Evolution of
Payments
A Historical Perspective on Payment
Systems and Influences
Introduction to Payments
From gold coins to Bitcoins, the payments space has
always evolved. But the reality is that to get to this
point, where we have a wide range of payment
options, we have gone through a great process of
evolution and transformation
Historical Overview of
Payment Evolution
The evolution of payment systems can be traced
from barter systems to modern electronic
payments, showcasing a journey of increasing
sophistication.
Key milestones include the introduction of coins,
paper currency, credit cards, and internet banking
in the late 20th century.
Recent innovations such as digital wallets and
cryptocurrencies represent the latest phase in this
ongoing evolution, focusing on convenience and
speed.
Early Payment Methods
From times unknown to 3000 B.C
• Bartering was one of the first payment methods, involving the direct exchange
of goods and services.
3000 BC and Later
• Payment system worked with commodity money instead of simple barter
• The use of commodities like salt, cattle, and grain emerged as standardized
forms of value, facilitating trade.
• Primitive forms of currency included beads and shells, which represented
wealth and could be traded or gifted
Introduction of Currency
Around 600 BC
• The first metal coins were introduced in Lydia, revolutionizing trade by
creating a standardized medium of exchange.
7th Century AD
• Paper money emerged during the Tang Dynasty in China, improving the
convenience of carrying wealth.
• The concept of fiduciary money arose, where the value was based on
trust rather than intrinsic value.
What is a Currency Note
Knights Templar – Bill of Exchange
• Each Templar house had
several
strongboxes for the purpose
of
safekeeping. Once money
was
deposited, it could only be accessed
by the owner or by another
party
who had the explicit permission of
the owner
• To avoid carrying large amounts of
precious metals and
other
possessions, the Templars produced
the concept of the letter of credit. A
person could deposit their money in
a Templar house in their hometown,
go to a Templar house in some other
Modern Bill of Exchange – Cheques
1659 – 1762
• Drawn notes, nowadays known as cheques, are introduced by bankers of London for
the first time in the economy.
• First printed checks by British banker Lawrence Childs
1959
• Checks had been processed manually throughout their history, but the invention of
magnetic ink character recognition (MICR) and printing of checks using the MICR
standards made them more secure.
1974
• The National Automated Clearinghouse Association (NACHA) was formed in 1974 to
nationalize transactions among financial institutions.
2010
• Cheque Truncation System – Images of cheques instead of physical cheques
Electronic Payments
1870
• Western Union debuted its electronic funds transfer (EFT), aka “wire transfer”
(which was operated via telegraph on copper wires)
1910
• Federal Reserve first used the telegraph system to transfer money
1950
• Diner’s Club issued the first credit card, Transactions became instantaneous,
including deferring payments and accumulating debt
1967
• Barclay’s Bank introduced first Automated Teller Machines (ATM), followed by
Chemical Bank of US in 1969
Online Payments
1994 - 1995
• In 1994, the Stanford Federal Credit Union was credited as the first
financial institution in North America to launch its online banking
services for all of its customers.
• Presidential Bank soon followed their steps in 1995, being the first
bank in
the country to offer their clients access to their accounts online
• During this time, the first online purchase was believed to be a pizza
from
Pizza Hut. It was supposedly a pepperoni and mushroom pizza, one of
Pizza Hut's classic menus!
1996
• In India, ICICI started the first online services for retail customers.
Mobile Payments
1983
• Electrical engineer Charles Walton received the first patent for a Radio Frequency
Identification (RFID) device, the technology on which most mobile payments are largely based
1995
• The first contactless payment was made in South Korea using a prepaid travel card called a UPass
card, which was used by commuters for bus trips
1997
• Coca Cola introduced mobile payments via a limited number of vending machines. Customers had
to send a text message to purchase their drinks
2011
• Barclays teamed up with Orange and launched Europe’s first contactless mobile payment. The
system enabled customers to pre-load their phones with up to £100 and make purchases that
were up to £15 by using their phones. Google Wallet (Now Google Pay) was launched
• 2014 – Apple Pay & 2015 – Samsung Pay
Payment
Systems
RETAIL PAYMENT INSTRUMENTS, SCHEMES & ARRANGEMENTS
Definition of Payments
Payments is transfer of value
from one to another.
Payer’s transfer of monetary
claim on a party acceptable to
Payee (Receiver).
1
4
Definition of
Payments
Banking payments refer to the
processes and systems used to
transfer funds between parties in a
financial transaction.
Payment systems can involve
traditional methods like cash,
cheques, and modern electronic
methods such as credit cards and e-
1
4
Definition : Payment Systems
“A payment system refers to a method that enables
financial transactions between businesses and
customers in a secure way”
“Payment systems are mechanisms established to
facilitate the clearing and settlement of monetary and
other financial transactions” 1
5
Why do we need Payment
[Link] and secure financial transactions.
Systems
[Link] of the financial system and support economic
growth.
[Link] payment systems build consumer trust and
encourage more participants. 1
6
Retail Payment
Systems
Payment Instruments
Payment
Schemes
Payment
Arrangements
Payment instruments
Payment instruments consist of personalized
devices, software and sets of procedures
agreed between end-users and payment
service providers when electronic payment
transfers and requested and executed.
PAY M E N T I N S T RU
MENTS
oA payment instrument is any method or tool
used to make a payment, transferring funds
from a payer to a payee(receiver).
oA payment instrument can be Cash, Payment
cards (Credit and Debit Cards), Bank Transfers
(Wire transfers), Mobile Payments, E-Wallets
(Digital Wallets), Cryptocurrency, Cheques, Buy
Now, Pay Later (BNPL), Direct Debits etc.
PAY M E N T I N S T RU
MENTS
“Electronic payment instruments allow for the
user (remote) access to funds held in thier
account by using an electronic device and
electronic communication channels”
“Paper payment instruments are those for
which a payment order is submitted to the
payment service provider in paper form”
C L A S S I F I C A T I O P AY M E N T INSTRUMEN
N O TS
Credit Payment
F Instruments
o Credit payment instruments Debit Payment Instruments
are financial tools that o Debit payment
allow consumers to make
purchases or payments and instruments are financial
then repay the amount tools that allow consumers
borrowed over time, to make payments by
typically with interest or directly withdrawing funds
fees. from their bank accounts,
rather than borrowing
money.
o Credit Cards
o Debit Cards
o Personal Loans
o Buy Now, Pay Later (BNPL): o Prepaid Cards
Lazypay, Simpl
Payment scheme
Payment schemes are a set of formal and standardized
rules to enable the transfer of value between end-user via
electronic payment instruments which is generally managed
by a governing body.
PAYM E NT S C H E M E
S
Examples of Payment Schemes:
1. Card Payment Schemes - Visa and Mastercard
2. Digital Wallet and Mobile Payment Schemes:
Google Pay
How Payment Schemes Work:
1. Initiation: A customer initiates a payment through a payment
instrument (e.g., card, bank transfer, mobile wallet).
2. Authorization: The payment scheme validates the transaction,
checking that sufficient funds are available and that the payment
request is legitimate.
3. Clearing: The payment is processed by the payment network
(e.g., Visa, MasterCard), and the funds are cleared between the
payer’s and payee’s banks.
4. Settlement: The funds are transferred to the recipient’s account,
and the payer’s account is debited.
PAY M E N T A R R A N G E
MENTS
Payment arrangements are sets of operational functionalities
which support end-users of payment service providers when
electronic payment instruments are used. Arrangements are
managed by a governing body which issues the relevant terms
and conditions through which payments can be executed etc.
Operational functionalities include the payment initiation and
execution, in addition to the storage and/or registration of
personal security credentials and/or data.
Payment Systems
The infrastructure and set of processes that facilitate the transfer of money or
the settlement of financial obligations between individuals, businesses, banks, and
other financial institutions. It encompasses the entire ecosystem that enables
electronic and digital payments, including the rules, technology, and platforms
through which money is transferred or payments are made.
Examples:
1. UPI
2. National Electronic Funds Transfer (NEFT)
3. Real-Time Gross Settlement (RTGS)
4. Immediate Payment Service (IMPS)
RTGS (Real Time Gross Settlement)
RTGS (Real-Time Gross Settlement) is a payment
system used for transferring large-value funds from
one bank to another. It is a real-time, gross
settlement system where transactions are processed
and settled immediately on an individual basis,
without being queued or batched with other
transactions.
Deferred Net Settlement Systems
In deferred net settlement (DNS) systems, payment orders
are cumulated through-out the day, and settlement of the
net amount takes place (in the RTGS system) in central
bank money at the end of the day (or possibly several
times throughout the day).
NEFT (National Electronic Funds Transfer)
NEFT (National Electronic Funds Transfer) is a
popular electronic payment system in India that
allows individuals, businesses, and institutions to
transfer money between bank accounts in a secure
and efficient manner. Unlike RTGS, NEFT is
generally used for smaller value transactions and
operates on a batch processing system, where
multiple transactions are processed together in
batches rather than individually.
Payment Gateway
A payment gateway is a technology that facilitates
the processing of online payments. It acts as an
intermediary between the customer, the merchant,
and the financial institutions involved in a transaction.
Example of payment gateway in India: Billdesk
Large Value Payment Systems (LVPS)
Large value payment systems (LVPS) are payment
systems which are used to settle larger payments
between banks. These can be client payments,
interbank payments, or payments to settle claims
resulting from retail payment systems.
Example: SWIFT (Society for Worldwide Interbank
Financial Telecommunication), RTGS
Retail Payment Systems
A retail payment system (RPS) is a payment
system in which retail payments (i.e.
payments initiated by households and
smaller businesses) are settled.
Example: NEFT
Large Value Payment Systems vs
Retail Payment Systems
While normally LVPS are associated with RTGS
systems and retail payments are associated
with DNS systems, this strict distinction has
recently become blurred.
Single settlement layer
payments
A system where all transactions, regardless of the
payment method or network used, are ultimately
settled on a single, unified platform, meaning the
final transfer of funds happens through one central
point.
Features
• Centralized clearing
• Reduced complexity
• Faster settlement
Example
Amar initiates the payment: Amar wants to send Rs.100 to
Sumer through a digital payment system, like PayPal
(internal payments from GooglePay to GooglePay).
Double settlement layer
payments
A double settlement layer payment is when a
transaction goes through two separate stages: one
for authorizing (verifying and approving) the
payment, and another for finalizing and
transferring the money.
Example
When GooglePay moves funds through the banking
system like Rupay to transfer money outside its own
network.
Triple settlement payment layer
A system where payment transactions go through three
distinct layers or stages for processing and settlement,
namely
1. Authorization
2. Clearing, and
3. Settlement
• Example: RTGS, SWIFT