At the invitation of founder Othon P. Blanco, the early town was populated by settlers from Belize (including Caste War refugees and Englishmen).

The first step in combating them was to prevent the trafficking of arms from Belize and to assert Mexican sovereignty at that end of the territory, so it was decided to build a fort and customs section at the point where the Hondo River feeds into Chetumal Bay, which they named Payo Obispo in honor of Payo Enríquez de Rivera, who as bishop of Guatemala had visited the region in the 1660s.

He left New Orleans in late 1897 and, after making stops in Progreso, Yucatan and Cozumel, arrived at the mouth of the Hondo River on 22 January 1898.

Finally, Othón P. Blanco officially founded the new town, on 5 May 1898, with neighbors from Corozal and other parts of the peninsula and gave it the name Payo Obispo', as the region was already known.

Payo Obispo was in the beginning a small border town, mainly dedicated to border surveillance and whose economic activities were concentrated on the exploitation of jungle resources such as Manilkara zapota and chicle, communication with the interior was only by sea, to the port of Vigía Chico, where a railway linked with the capital of the territory, Santa Cruz de Bravo, or further north Cozumel or Progress.

The houses were woodland Caribbean English style, as in Belize or Jamaica, built above ground level and painted brightly and with wooden latticework on the windows.

The final development of Payo Obispo occurred when the governor of Yucatan, Salvador Alvarado decided to return to the Maya the city of Santa Cruz de Bravo, which at that time belonged to Yucatan after the suppression of the Territory of Quintana Roo and that by being 1915 the capital was moved accordingly to Payo Obispo, thereby increasing population and economic activity, as government units were established in the population.

Since it is the location of all of the state's central offices, there is a large population of government employees whose consumption of local goods and services injects additional revenue into the Chetumal economy.

As Capital of the state, Chetumal receives a good share of the foreign currencies brought in by the considerable floating population composed of European, Asian and North American tourists.

There is a Country club, which features tennis, football and basketball courts, a gym, a swimming pool, a steam-bath and a lounge for parties.

In the early 1990s, the University of Quintana Roo was established at Chetumal, providing training and advanced tertiary degrees over a range of subjects.