern-day credit card. In the 1970’s, debit cards also started gaining popularity—which, combined with increased interest in credit cards, eventually gave rise to the intricate payments system we see today, complete with card issuers, card networks, and processors.

Post 1980s recession, credit cards began to thrive due to a massive inflation reduction, which boosted lending rates, even in spite of low interest rates. It was also when the concept of co-branding credit cards came into the fore, as airlines such as American partnered with banks to incentivize frequent flyers with points for every dollar spent. By the 1990s, credit cards were entrenched in the payment world. Comedian Jerry Seinfeld couldn’t leave home without his American Express card, and Mastercard convinced consumers that its value was priceless, while credit card debt nearly tripled to $692 billion from $238 billion over the course of the decade.

For merchants, the growth of card adoption first represented an additional obstacle to receiving payments, as merchants needed to set up and maintain card-accepting point of sale terminals—not to mention having no choice but to pay transaction fees to card networks and payment processors. At the same time, however, offering card payments was a way of incentivizing more and higher-ticket purchases, driven by what we now know as the “buy now, pay later” transaction, given consumers what they wanted and when they wanted it.

Credit Cards for Everyone

Merchants realized that, while credit and debit cards allowed customers to make purchases more easily than with cash, generic cards ultimately meant the loss of the intimate customer relationship that came with a private label card. Private label and co-branded credit cards have served as two solutions to this conundrum, both of which incentivize cardholders to buy more with the merchant that issues the card. In 2014, nearly one-third of credit card payments were made with a co-branded card.

These cards represent another way for merchants to entice their customers to make larger purchases, as they simplified the short-term financing process. While traditional short-term financing options involve taking out a loan from a lender or the merchant at the point of sale, which can be an arduous process, credit cards offer the consumer the equivalent (albeit usually at a higher interest rate) experience of paying for a purchase later.

Payments Move from Cards to Phones, Basic Terminals to Elegant Software Solutions

Fast forward to 2017, an era where billions of credit and debit card transactions are processed each year in the U.S. alone, and most merchants in developed countries accept at least Visa and Mastercard payments through some sort of point-of-sale (POS) terminal at checkout.

Things didn’t stop there—the rapid rise of mobile phones, combined with innovations in POS financing gave consumers more ways to pay, and simplified payments for merchants large and small.

For their part, mobile payments were more an innovation by phone producers than payment providers, as consumers still needed to connect a card to complete a transaction on their phones. That said, we have yet to rule out the possibility of at least some of these companies such as Apple eventually becoming banks in their own right—or at least playing a significant role in payments processing.

At the same time, technology advances enabled a slew of new POS solutions, both making it easier for smaller merchants to collect non-cash payments, as well as making the software more user-friendly. These new POS providers generally accept mobile payments as well as EMV cards, which have also grown in the U.S. over the past decade.

The continuous evolution towards software-enabled payment experiences was also a boon for merchants. It created an opportunity to provide a better customer experience, which is a massive deterrent to cart abandonment, although it also meant that systems and processes required a much-needed overhaul.

Physical Payments to E-commerce

While physical payments have evolved over history, e-commerce has exceeded even our wildest expectations—and digital payments have been an important part of that growth.

Online payments startups cropped up in the early days of e-commerce and kicked off a whole new area of interest within the payments space. As peer-to-peer e-commerce companies such as eBay struggled to handle payments between users on the platform, online merchants were looking for easy ways to accept card payments online, giving rise to solutions such as PayPal, Elon Musk’s online bank, X.com, and BillPoint.

As the years progressed, online payments became increasingly more streamlined, for both users and for merchants. Companies including Stripe and Adyen made accepting payments as easy as adding seven lines of code to websites, creating a seamless e-commerce customer payment experience for even the smallest merchants.

Today, cryptocurrencies such Bitcoin have offered as much praise as skepticism in their disruption of the payments sector, offering a decentralized, blockchain-powered vessel to completing transactions, and with the advent of buying and selling through websites such as Coinbase, the prospect of truly democratizing capital.

Payment software also became increasingly sophisticated and the opportunity for alternative financing options such as Bread arose. Unlike in a physical store where a customer would need to go through the lengthy process of applying for a card or loan, e-commerce financing allows for near-instantaneous approval for a short-term loan at the point of purchase. In addition, because these software solutions can integrate seamlessly into virtually every e-commerce platform, merchants are able to surface financing options to their customers earlier in the buying journey, ultimately increasing AOV and sales.

The New Shopping Journey

Merchants have the option of giving their customers nearly endless options when it comes to paying for their purchases—moving with the evolution of cash to cards to online financing—creating even more opportunities to engage with current and potential buyers. The rise of technological innovations in POS, payments, and financing has also made it easier for merchants to create this end-to-end experience, providing a pivotal service in the ever-competitive world of retail and e-commerce.