The Dynamic Evolution of Payment Instruments

Backspace Tech
7 min readNov 24, 2023

Introduction

In today’s world, making payments has become a natural and effortless part of our daily routine. Whether it’s the seamless transactions via UPI, the convenience of plastic cards, or the tangible feel of physical currency, the array of payment instruments at our disposal is growing in numbers every day. Yet, beyond the sleek designs and digital interfaces, lies a captivating history of how payments have undergone significant evolution.

This blog unveils the intriguing evolution of currency and its dynamics that have played a pivotal role in shaping the modern payment landscape.

Payment Instruments

Payment instruments are simply the ways we use to pay for things. They can be physical, like cash and coins, or digital, like cards and online payments. Payment instruments make it easier and more efficient to buy and sell things.

Let us explore the different types of Payment Instruments used from ancient times to the present day!

Types of payment instruments:

Let’s delve into the realm of payment instruments, examining their existence in two distinct eras: B.C. and A.D.

B.C

1. Ancient times: (Until 3000 B.C)

The Origin: Barter System

The barter system is a method of exchanging goods and services directly without using money. In a barter transaction, individuals swap items they have for items they need. For example, let’s say someone has extra apples but wants oranges. They find someone who has extra oranges and wants apples, and they trade with each other to get what they want.

2. 3000 B.C

The Rise of Commodity Money

Commodity money is a type of currency that has value based on the material from which it is made. It is a form of tangible asset. An example of this is using gold nuggets for transactions. For instance, if someone wants to buy a basket of fruits, they need to pay for this with the valuable items, like gold nuggets. The more valuable items the person has, the more their purchasing power.

3. Around 680 to 560 BC

The Invention of Metal Coins: A Milestone in Payment History

Around 680 to 560 BC, the initial appearance of coins marked a crucial milestone. The rise of coin usage stemmed from challenges encountered in barter transactions and the perishable nature of certain payment forms, (eg: Food and Agricultural products, Livestock, etc) hindering accumulation. These coins were commonly crafted from gold, silver, or copper, featuring a unique design that reflected the kingdom’s identity imprinted on them. They were in irregular shapes like oval, oblong, and square shapes. Over the period, these metal coins emerged as a solution with a shape for practical usage.

A.D

1. 17th Century — Part 1

Paper Money: A Revolution in Convenience

Paper money emerged in the 17th century as a practical alternative to metal coins, as it was a challenge when carried in large quantities. Originating in China, it began as promissory notes issued by governments, promising to pay the bearer a certain amount in precious metals upon demand. The evolution of paper money into modern currency involved historical developments, including the issuance of standardized banknotes, technological advancements to prevent counterfeiting, and the transition from the gold standard to fiat currency in the 20th century. Today’s paper money reflects a complex evolution influenced by economic changes, technological progress, and shifts in monetary systems.

In India, the first official Indian banknotes were issued by the Government of India in 1862. These early banknotes featured multiple languages and denominations and after gaining independence in 1947, India started issuing its own currency.

17th Century — Part 2

The Emergence of Cheque: A Written Promise to Pay

The cheque emerged as a response to the growing inconvenience of carrying large crates of money. The origin of cheques can be traced back to the late 17th century when they gained popularity as a payment method in England. In 1827, the British introduced Post Bills, which were promissory notes (crude form of cheque) issued by a bank in a distant location, which the holder could encash after a specified number of days. The cheque continued to evolve throughout the 19th and 20th centuries. In the 1960s, the first computerized cheque-clearing systems were developed, which further streamlined the cheque-clearing process. In India, cheques were initially introduced by the Bank of Hindustan in 1833.

2. 20th century

Cards: A Paradigm Shift in Consumer Finance

Payment cards, like credit and debit cards, emerged in the mid-20th century as a convenient alternative to cash. In the 20th century, consumers started experiencing the convenience of credit provided by retailers. Certain businesses, including department stores and gas stations, pioneered the development of individual credit cards tailored for consumers. The inaugural credit card was by Diners Club, which granted consumers the capability to purchase meals at various restaurants in New York City in 1950. These cards emerged in India in the late 1980s and early 1990s.

The Digital Revolution — online shopping and online payments

The rise of the Internet in the 1990s brought forth the concept of online shopping. Consumers eagerly embraced the opportunity to navigate the Internet and make purchases. The introduction of the Internet provided a platform for selling goods and services through this pioneering communication channel. However, the early days of Internet usage were marked by challenges, including poorly designed user interfaces and technological barriers. These difficulties ultimately paved the way for the evolution of digital payments that defined the 21st century.

3. 21st Century — Online Banking, Mobile Payments, Decentralized Alternatives and much more

Online Banking (Late 1990s — Early 2000s)

Online banking emerged as a response to the increasing digitization of financial services and the growing influence of the Internet. This led to the rise of online banking, allowing people to perform various financial transactions electronically worldwide.

In India,

· RTGS (Real Time Gross Settlement)

In 2004, RTGS was launched by the RBI (Reserve Bank of India) as a real-time funds transfer system. It allowed for high-value transactions to be settled on a gross basis in real time. In 2013, the RTGS system’s operating hours were extended to provide more flexibility to users.

· NEFT (National Electronic Funds Transfer)

In 2005, NEFT was introduced by the RBI as a centralized electronic funds transfer system in India. Initially, it had set batch timings for fund transfers. In 2010, the system was made available on a 24x7 basis, allowing customers to initiate fund transfers at any time.

Mobile payments (Early 2000s)

The concept of mobile payments, using mobile devices to make transactions, emerged in the early 2000s as a response to the growing popularity of mobile phones and the increasing demand for convenient payment methods. In 2006, PayPal launched its mobile app, enabling users to make payments using their mobile phones. This marked a significant step forward in the development of mobile payments globally, as it provided a secure and user-friendly platform for mobile transactions.

Mobile payments transformed the way people transact, providing a faster, more convenient, and secure alternative to traditional payment methods. They have also played a significant role in promoting financial inclusion and reaching underserved populations with access to financial services.

Cryptocurrency (2009) — A Decentralized Alternative

Cryptocurrency is a virtual form of currency that uses cryptography for security and operates on a technology called Blockchain. In 2009, bitcoin, the inaugural virtual currency came into existence. Cryptocurrency operates on a decentralized (not subject to government/ financial institution control) currency form, offering a novel approach to financial transactions.

Digital Wallets (Mid 2000s)

Digital wallets encompass any digital application/ service that stores payment information, which includes mobile wallets, web-based wallets, and desktop applications. Digital wallets store payment information for convenient transactions. Mobile wallets, like Google Wallet (2007) and Apple Pay (2014), revolutionized payments. Apple Pay, using NFC technology, marked a turning point, leading to the rise of wallets like Samsung Pay and Google Pay. These wallets offer secure, contactless payments, contributing to their mainstream popularity with millions of users globally. Their success highlights a shift towards convenient and secure digital payment methods.

Contactless payments (2010)

Contactless payments involve transactions where a user can make a payment by tapping, waving, or holding a contactless-enabled card, mobile device, or wearable near a compatible payment terminal. Near-field communication (NFC) is the technology that enables contactless communication between devices over short distances. These transactions are quick, and convenient, and eliminate the need for physical contact or the insertion of cards.

Mobile Banking / Payments (2010 and after)

In India,

· IMPS (Immediate Payment Service)

In 2010, IMPS was introduced as a pilot project by the NPCI (National Payments Corporation of India) to enable instant interbank electronic fund transfers. In 2011, IMPS was officially launched, allowing customers to make instant fund transfers 24x7 using mobile phones.

· UPI — A Revolution in Indian Payments

In 2016, the Unified Payments Interface (UPI) was launched by NPCI, integrating IMPS with a more user-friendly and versatile platform for mobile-based transactions. The factors of demonetization and the pandemic accelerated the adoption of this payment interface. Incidentally, UPI now also serves as a real-time payment inspiration for other countries.

Central Bank Digital Currency (CBDC)

A Central Bank Digital Currency (CBDC) is a digital representation of a nation’s official currency, created and overseen by the central bank. These currencies are centralized, with the country’s central bank having full control over issuance and circulation.

In India, the RBI initiated a pilot project for the retail CBDC in December 2022, focusing on peer-to-peer transactions. The pilot is currently in its initial phase and is expected to provide potential benefits in India.

Conclusion:

From the simplicity of barter systems to the complexities of cryptocurrencies, the evolution of payment instruments reflects the continuous innovation and adaptation within our financial landscapes. As we marvel at the transformative power of technology and the resilience of human ingenuity, it becomes evident that the future holds even more exciting possibilities for how we conduct transactions. As we navigate the ever-changing currents of the financial world, one thing remains clear — the evolution is ongoing, and the journey is bound to bring forth new chapters in the fascinating narrative of payments.

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Backspace Tech

Backspace Tech offers Fintech-as-a-Service to automate,simplify, and disrupt the payment industry by handling chargeback requests through a plug-and-play model.