A payment method is the way an individual pays for goods and services. The earliest payment methods involved barter, an exchange of goods between the two parties. Subsequent evolutions in payment methods involved the use of cash and coins and credit cards. In recent times, electronic bank transfers and, to a limited extent, the use of cryptocurrencies, such as Bitcoin, have gained popularity as modes for payment. Each type of payment method has advantages and disadvantages based on the situation and economic conditions. Depending on the type of payment method, there may be additional charges associated with it. For example, payments made using credit cards incur fees in the form of processing charges while those that use cash do not have charges. As technology solutions proliferate across the world, there has been a trend away from cash payments. The Federal Reserve’s 2018 American Payment Study showed that cash payments made up 26% of all payments in the US, down from 31% in 2016. Several types of payment methods are used in society based on the stage of development for a given economy. Broadly, they can be divided into two types of payment methods: cash and electronic. A third type of electronic payment, known as cryptocurrency payments, is slowly becoming popular and may play an important role in the future. Cash is used to denote paper-based currency and metal coins. It is the most widely-used form of payment method throughout the world currently. A physical number is associated with each cash artifact, representing the value of that artifact. There are three main advantages to cash. The first one is that it is easy to carry over long distances, allowing the user to conduct trade over geographies. The second advantage of cash is that it is fungible, meaning one unit of cash is always equal to another unit. The final advantage of cash is that it is anonymous. While cash-based currencies have serial numbers imprinted on them, it is difficult to trace the progression of transactions using cash money. Cash has remained the dominant payment method for several centuries but the advent of electronic methods of payment have led to a decline in its use. An example is Sweden, which is hurtling towards a cashless society. According to statistics, only one percent of its gross domestic product was transacted using cash by September 2020. An opposite case is that of Japan, which has a significantly high penetration of electronic payment options and where cryptocurrencies are considered legal tender.Types of Payment Methods
Cash
According to a November 2019 survey, almost 84% of Japanese citizens use cash for transactions.
Credit Cards
A credit card is a card with a magnetic stripe that contains data relating to the card and its owner.
It connects electronically to a bank or issuing company’s servers.
Credit cards are the most popular form of electronic cards in use today.
Credit card issuing companies pay vendors immediately and later collect from the individual for a processing fee.
A FICO score, short for Fair Isaac Corporation score, tracks an individual’s history of payments and their ability to pay.
The FICO score influences the credit card holder's credit limit or the amount that the issuing company is willing to lend to the cardholder. It is also used in other industries, such as real estate, as a mark of the individual’s creditworthiness.
Credit card payments are generally made in two formats.
The first one is by using the physical card at a Point of Sale (PoS) system, which connects to a server in the background to verify balance and identity.
The second method to use credit cards is online.
In this method, physical cards are not required. Instead, credit card details are entered on an eCommerce site, such as Amazon, and used for transactions.
The site uses these details for payments each time a purchase is made. Since the introduction of the first credit card, other variants have been introduced.
For example, debit cards are also electronic cards but they are connected to a bank account. They have no credit facility and the user cannot spend more than the amount in their account.
Prepaid cards are electronic cards that are preloaded with specific amounts and users are not allowed to spend more than that amount.
Electronic Transfers
Electronic transfers can be money transfers accomplished electronically or bank transfers located in two different geographies.
In both types of transfers, an originating party sends money to an Automated Clearing House (ACH) which transfers the required amount to the destination.
In electronic bank transfers, a SWIFT routing code is used as the address of a destination bank. Money transfers are also used as payment methods between businesses.
Purely online money transfers can be made using services like PayPal. Services like Western Union do not operate in a purely online fashion and enable sending of money using cash and in offline mode.
Mobile Payments
The rapid proliferation of smartphones has made mobile payments a popular payment method, especially in developing countries.
Smartphone applications like Venmo in the United States and WeChat in China are popular with millennials as a preferred payment method.
To enable payments via mobile apps, the account should be linked to a bank account or a card. The relevant amount is debited from bank accounts or cards via mobile payments.
In emerging markets, such as India, mobile payments are considered a key factor enabling socio-economic development.
This is because they enable banking and lending services to underserved areas of the population by reducing the infrastructural costs for money management and banking services.
Cryptocurrencies
Cryptocurrencies are the latest payment method.
They are an evolution over credit cards because they allow for transfer of money and value over electronic networks that span multiple geographies.
For example, non-fungible tokens or NFTs are a type of cryptocurrency that allow for transfer of unique collectibles, such as rare digital artifacts, between two parties.
More conventionally, cryptocurrencies like Bitcoin can be used for business transactions between geographies.
Their underlying technology, blockchain, is a global ledger that is tamper-resistant and can be used to minimize conventional transfer fees that such transactions generally incur.
While the share of cryptocurrencies in the overall payment methods pie remains fairly low, it is expected to climb in the future as the technology develops and becomes easier to use.
History of Payment Methods
The development of payment methods is intertwined with the idea of money and commerce.
The exchange of goods during commerce requires an equivalent mode of currency, one that satisfies both parties.
Payment methods progressed in tandem with the type of currency being used for trade. Bartering was the earliest form of payment method. Two parties exchanged goods that each needed.
For example, party A might trade a bag of wheat for a gallon of milk from party B.
The transaction was conducted manually, with party A transporting a bag of wheat to party B’s home and vice versa.
But there was no way to measure the equivalency in value of a bag of wheat and a gallon of milk.
As the idea for money evolved, transactions and payment methods became more sophisticated.
Cash first became prevalent in the form of coins that were created by melting metals. Various metals were used in the process.
For example, one of the first coins is said to have been created from a mix of electrum and gold. Roman armies used bronze coins to pay out their soldiers.
Paper money was first developed in China and became an acceptable form of payment method in Europe only in the 16th century.
In recent times, technology’s furious pace of development has led to an explosion in the various types and formats of payment methods. Some of them have been highlighted above.
Bartering has also remained relevant and become a popular payment method during recessions.
For example, the barter economy swelled to $3 billion during the financial crisis of 2008.
Online barter exchanges enabled trading of goods across state and national borders and modern goods, such as vacation stays, became popular instruments to negotiate for goods during cash-strapped times.
Payment Method FAQs
A payment method is the way in which an individual pays for goods and services.
Credit cards are a commonly-accepted payment method, although the individual does not pay until later.
According to the Federal Reserve’s American Payment Study, the modern world is shifting away from cash payments each year.
Modern payment methods include credit cards, debit cards, electronic fund transfers, mobile payments, and cryptocurrency.
Bartering has also remained relevant and become a popular payment method during recessions. Online barter exchanges enabled trading of goods across state and national borders and modern goods, such as vacation stays, became popular instruments to negotiate for goods during cash-strapped times.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.
Introduction
As an expert in payment methods, I have a deep understanding of the various concepts and technologies involved in this field. I can provide you with comprehensive information on the different types of payment methods, their advantages and disadvantages, and their historical development. Let's explore the key concepts mentioned in the article you provided.
Types of Payment Methods
The article mentions several types of payment methods, including cash, electronic transfers, credit cards, mobile payments, and cryptocurrencies.
1. Cash: Cash refers to paper-based currency and metal coins. It is the most widely-used form of payment method worldwide. Cash offers three main advantages: portability, fungibility, and anonymity. However, with the rise of electronic payment methods, the use of cash has been declining in many countries.
2. Electronic Transfers: Electronic transfers involve the movement of money electronically between individuals or banks. This can be done through services like online banking, mobile banking apps, or money transfer platforms such as PayPal. Electronic transfers are convenient and efficient, allowing for quick and secure transactions.
3. Credit Cards: Credit cards are electronic cards with a magnetic stripe that contain data related to the cardholder and their account. They are widely used for making purchases both in-person and online. Credit card companies pay vendors immediately and later collect payment from the cardholder, usually with a processing fee. Credit cards offer convenience and the ability to make purchases even when funds are not immediately available.
4. Mobile Payments: Mobile payments have gained popularity, especially in developing countries, due to the widespread use of smartphones. Apps like Venmo and WeChat enable users to link their bank accounts or cards to make payments directly from their mobile devices. Mobile payments provide a convenient and secure way to transfer money and make purchases.
5. Cryptocurrencies: Cryptocurrencies, such as Bitcoin, are digital currencies that use cryptographic technology to secure transactions and control the creation of new units. They offer the ability to transfer money and value across borders without the need for intermediaries like banks. While cryptocurrencies are still relatively new and their adoption is limited, they have the potential to revolutionize the payment industry.
Historical Development of Payment Methods
The development of payment methods is closely tied to the evolution of money and commerce. The article mentions that bartering, the exchange of goods between parties, was the earliest form of payment method. However, bartering had limitations as there was no standardized measure of value.
Over time, various forms of currency emerged. Coins made of metals like gold and bronze were introduced, followed by the development of paper money in China. The use of cash as a payment method has been dominant for centuries, but the rise of electronic methods has led to a decline in its use.
Conclusion
In conclusion, payment methods have evolved significantly over time, from bartering to cash, electronic transfers, credit cards, mobile payments, and cryptocurrencies. Each method has its advantages and disadvantages, and their popularity varies across different countries and economic conditions. The development of technology has played a crucial role in shaping the payment industry, and we can expect further advancements in the future. If you have any specific questions or would like more information on a particular aspect, feel free to ask!
