The means of exchange is one of the three key functions of money. Since the ancient times of trade relations developments, people has been searching for ways to speed up and simplify the process of money exchange. With the development of technology, especially with the spread of the Internet, more and more solutions are emerging to facilitate transactions.
Initially, first money transfers started three hundred years ago due to the banking system development, money lenders and guarantors, as well as postal services, yet it was the appearance of telegraph in the 1800s that brought the money transfer industry to a new level. In 1858, the Mississippi Valley Printing Telegraph Company (NYMVPTC, founded in 1851) was rebranded and renamed Western Union. The company’s founders, Hyrum Sibley, the former sheriff of Monroe County, New York, and Judge Samuel Selden, had no idea at the time that the future company would refuse to simply send telegrams and focus on money transfers alone. The first Western Union money transfer via the telegraph was executed in 1871. The service turned out to be on-demand. By 1876, the company carried out 37,190 money transfers.
In general, the workflow was the same as with the postal transfers, which have been used for more than a century. It worked as follows: a sender would come to the post office, give a post-office employee the amount he wanted to send, and the latter had just to register the amount in a special record book. The form was then sent to the post-office, where the addressee received money. It was possible to speed up the process using the telegraph. It was no longer necessary to send coupons and discounting forms by mail. Information about the receiver and the amount of payment was transmitted by telegraph.
From the telegraph to first credit cards
The development of cash-free payment systems in 1900s went faster. Western Union was the first company to issue a kind of payment card, a forerunner of a bank card. In 1921, loyal clients of Western Union could issue a prepaid card. So much the idea was approved that it was picked up by many large retailers in the United States, from petrol station chains to fast-food restaurants and grocery stores.
The first credit card was the one from Diner’s Club, issued in 1950. With its help, it was possible to pay in a chain of restaurants in New York. 1958 saw credit cards issued by Bank of America (BankAmericard) and American Express (Carte Blanche). With their appearance in the US, the consumer lending boom began. American Express used a simple workflow: they issued credit cards, collecting annual fees from their owners. They paid with cards, and American Express billed invoices on a monthly basis. The following decades gave the world Visa and Mastercard payment systems.
World Wide Web and Pizza
The speed and volume of transactions increased, and the users’ appetites grew with them, too. They wanted much faster, much easier and cheaper. By the early 1990s, the Internet, which originated as the development of the ARPANET defense industry in 1960s, began covering the world and a wide range of users. This process is often considered to start as early as in 1989. In March 1989, a British development engineer, Tim Berners-Lee, who later received the title of Sir and became known as TimBL in the network, developed the concept of a network of web pages that would be linked together by hyperlinks. The concept was called the World Wide Web. In November, he performed the first successful connection between a client and server using Hypertext Transfer Protocol (HTTP) via Internet. The development of the Internet allowed the use of new communications for money transfers. In 1994, Stanford Federal Credit Union was the first to offer online banking services to its clients. Though since the interface of these early systems cannot be called friendly, the transactions were effected not by the users themselves, but by Transactions Officers who had special knowledge in computer technology. In August 1994, the world’s first online purchase was completed. This was a pizza from Pizza Hut – a big Pepperoni with mushrooms and an extra portion of cheese. But some people argue that the first purchase was “Ten Summoner’s Tales” by the British singer, Sting. It was paid online at the Net Market Company store in New Hampshire a week before the online pizza purchase. One thing is true that since then, online payments and money transfers have begun to develop rapidly. In 1995, services of electronic micropayments Millicent and ECash (trademark of DigiCash, founded back in 1980s by the legend of cryptography David Chaum from Berkeley University) appeared. Both offered an option to cash and a quick way to the value transfer.
In 1998, a programmer Max Levchin, a financier Peter Thiel, with Luke Nosek and Ken Howery, founded Confinity, which in 1999 launched a money transfer service called PayPal, a name that is well-known worldwide. At the same time, a businessman Elon Musk was trying to develop his fast online payment banking service X.com. In 2000, X.com and PayPal joined their efforts, and in 2002, PayPal successfully held an IPO and was sold to eBay for $ 1.5 billion. PayPal owes its popularity mainly to eBay users. In 2002, more than 70% of all eBay auctions were paid using PayPal.
Not only PayPal developed the popularity of online payments, it also actively participated in the technological development of the industry. Particular attention was paid to security, the development of appropriate software, VeriSign, PayPal Secure Card and other solutions.
China and a Chinese way
Payment technologies were developing all over the world, but China as one of the largest markets has been developing separately for a long time due to a number of geopolitical factors. Along with PayPal, an online e-commerce Alibaba company appeared in China. In 2004, Alibaba launched the Alipay payment system, which initially acted as an intermediary between sellers and buyers at the Taobao C2C-trading site. In fact, it was a kind of Chinese equivalent of eBay with its PayPal. The main advantage of payments through Alipay was that the seller would not receive money from the buyer until he confirmed the receipt of the ordered products.
Over time, Alipay was so liked by sellers and buyers that other enterprises began to use it. In 2009, the number of registered users of AliPay exceeded 200 million. In 2013, Alipay overran PayPal as the world’s largest mobile payment platform. Now Alipay’s payment services are used not only by the affiliate giants Taobao, Tmall, but also by more than 460,000 online and offline Chinese companies. Alipay is especially popular with small and medium businesses, for which acquiring services from banks are not as affordable as the cheaper Alipay service. In China, via Alipay you can pay for goods in stores, both large and small, top-up your balance of mobile phone, order food, pay for tickets in a bus or a train, or travel in a taxi, pay for going to cinemas and utility bills. Alipay has long reached the international level since then, but outside China it has not gained such widespread distribution, although it has occupied a certain level, supporting transactions in 18 foreign currencies.
In China, its main competitor was the WeChat social media payment service, which emerged in 2013. In August of that year, the micro-message service WeChat released the Wallet application. This made it possible to operate with any payment cards issued in China. Now users of WeChat Pay can link bank accounts with Chinese banks to their wallets, as well as Visa and MasterCard issued by foreign banks.
In 2018, Charlie Munger, the legendary American investor, Vice Chairman of Investment Berkshire Hathaway and a collaborator of Warren Buffett, mentioned WeChat as a potential competitor to credit card companies such as American Express.
“…and there is one tiny cloud on the horizon of the payment processors and that is the system of WeChat in China”, Mr Munger said at the annual meeting of Berkshire Hathaway shareholders in 2018.
In 2017, Tencent company, which owns WeChat, reported that they managed to overrun Alipay in the number of active users of mobile payments – 600 million against 450 million with Alipay. However, if you compare the market share by the volume of transactions, Alipay still remains its leader with 54% against 37% for WeChat in 2017.
The world financial crisis
In 2007, the US mortgage loan bubble burst, leading to a banking crisis. On September 15, 2008, Lehman Brothers, an investment bank, one of the largest in the US, declared its bankruptcy. The world was in panic. The distrust to the financial system became the catalyst for the emergence of a completely new tool, which was called Bitcoin. On October 31, 2008, an anonymous developer or a group of developers under the name of Satoshi Nakamoto sent out to a limited society of cryptographers and developers a description of the world’s first cryptocurrency:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Although the idea of creating private electronic money using cryptographic security tools has yet been circulated in the narrow environment of developers since 1980s, it was Bitcoin in which it turned possible to combine all the existing developments of the time.
The Bitcoin network was launched in January 2009. On January 3, the first block in the Bitcoin network was extracted. The Genesis block of Bitcoin contains a symbolic message from Satoshi Nakamoto: a title from The Times – Chancellor on Brink of Second Bailout for Banks. Thus, the creator of cryptocurrency hinted that the Bitcoin is a response to the financial instability, a decline of confidence to banks and government institutions.
In 2010, the first deal was made with the Bitcoin: for the first time ever, goods from the real world were paid for with the cryptocurrency. As in the case of the first online payment, this product has become … a pizza. More precisely, it was two pizzas from Papa John’s. On May 22, 2010, Laszlo Hanyecz, a programmer from Jacksonville, Florida, transferred 10,000 BTC to his friend Jeremy Sturdivant, who ordered 2 pizzas from Papa John’s to Laszlo at the cost of $ 25 using his credit card.
In 2019, Bitcoin is an asset worth $ 200 billion with a user base of more than 633 thousand active addresses.
“It is difficult for people of the 21st century to sell banking services of the 14th century. We get information faster, move faster between cities, we communicate with people from the other end of the planet. The monetary system also adapts to this, – Sergey Esipov, co-founder of Bitlish crypto-exchange, registered in the UK, says. “Bitcoin is a tool that gives the user not only the possibility of a quick and cheap transfer of value, but also what banks did not give – full control over their assets.”
Apple Pay and Google Pay
In the mid of 2010s, solutions for transfers and online payments using mobile phones started to emerge in the foreground. In September 2014, Apple showed new models, iPhone 6 and iPhone 6 Plus, as well as Apple Watch, which was equipped with an NFC chip to pay via a payment terminal. Thus, Apple has launched the Apple Pay payment system. It was enough for users to enter card data into the system. You take a smartphone or a watch to the payment terminal and the payment gets confirmed via the Touch ID fingerprint scanner. During the presentation on September 9, 2014, Apple CEO Tim Cook suggested that after a while, the new service would replace plastic cards.
In parallel with Apple, the system of electronic payments from mobile devices was developed by Google, which completed the creation of the Android operating system, the main competitor of iOS. In 2015, Google launched Android Pay on the basis of the existing Google Wallet system, which was created in 2011. In 2018, both payment solutions were combined under the same Google Pay brand.
In the 2018-2019 fiscal year, some 10 billion payments will be made through Apple Pay. “This is awesome!” – said Tim Cook, announcing such a forecast in March 2019 at Apple’s Keynote conference.
According to analysts at Morgan Stanley, the volume of transactions through Apple Pay will reach $ 190 billion by 2022, and $ 304 billion by 2027. To compare, according to the forecast of the analysts at Morgan Stanley, the volume of transactions through PayPal will be $ 431 billion by 2022, and $ 579 billion by 2027.
Apple intends to compete not only with PayPal, but also with the credit card market, releasing its first credit Apple Card in the fall of 2019. Thus, it will try to get a part of the market, which is dominated by Visa and its closest competitor Mastercard. However, Visa has an indisputable advantage so far, as in 2018, 124.3 billion transactions were effected via Visa system, and in 2019 their volume will reach 140 billion.
Facebook and Telegram
Apple, Google and the Chinese Alibaba and WeChat have shown that now the main key to success in the market of electronic payments is in the presence of an extensive base of active and loyal users.
In early 2018, the media got information about the plans of the Telegram messenger to create a blockchain platform, TON (Telegram Open Network), and build its own crypto-economics around. There will be tokens as well for internal user payments, GRAM. To finance the project, Telegram founder Pavel Durov chose the initial coin offering (ICO), which was popular at the time in the cryptocurrency market. Telegram has managed to raise $ 1.7 billion in two closed rounds of financing, it was said in documents filed with the US Securities and Exchange Commission (SEC).
In April 2019, Telegram launched a test version of TON and gave access to it to a limited number of professional blockchain teams around the world. It is expected that TON will be launched before the end of 2019, but the exact date is still unknown.
At the same time, Facebook is thinking about the creation of its own cryptocurrency. It is curious that the blockchain division of Facebook is headed by none other than David Markus, the former president of PayPal. In June 2019, Facebook officially announced plans to launch its own digital currency, and its rate will be pegged to the US dollar and other national currencies for stability. Facebook calls Libra’s main mission to create a simple global financial infrastructure that will be accessible to billions of people around the world.
“This is especially important for people who don’t have access to traditional banks or financial services. Right now, there are around a billion people who don’t have a bank account but do have a mobile phone”, Zuckerberg wrote.
Libra Association, which already comprises 28 companies, including Visa, MasterCard, Uber and many others, will develop the stablecoin, which was called Libra. The launch of Libra is expected in 2020.
Looking to the future
Nowadays, the global electronic payments industry is developing faster than ever. It took mankind thousands of years to move from metal coins to paper, a century to go from bank accounts to electronic wallets, but the Internet gave an incredible power impulse. Almost every year launches new providers, platforms and payment instruments. And this is despite the fact that the level of Internet penetration in the world has not yet reached the limit value. According to the developer of the platform for managing social networks HootSuite, at the beginning of 2018 over 4 billion people worldwide had access to the Internet. This means that the industry will continue to move upwards due to the influx of new users.
“Now the main focus is the synthesis of all payment solutions in one. Users don’t want to choose between PayPal and Bitcoin, they want to be able to use everything and, preferably, from one interface,” Sergey Esipov, co-founder of Bitlish, notes. “We are moving in that direction ourselves. For operations with crypto-assets, Bitlish customers can use transfers from a variety of payment systems, bank transfers, cryptocurrency, special vouchers, through which users can transfer to each other cryptocurrency without a fee. We are trying to offer all possible ways to exchange assets because we see that this is what users are waiting for. “
Recent years have shown that the financial market is no longer the prerogative of larger banking organizations, and larger players from other industries may appear on it in the coming future.