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How Digital Payments Grew Into a Must-Have Banking Service

Digital payments in the form of peer-to-peer (P2P) transactions and user-to-vendor payments went mainstream years ago. But the majority of options come in the form of third-party services and digital-payment agents. 

Popular platforms offer seamless payment delivery, a feature that an increasing number of consumers want from their bank or credit union. So, let’s explore the evolution of digital payments and learn how technology poses opportunities and challenges.

Digital Payments: A Slow but Steady Start

Today’s digital-payment systems may have Western Union to thank. After all, Western Union was the first business to offer electronic funds transfer, in 1871, letting people and businesses send money nationally. However, it wasn’t until 1989 that the company supported consumer-to-vendor payments, allowing people to pay their electric or car-loan bills from any location with Western Union services. 

Meanwhile, the automated clearing house (ACH) came about in the 1970s. It reduced the number of paper checks used for recurring payments. But providers still had to physically deliver magnetic tapes and diskettes containing ACH information. By 1994, the Federal Reserve decided that all incoming and outgoing ACH payment files would need to be deposited and delivered electronically. 

This time frame coincided with the rise of computer technology and the internet. In 1995, Amazon, Internet Explorer, eBay, Yahoo and the Windows 95 operating system were all new. Three years later, Google began, followed quickly by PayPal in 1999 and Bill Me Later in 2000.

PayPal’s platform allowed people to send money online using an email address without sharing their credit-card information with a vendor or another person.  At this point, people were beginning to get access to computers and nontraditional banking channels. Yet throughout the 1990s and early 2000s, cell phones weren’t very smart. They supported texting, and some had email capabilities.

Over the next few years, we saw technology platforms skyrocket — then came the dot-com bust in 2000. It was in 2007 that the iPhone launched, followed by the first Android smartphone in 2008, changing the digital-payment industry. With a pocket computer, people could access digital-payment platforms from their phones and send funds worldwide.

Technology Fuels Digital-Payment Adoption

As PayPal and smartphones attracted users, mobile payments began increasing. According to the Federal Reserve, 28% of US smartphone users made a mobile payment in 2014. Consequently, large financial institutions took note. In 2016, JPMorgan Chase, Bank of America, Wells Fargo and U.S. Bancorp launched clearXchange, which let bank users transfer funds to other banking clients. The platform also offered an advantage over third-party payment agents, providing near-instant transfers of funds compared to the one- to three-day timeline for PayPal and others. 

One year later, clearXchange rebranded as Zelle, and now it is a popular solution used by banks for person-to-person payments. Estimates from eMarketer predict that this year there will be 48.2 million Zelle users in the US, “making up 18.5% of the population,” and that by the end of 2023, transactions via mobile P2P apps will reach $1.152 trillion, “driven by Venmo, Zelle, and Cash App.”

Indeed, eMarketer expects rapid adoption of all P2P payments, saying, “We estimate that 38.5% of Gen Z smartphone users in the U.S. will transact via these apps. By the end of 2025, this proportion will be closer to 62%.”

Digital Payments Show No Signs of Slowing

Between internet-connected wearables and voice-enabled services, consumers have more ways than ever before to connect online. But every dollar sent using digital-payment agents is a dollar not used at your bank or credit union. Fortunately, financial institutions can take advantage of third-party fintech partnerships, giving them access to advanced technology solutions without steep infrastructure and IT investment. Moreover, technology boosts user retention.

Explore Digital-Payment Solutions

From mobile banking solutions to online payment features, consumers want convenient financial products. Few banks or credit unions can afford to discount the importance of offering P2P or bill-paying account features. Instead, they should pivot quickly to snag their share of the market and deliver excellent online experiences. Learn how a partnership with Lumin can benefit your organization by contacting us today.

Jessica Elliott is a business writer and communications consultant who develops insights from data collection, observation and analysis that enable clients to envision their future while taking immediate action. With 24 years in public-facing roles, she understands how to connect the dots so that professionals can develop their billion-dollar idea into total market visibility.


Western Union – 6 fascinating things about Western Union’s history

New York Fed – Automated Clearing Houses (ACHs)

Thomas Jefferson University – From Arpanet to World Wide Web: An Internet History Timeline

Google – Our Story – Throwback Thursday: PayPal’s Biggest Days In History 

Crunchbase – Bill Me Later

ComputerWorld – The evolution of Apple’s iPhone

Android Authority – The history of Android: The evolution of the biggest mobile OS in the world

Federal Reserve – Consumers and Mobile Financial Services 2015

Business Insider – Big banks are targeting tech giants with their own mobile payment services

eMarketer – How the biggest mobile P2P payment players stack up