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Evolution of payment technologies: from telegraph to cryptocurrencies

May 2020

Money is primarily a medium of exchange. People have always looked for ways to simplify the process of exchanging money, opportunities to make it faster, since the effectiveness of trade and the development of society directly depended on it. Today, the sphere of money transfers is booming - this is facilitated by the widespread distribution of the Internet, due to which the distance between people is becoming more and more arbitrary.

Telegraph and the first quick transactions

Western Union dates back to the 19th century. Founded in the middle of the century, a telegraph company from Mississippi was destined to make a real revolution in the field of money transfers. At that time, transactions were carried out by banks, money lenders and postal services. Thanks to the telegraph, the process of delivery of money items was simplified and became much faster, the recipient's data and the transfer amount were sent by telegraph, it was not necessary to wait for the registration documents to arrive by mail. The service, first launched in 1871, turned out to be extremely popular: over the next 5 years, Western Union made 37190 transactions.

Prepaid cards and credit cards

The idea of ​​issuing the first prepaid cards also belongs to Western Union: in 1921, the company began to issue such cards to its regular customers. The experience turned out to be successful and soon the idea was picked up by other American companies, the cards became fashionable, they were issued by network trading organizations - gas stations, restaurants, shops.

The first credit card was issued in 1950 by the Diner’s Club restaurant chain in New York, and just eight years later, two American banks started issuing credit cards at once. These were Bank of America and American Express, whose new financial products sparked a boom in consumer lending in the market. The scheme for working with credit cards looked like this: the bank issued a card and charged its owner a fee for annual maintenance, after which a customer was billed monthly for all purchases that were made on this card.

Visa and MasterCard issued their first cards in 1966. Visa initially appeared as a franchise division of Bank of America, which was engaged in cards. MasterCard was the brainchild of the Interbank Card Association, which included the world's largest banks. The aim of the association was to create an open system for the smooth passage of money transfers between banks.

Internet is faster, easier, cheaper

As the Internet developed, its coverage spread to an increasing number of territories of the globe, money transactions began to flow into this space without borders. The first bank to offer customers online transfers in 1994 was the Stanford Federal Credit Union. The online banking services of those years were little alike to modern online transfers: they were not carried out by the sender, but by the bank’s operator, and the program interface could not be called friendly.

In August of the same year, another historic event occurred - the first purchase was made through the Internet. Opinions regarding the object of purchase vary, some claim that it was a big pepperoni pizza from Pizza Hut, others believe that the first online purchase was a disc with Sting's album. One way or another, the start of the process was given, and from that moment the area of ​​online translations began to develop at a frantic pace.

In 1995, Millicent and ECash were launched, electronic micropayment services that positioned themselves as an alternative to cash and offered fast transfer of money to any distance. ECash was a trademark of DigiCash, which was founded in the 80s by the legendary cryptographer David Chaum.

In 1999, PayPal money transfer services, the brainchild of programmer Max Levchin and financier Peter Thiel, and, created by entrepreneur Ilon Mask, began their work. In 2000, the companies merged under the PayPal brand, which conducted an IPO in 2002 and was sold to eBay for $ 1.5 billion. Thanks to eBay's popularity, PayPal has grown to a global scale, 70% of all purchases on eBay went through PayPal.

Chinese Way

As in many other things, in the field of online money transfers, China has moved forward along its own separate path. At the same time, when PayPal began to develop in the west, an Alibaba retailer with its own Alipay payment system appeared in the Middle Kingdom. Payments through Alipay had an innovative design: until the buyer confirmed that he had received goods of the appropriate quality, the money was frozen on the account of the site and only then transferred to the seller.

Alipay’s workflow was very successful, and over time, not only Alibaba’s customers began to use it. In 2009, AliPay already had 200 million registered users, and in 2013 the service overtook PayPal in the number of mobile payments. Today, payments through not only such huge sites as Tmall and Taobao, but also 460000 other Chinese companies from online and offline spheres pass through AliPay. AliPay customers not only can pay for purchases using the service, but also can pay for mobile communications, utility bills, and public transport.

In recent years, Ali has a competitor, the Wallet application from the popular in China social network WeChat. Wallet was launched in August 2013, and it was possible to make payments using any payment cards issued in China through it. In 2017, the WeChat platform reported that the number of active users of its mobile payments reached 600 million, which is 150 million more than AliPay’s number of users. Nevertheless, with regard to the total volume of transactions in the Chinese market, here AliPay remains the leader. Its share is 54%, while WeChat occupies 37% of the market.

Mortgage Bubble and Satoshi's Creation

In 2007, the United States was experiencing one of the most powerful historical crises, in fact the collapse of the banking system with mortgage loans, which were issued to everyone, thanks to which the credit bubble was inflating more and finally burst. In September 2008, one of the largest US banks, Lehman Brothers, filed for bankruptcy, which shocked the world community.

It is precisely because of dissatisfaction with the current situation in the financial world that the cryptocurrency phenomenon came into being. On October 31, 2008, someone named Satoshi Nakamoto, whose identity still could not be identified, published on the network a description of Bitcoin, a cryptographic-based financial network that transferred power over finances to the owners. The design of Bitcoin completely removed intermediaries from the circulation of money, since transactions on this network were made directly between people, and not a bank was the guarantor, but a triad of mathematicians, miners, and blockchain.

On January 3, 2009, the genesis block of Bitcoin, the first block with 50 network coins, was generated. The hash record of the genesis block contains a fragment of a line from an article by The Times, which was not chosen by chance: the article dealt with the fact that the Minister of Finance of England was forced to consider new measures to save banks in an economic crisis.

Indeed, the crisis proved that the world needed a completely new approach to money, because the money printing press obviously did not live up to its expectations. This is exactly the approach that Satoshi suggested in Bitcoin's concept.

"Bitcoin is no better and no worse - bitcoin is a tool completely different from tools of the past to save value and payments," Sergey Mendeleev, founder of the Garantex exchange, says. "By and large, since the time of the Templars’ golden receipts, mankind has not invented anything new until 2008. Only regulators and means of payment changed from paper to electronic media, but the scheme still remained the same, there is a centralized register maintained by the regulator, and there is an independent value of the assets being moved."

Satoshi revolutionized these two pillars at once. Firstly, by declaring the regulators unnecessary. All payments are stored in a centralized registry and it is enough to sign your will with a valid key to complete a transaction, which will be verified and accepted by all participants of the settlement network. But it was drawn only to an extremely convenient innovation, no more. The idea of ​​endowing an independent value with a meaningless set of symbols was truly revolutionary, which is absolutely useless in terms of practical application and has value only for participants in the settlement system.

And if the ideas of the blockchain were expressed earlier (they simply were not brought to practical implementation), then this second idea gave rise to a truly global new paradigm. And from this point of view, comparing Bitcoin with previous payment methods is simply insulting to the former. Modern credit cards and ancient valuable shells for transactions are much more in common than credit cards and bitcoin. It’s important to understand this very clearly and build your relations with payment systems based on this very concept.

Another historical event occurred in 2010: for the first time, something material was acquired for bitcoins, and again, pizza turned out to be a historical artifact. A programmer from Florida Lazlo Hanesh sent a certain Englishman 10 thousand bitcoins in exchange for the fact that he ordered two pizzas for $25. To date, the cost of these two pizzas is $ 70.4 million...

Contactless payment from Apple and Google

The main payment trend of the second decade of the 21st century is contactless NFC-solutions for smartphones. The first such solution was proposed by Apple, in the 2014 models of the iPhone 6 and Apple Watch an NFC chip was built-in, with which it was possible to pay via a cash register terminal with a credit card loaded into the user's apple device. Transactions were made through the Apple Pay payment gateway.

Apple's main competitor, Google, could not stay away and the next year launched its own payment system Android Pay, which in 2018 was renamed Google Pay. It functioned similarly on devices equipped with an NFC chip and Android system.

Over the course of 2018-19, Apple Pay made 10 billion payments, and as far as forecasts are concerned, Morgan Stanley analysts believe that $20 billion transactions will be made through Apple Pay by 2022, and in 2027 this figure will reach $304 billion. For comparison, the same analysts predict that $431 billion will be transferred through PayPal by 2022, and $579 billion by 2027.

Social networks offer their payment solutions

The unconditional success of the Apple and Google money projects in the West and Alibaba and WeChat in China showed that the main secret of a successful launch of a payment solution is to have an extensive user base that enthusiastically accepts everything that comes from a company to which they are loyal. Payment solutions from the main characters of today, social networks, should have appeared, and in fact would have already been launched, if not for the certain difficulties that they had to face.

It's about blockchain projects of the Telegram messenger and the Facebook social network. In 2018, Telegram announced that it plans to create a decentralized TON network, in which a financial system based on an internal coin will be deployed. The scale of the potential impact of the new system on the public is huge, as the number of Telegram users as of March 2020 is more than 600 million users. The figure is unofficial, it is calculated according to the statement of the Telegram creator Pavel Durov, that about 600 thousand people are registered in the messenger every day, and at the end of March 2018, 200 million users were registered in Telegram.

Most likely, it is the scale of the project that prevents it from starting now, when TON is already fully prepared for this. US regulators do not give the green light to launch a blockchain network, and when this happens is not known. One thing is clear: the traditional financial system has never before been so close to becoming secondary, since social networks with their own progressive payments will lead a huge number of users to their side.

A similar situation can be seen with the Libra project from Facebook. The world’s most famous social network is also going to launch its own cryptocurrency, which is also tied to the dollar, i.e. stable. According to the authors, the stable coin from Facebook should give a chance for financial prosperity to many areas of the planet that today do not have access to the banking network and the world market. In order to become part of the financial system of Libra, you only need to have a smartphone connected to the Internet. And again, regulators are openly opposing the launch of the project, this time expressly stating that it is dangerous for traditional finance.

The future is here

We live in an amazing time. If earlier it took centuries for mankind to move from one stage of development to another, today every year the development of technology is equal to decades of previous eras. The Internet is erasing more and more boundaries, mental and physical, and new fundraising mechanisms through crowdfunding on the network make it possible to develop the most fantastic ideas.

Payment systems are developing, and traditional institutions have to meet the requirements of the new time, and now the largest banks in the world are studying and implementing blockchain technologies in their work, trying to optimize their services in order to continue to be needed by people who have more and more alternatives. It is not necessary for cryptocurrencies to completely replace old money, they very energetically affect the world of traditional finance without it, forcing them to be better for retaining their customers.

Author: Kate Solano for С

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