Every time we make a payment, whether it’s to pay a bill via direct debit or move some funds into a savings account for example, there’s a lot going on behind the scenes with payment systems. Payment systems are the necessary foundation to secretly move money from one place to another. In the UK, the types of payment systems we use have stayed the same for decades. However, these are undergoing change because of a drive for financial technology (FinTech) that is creating secure payment systems with technology, delivering a number of benefits for all of us. In this article, we’ll define the three types of payment systems and explore how these are being changed by digital currencies and electronic solutions.

1. From Analog to Digital: A deep dive into payment
systems
Every time we make a payment, whether it’s to pay a bill via direct debit or move some funds
into a savings account for example, there’s a lot going on behind the scenes with payment
systems. Payment systems are the necessary foundation to secretly move money from one
place to another. In the UK, the types of payment systems we use have stayed the same for
decades. However, these are undergoing change because of a drive for financial
technology (FinTech) that is creating secure payment systems with technology, delivering a
number of benefits for all of us. In this article, we’ll define the three types of payment systems
and explore how these are being changed by digital currencies and electronic solutions.
A brief history of payment systems
We’ve always had payment systems in some form, even before we used currency. It is
believed that the earliest transactions happened before 3000 BC through a bartering system;
a method of exchange where goods and services are directly traded for other goods and
services. Naturally, this payment system was limited due to the challenge of sourcing what
you need if you don’t have an attractive swap for the retailer. The concept of money emerged
in ancient Lydia around 600 BC where we saw standardised currency. Fast-forward to the
20th century and the advent of credit cards in the mid-1900s revolutionised payment
systems, allowing for electronic transactions. Today, digital wallets, online banking, and
cryptocurrencies represent the latest advancements, reflecting the continual evolution of
payment systems towards greater efficiency and convenience.
What is a payment system?
A payment system is a set of processes and infrastructure that facilitates the transfer of
money between individuals, businesses, or entities for goods, services, or financial
transactions. It encompasses various methods, including cash, checks, credit cards, and
electronic funds transfers. It operates across different platforms such as physical
point-of-sale terminals, online interfaces, and mobile applications. Financial protocols and
regulations must be followed to securely exchange funds. Essentially, all types of payment
systems play a crucial role in the modern economy. They function as the foundation of all
financial exchanges.

2. What are the four types of payment systems?
We can break down various payment systems into 4 categories:
Cash payments
Physical currency, such as coins and banknotes, is exchanged directly between the payer
and the payee. Since the COVID-19 pandemic, the use of cash has decreased. While it’s
immediate and tangible, it also lacks traceability and is susceptible to being stolen or lost.
Electronic payments
Transactions are conducted digitally without the need for physical currency. This type of
secure payment system includes various electronic methods such as credit/debit card
transactions, digital wallets, and online banking transfers. This type of payment system is fast
and highly convenient.
Cryptocurrency payments
Cryptocurrency is emerging fast. Digital or virtual currencies, such as Bitcoin, Ethereum, and
others, are used for peer-to-peer transactions. These currencies operate on decentralised
blockchain technology. It offers the potential for anonymity.
Central Bank Digital Currencies (CBDCs)
Central bank digital currencies (CBDCs) are digital forms of national currency issued and
regulated by a country's central bank. Unlike decentralised cryptocurrencies such as Bitcoin,
CBDCs are centralised and typically operate within a controlled regulatory framework,
ensuring oversight and stability. CBDCs serve as a digitised extension of a country's official
currency, maintaining the backing and authority of the central bank.
The main payment system platforms
To help us understand deeper, here are payment system examples that you probably come
across day-to-day:
● Credit card networks
● Digital wallets - PayPal, Apple Pay, Google Pay, Samsung Pay, etc
● Online payment processors - Stripe, Square, Braintree, PayPal, etc
● Mobile banking apps
● Cryptocurrencies - Examples include Bitcoin, Ethereum, and Ripple, etc

3. ● Contactless payment - Using cards, smartphones, or wearable devices has become
popular for quick and secure transactions
How are payment systems changing?
Payment systems have come a long way from swapping some eggs for some milk before the
emergence of currency. This is because of the acceleration of FinTech; innovative
technologies and digital solutions that leverage software and other technological
advancements to enhance and streamline financial services. The reasons for these changes
include consumer preferences as well as achieved technological advancements that make
this change possible. Businesses are being innovative with their methodologies whilst
conducting research and development in the financial sector. This is causing a
breakthrough of transformations.
For example, previously if you wanted to cash a check you would need to take it into your
bank. This requires you to find a time when you are free to cash it in while the bank is open,
and if you work traditional hours of 9-5, this can be tricky. Now, you can take a picture of the
check using your phone and banking app, at any time that suits you. Other ways payment
systems are undergoing change include:
Sustainability and green payments
There is a growing emphasis on environmentally friendly payment options, encouraging the
development of green payment solutions and eco-friendly practices within the financial
industry.
Instant payments
The demand for faster and real-time payments has led to the development and adoption of
instant payment systems, enabling users to transfer funds almost instantly, 24/7, reducing the
reliance on traditional delayed settlement processes.
Biometric authentication
The integration of biometric authentication methods, such as fingerprint recognition and facial
scans, enhances security in payment systems, offering users a convenient and secure way
to authorise transactions.
AI and Machine Learning
Payment systems are increasingly leveraging Artificial Intelligence (AI) and Machine
Learning to enhance fraud detection, risk management, and personalised user experiences.

4. The benefits of electronic payment systems
There’s been talk of an elimination of cash altogether in the near future as we continue to
embrace electronic payment systems. Electronic payment systems have emerged as
transformative tools, reshaping the way individuals and businesses engage in financial
transactions. They provide numerous benefits:
Convenience and accessibility
Electronic payment systems offer unparalleled convenience, allowing users to make
transactions, pay bills, and transfer funds at any time and from virtually anywhere with an
internet connection, eliminating the constraints of physical locations or business hours. They
reduce the processing time associated with traditional methods, such as checks or manual
bank transfers.
Enhanced security
Online payment systems prioritise security through encryption, multi-factor authentication,
and fraud detection mechanisms, providing users with a higher level of protection against
unauthorised access and fraudulent activities compared to traditional payment methods.
Cost efficiency
Digital transactions often involve lower costs compared to traditional payment methods,
reducing expenses related to paper, printing, transportation, and manual processing,
benefiting both consumers and businesses.
Global reach
Electronic payment systems break down geographical barriers, enabling users to conduct
international transactions and transfers without the need for physical currency exchanges or
complex international banking processes.
What role do digital currencies play in revolutionising
payment systems and traditional finance?
Digital currencies are playing a pivotal role in revolutionising payment systems and
traditional finance by introducing decentralised and technologically advanced alternatives.
Operating on blockchain technology, digital currencies such as Bitcoin provide a secure and
transparent platform for financial transactions without the need for traditional intermediaries.
These currencies facilitate faster and cost-effective cross-border transactions, challenging

5. the conventional banking system's limitations. Moreover, the rise of central bank digital
currencies (CBDCs) signifies a shift towards a digital economy, offering users a more
inclusive, efficient, and resilient financial landscape.
Summary
In the dynamic realm of payment systems, digital currencies, led by pioneers like Bitcoin, are
reshaping the finance industry by providing secure, transparent alternatives to traditional
methods. Blockchain technology underpins these currencies, facilitating rapid, cost-effective
cross-border transactions and challenging the limitations of conventional banking. The ascent
of central bank digital currencies (CBDCs) represents a pivotal shift towards a more inclusive
and efficient digital economy. In this era of accelerated FinTech innovation, our
understanding of payment systems is undergoing a dynamic transformation, promising a
future where accessibility, security, and efficiency converge in unprecedented ways.
The role of R&D tax credits with the FinTech drive
If your business has been involved in FinTech, perhaps using Bitcoin and digital currency,
moving past manual processes, then you could potentially claim some money back with R&D
tax credits. Our team can determine your eligibility for the tax credit incentive that rewards
innovation and prepare your claim to secure your R&D refund in weeks! Get in contact
today and we’ll get you started.