From debt to currency

We will start by examining how payments have evolved. Humans have used the concept of debt and credit for trading since before the time of currencies.

From about 2,600 years ago, people began using precious metals as coinage. But these were easily forged, debased, or stolen. Large sums of coinage were also difficult and expensive to transport, especially when trading overseas.

In the 13th century, bills of exchange were invented in Venice to allow international trade to be undertaken without having to carry gold bars or coins. These are a formal, written IOU that binds one party to paying a sum of money on a certain date to another, which may be the party who wrote it or a third-party. Because it doesn’t have to be paid immediately (which would be called an ‘on demand’ or ‘sight bill’) it can be paid on a defined date in the future (called a ‘time bill’) and so can be used to help facilitate domestic or international trade.

They became widely used and developed into cheques in the 17th century, initially written on any form of paper, and then on printed forms that improved security, with a counterfoil.

With their increasing use, daily cheque clearing developed whereby bankers would exchange cheques drawn on their customers that were presented for payment and settlement, with the first ‘clearing house’ in London being a public house!

In 1871, in the US, Western Union introduced the money transfer to help move people’s funds across the growing country, expanding services to Europe, North Africa and North and South America during the 1890s.

In the US, from 1914 the predecessors to credit cards emerged as metal tokens issued by Western Union, oil companies and hotels that could buy goods or services that were charged back to the company. In 1946, Biggins Bank in New York issued the first bank-issued card, made from metal, and having an account number. It was called ‘Charge-it’. When a customer of the bank used it for a purchase, the bill was forwarded to the bank, who reimbursed the merchant and got payment from the customer. Purchases could only be used locally.

A few years later, the charge card and then the credit card were born and boomed during the 1950s and 1960s in the US and across the world, with an early type of pre-paid cards appearing for US college campus students in the 1970s.

Payment cards used manual paper-based forms that the embossed card details were imprinted on until 1979, when the magnetic stripe was read electronically to complete the transaction, which was separate from the purchase. But it was a few years until the first point of sale (POS) terminal was connected to the store’s register to combine the two. In many if not most cases, small merchants still do not connect the POS with the store register.

Online shopping was started in 1984 when Mrs Snowball used a television and controller to purchase groceries. Then it really ‘snowballed’.

In 1990 France introduced chip and PIN for domestic cards, which heralded a new, more secure way of paying.

In 1990, in the UK, National Westminster Bank created Mondex, electronic cash that existed on the chip embedded in the card and launched it with Midland Bank (now HSBC) and British Telecom. Money could be exchanged for goods with merchants and exchanged between individuals instantaneously without having to transact through a bank or other intermediary. Although it ultimately failed to take off, mainly as it was sometimes inconvenient to load money and less than 50% of UK banks adopted it, Mondex was ahead of its time. It is at about this time that payments, options, and technology developed rapidly, because of the growth of the Internet and ecommerce.

By the mid-1990s, debit card transactions were exceeding credit card transactions and in 2004 card transactions began to exceed cash transactions. Cheque transactions were falling rapidly as card and other electronic payment methods grew.

The first contactless payment took place in 2007, which was a busy year for payments innovation.

Also in 2007, Kenya’s largest mobile carrier Safaricom (owned by Vodafone), formalised a process and service called ‘M-Pesa’ that allowed rural migrants to send their earnings from Nairobi to back home in the countryside through their mobile phones, thus replacing banks in ordinary people’s lives.

The same year, a mobile phone with built-in contactless payment card technology (and Oyster card functionality for travel on London transport) was piloted in London. Western Union announced a partnership with GSMA to develop mobile money. (GSMA represent mobile operators and organisations across the mobile ecosystem.)

In 2009, the first Bitcoin transaction took place.

Starbucks, from 2011, accepted mobile payments as an opportunity to serve the increasing number of people who don’t always carry cash.

Apple Pay launched in the US (and in the UK in 2014).