Be it due to demonetisation or sheer tech savviness, we’ve started using digital payments a lot more off late. Even offline payments – where you complete otherwise offline transactions via digital means – have picked up pace. If you were to visit the Digit test labs you’d hardly see any physical bills lying around. We have innovations on the payments front to thank for that. Overall, it is obvious that digital payments owe their popularity to their ease of use, constant availability, and better security in the present day scenario. But there’s more to that story than meets the eye.
The barter system had existed for, well, as long as people needed stuff that other people had. Quite obviously, a time came in every market system where the people involved collectively realised that the mutual need required for barter was a hindrance to trade. In came the concept of money – something that everyone would be willing to accept in exchange. Explains why salt and cocoa beans were accepted as valid tender at one point of time.
Over time, as technology progressed to a point where things were becoming faster, smaller and easier in every aspect of life, carrying around huge wads of cash to complete transactions became cumbersome. That is where technology stepped in and brought humanity on the road to digital payments. Today, we see huge volumes of digital transactions. According to a BCG report, in 2016, the total value of digital transactions was roughly 411 trillion USD, which is roughly equivalent to every person on the planet ordering a vadapav every 90 seconds for the entire year. Kind of takes care of the hunger problem, doesn’t it?
The concept of using thin, plastic cards for payments at almost every store was probably unimaginable a hundred years ago. What wasn’t unimaginable was the idea of banks and stores extending credit to users by means of tokens and tags. One of the earliest implementations of this was the Charga Plate. It was very similar to a dog tag with customer information embossed onto it. This was fed into an imprinter to record a transaction. Soon after, American Airlines introduced an Air Travel Card that would let you ‘buy now and pay later’. Within the next 15 years, the Air Travel Card became the first internationally valid charge card.
But most cards then were still limited to a particular vendor. You would need to carry one card for each vendor, or at least carry cash for anything beyond. The first roughly general purpose card was the Diners Club in 1950, which was soon followed by Carte Blanche and American Express. Over the next 20 years, Visa (initially BankAmericard) and MasterCard (then Mastercharge) would come to be. But all of this was still not computerised and a credit card transaction involved the following steps:
- Customer presents card.
- Merchant calls bank with card details.
- Bank calls credit card company with card details
- Credit card company gets employee to manually check details
- Transaction gets approved
Although computerisation did speed up the process to under one minute, it still took a while (the advent of the 21st century to be precise) for always connected payment terminals to become ubiquitous. Meanwhile, the magnetic strip was standardised for all cards – the same strip that you see today behind your card – around 1979. This was also the year when PoS terminals began to emerge across the U.S.
Internet arrived on the scene early in the 1990s. Almost every sector benefited from the connectivity, including digital payments. Some of the most significant online payment systems started operations in the early 90s. In 1994, the Stanford Federal Credit Union was established. This was the first financial institution to offer online internet banking services to all members. However, these systems weren’t even remotely user-friendly and required highly specialized knowledge in areas like encryption or data transfer protocol. Additionally, the systems weren’t flexible enough to adapt to the rapidly changing volume of users and the nature of their transactions.
Initially, the main players in the e-payments arena were Millicent (founded in 1995), and ECash or CyberCoin (both in 1996). The majority of the first online services were using micropayment systems and almost all of them were trying to implement electronic cash alternatives (such as e-money, digital cash or tokens). Moreover, in 1994, Amazon was founded and Pizza Hut started accepting online food ordering. Pizza Hut’s online food delivery system was one step ahead of all its competitors.
Getting pally with your payments
In 1999, PayPal began as a wireless payment service provider for the Palm Pilot. Back then it was launched by Confinity, a security software provider, which later merged with X.com, an online banking company founded by Elon Musk. Eventually, PayPal established a strong customer base on eBay, which prompted an eventual acquisition by eBay for 1.5 billion USD in 2002. At the time of the deal, 70% of all eBay auctions accepted PayPal payments, and roughly 1 in 4 closed auction listings were transacted using the payment service.
Between its establishment and the eBay acquisition, PayPal had implemented a lot of innovative features around online payment – like HTML payment buttons, sending payments using email addresses, launching the reverse Turing test to reduce fraud and more. On the other hand, eBay’s own response to these innovations was the creation of Billpoint, which was essentially a PayPal clone. On top of that, eBay took several measures to push people to use Billpoint, like offering free listing days for using Billpoint, cutting fees, mandating use of Billpoint for its Stores sites, rolling out a checkout button at the top of every listing that defaulted to Billpoint and more. And it wasn’t just eBay – even banks were up in arms against PayPal, pursuing litigation to get PayPal classified as a bank or an unsecured service. It was sheer customer loyalty and popularity that pulled PayPal through this, which was followed by the acquisition.
In the subsequent years, PayPal made a lot of progress in terms of integration and adoption on eBay. But most of this progress was with the aim of improving the shopping experience on eBay. The core customers of the global payments ecosystem itself were largely ignored. In 2014, Carl Icahn, an activist shareholder in PayPal, made a public statement asking eBay to spin-off PayPal as an independent company. Quoting Elon Musk, he said, “It doesn’t make sense that a global payment system is a subsidiary of an auction website… It’s as if Target owned Visa….[PayPal] will get cut to pieces by Amazon Payments, or by others such as Apple and by startups if it continues to be part of eBay.”
Bit by bit
A mere three weeks after the launch of Apple Pay, eBay announced the separation of PayPal as an independent entity on September 30, 2014. Ironically, Apple Pay had originally approached PayPal as a partner, but eBay CEO John Donahoe reportedly forced PayPal to go with Samsung’s payment services plan. But by then, a lot had happened in the world of digital payments.
For starters, bitcoin had been invented. In 2008, a paper was released online under the name Satoshi Nakamoto titled ‘bitcoin: A Peer-to-Peer Electronic Cash System’. This paper detailed a peer-to-peer network for money transfer that did not rely on trust. Within one year, bitcoins were officially being issued and by 2011 services had started accepting payments via bitcoin. Bitcoin, as a mode of digital payment, never looked back from that point and on March 2, 2017, the price of one bitcoin crossed the spot price of one ounce of gold.
Why did bitcoin succeed? For starters, the internet loves something that is for and by peers, instead of corporations. A typical bitcoin transaction is verified by six computers, hence it is absolutely secure. This verification process, carried out by network computers, is called bitcoin mining, where users are rewarded for helping with the transaction verification against the blockchain (a network ledger). Other factors affecting bitcoin’s success are online access, reduced chance of identity theft, protection from fraud, and lower fees.
The great wall(et) of Near Fields
Two technologies transformed the way we look at digital payments in the 21st century – digital wallets and contactless payments. NFC, as a technology, was being worked on since the dawn of the 21st century. But it was the introduction of Apple Pay in 2014 that pushed NFC to the mainstream. Just scanning a credit card added it as a payment option to Apple Pay. It also added a layer of biometric authentication to it with the fingerprint scanner. This second authentication factor has, in fact, helped it cross transaction limits applied to one-factor transactions in several countries, like the U.K. The service is compatible with the iPhone 6, 6 Plus, iPhone 6S, 6S Plus, 7, 7 Plus, iPhone SE, iPad Air 2, iPad Pro and the Apple Watch. Users with an iPhone 5, 5C, 5S, 6, 6 Plus, 6S, 6S Plus, 7, 7 Plus and iPhone SE can use the service through an Apple Watch, though it lacks Touch ID security.
While much of the global digital payment wallets are split among key players, India has a clear leader – Paytm. While Apple Pay was launched in September 2014, Paytm wallet in India was launched almost one year earlier in 2013. And since then a lot of other mobile wallets have also emerged in India, namely Freecharge, Mobikwik, Citrus and more. While their services are differentiated mainly by the charges they levy on transactions and bank transfers, Paytm is currently the market leader in this segment. A big factor in the current popularity of Paytm was the demonetisation of ₹500 and ₹1000 notes in India on Nov 9, 2016. App downloads soared and so did transaction volumes. The Prime Minister himself was featured on a promotional ad for Paytm (which is currently under dispute).
The sound of money
While India is still behind the global market in terms of newer payment technologies like NFC, it is definitely one of the biggest digital payment economies in the world in terms of number of users. Simple features such as payment to a mobile number or scanning in-store QR codes for payment are gradually picking up pace and have become quite popular since November 2016. Innovative startups like Tonetag, which provides payment solutions with the help of sound, are constantly redefining what digital payments can do. The future of digital payments lies in novel and seamless payment methods like paying via wearables, biometric payments and mass implementation of technology like blockchain.
Currently, digital payments account for a mere 6% of total retail transactions worldwide. But with digital payments increasing everyday in volume and scope, trends indicate a much different scenario roughly 8-10 years down the line. With key merchants participating, proper IoT implementations and strong security in place, the overall share could go up to 26% with 13% of that being proximity-based payments, according to a BCG report. The day that happens, there will still be a few things that money can’t buy. But for everything else, there will be your biometrics.
This article was first published in May 2017 issue of Digit magazine. To read Digit’s articles first, subscribe here or download the Digit e-magazine app for Android and iOS. You could also buy Digit’s previous issues here.