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A brief history of digital payments

As the use of physical cash and cheques declines, digital payments continue their march to become the dominant method of financial transaction. According to a study by Capgemini and BNP Paribas, digital payments are expected to reach 726 billion transactions by 2020.

And, with some countries – such as Sweden – well on the way to becoming cashless economies, it’s an exciting time. Digital payments are transforming retail and bringing numerous benefits to consumers, businesses and the public sector.

The journey has taken many decades and involved breakthroughs and innovations that gradually saw the use of physical cash make less and less sense. We’ve taken a look back at some of the major milestones in the rise of digital payments.


The internet and World Wide Web

Digital payments are inextricably linked to the beginning of the internet, which can be traced back to ARPANET, developed by the US during the Cold War and launched at the end of the 1960s.

But it was in 1989, when Tim Berners-Lee came up with the concept of web pages and sites that could be linked together by hyperlinks (the World Wide Web), that digital payments became a more realistic proposition.


The first online payments take place

Online payments began in the 1990s. The Stanford Federal Credit Union was the first institution to offer online banking services to customers in 1994. However, early online payment systems were not very user friendly, requiring specialised knowledge of data transfer protocol.

Early players in digital payment were Millicent and Ecash, which offered services that used micropayment systems and electronic alternatives to cash, such as e-money, tokens or digital cash.

The founding of e-commerce pioneer Amazon in 1994 provided further impetus to these early digital payment efforts.


The emergence of PayPal

One of the earliest companies to specialise in online payment was PayPal, which started as an online money transfer service in 1999. Its popularity took off when it became popular with eBay users.

PayPal consistently innovated, with features like payments that could be made using email addresses, the addition of new currencies, mobile payment apps, HTML payment buttons, and using a reverse Turing test (to determine if an interaction was human or machine) to reduce fraud.

PayPal was soon targeted by established financial institutions and banks, as well as eBay, who attempted to have the company legally classified as an unsecured service or bank. EBay acquired PayPal in 2002, owning it until 2015, when it was spun off as a separate company.


Digital payments companies become major players

With e-commerce and online banking becoming more established, digital payments grew quickly, with numerous digital payments companies emerging as major players.

PayPal was awarded an EU banking licence in 2007, by which time it had 35 million customers across Europe. After eBay spun-off PayPal into an independent company in 2015, PayPal turned its focus to reducing friction around payments.

PayPal continued to grow and, showing its current scale, recently spent $2.2 billion to acquire Swedish payment start-up iZettle, which offers a low-cost card payment device and point of sale app for small businesses.


Digital wallets come to the fore with Apple Pay

Digital wallets have been around for some time but have gained more traction with the Millennial generation. Stored online or on smartphones, they are linked to bank accounts or payment cards and used to make purchases online or in physical shops using contactless technology.
The launch of Apple Pay in September 2014 was a significant moment as it improved wallet functionality by enabling payment cards to be added via a photo of the card and authenticating payments via the iPhone fingerprint scanner. Credit card providers now pay the company a fee for each transaction on the platform.

Online giants Amazon and Google also offer digital wallet functionality. Google Pay enables users to send money and split restaurant bills, while Amazon Pay provides a secure single-click checkout process.


Virtual banking comes of age

The development of digital payments opened the way for virtual banks that focus on helping customers conduct their financial transactions digitally.

In 2011, for example, ePayments launched, giving small businesses and individuals a more efficient and cost-effective way to receive and make domestic and international payments.

The virtual bank accounts offered by ePayments make it simple and secure to make payments and manage accounts via computer or mobile device, supporting a cashless approach to finances.


Cryptocurrency gets serious

The concept of a decentralised currency – using a type of cryptography to enable automated and untraceable digital payments – has been around for several decades, but really took off with the launch of the Bitcoin cryptocurrency in 2009.

Many cryptocurrencies use blockchain technology, which was invented in 2008 to serve as the public ledger of Bitcoin. A blockchain is a list of records, or blocks, that are linked together using cryptography. Each block contains a scrambled version of the previous one, as well as a timestamp and transaction data.

A blockchain is secure by design, as it stops data being modified. This made Bitcoin the first digital currency to solve the problem of double spending – caused by replication of digital data – without requiring a trusted authority or central server.

Cryptocurrency is regarded as the next major milestone in digital payments and, with blockchain, promises to take the industry in new and unexpected directions in the future.

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A brief history of digital payments
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