The new kid on the payments block — dubbed variously account-to-account (A2A) and “Pay By Bank” — could seriously threaten interchange revenue from credit and debit cards for issuing banks, credit unions, digital banks and payment companies.
The 70-year-old system of merchants paying percentages of their sales for access to the card-based payment system faces a growing challenge. With A2A, merchants and their customers in the U.S. connect directly from one bank account to another via ACH, eschewing traditional credit and debit rails. Overseas, these payments are similar but rely more on open banking arrangements.
But even as interchange revenue declines — a significant development to be sure — opportunities could arise for financial institutions quick enough to take advantage of payment system changes.
In an A2A system merchants pay far less per transaction and could boost customer relationships by providing their own rewards. For customers they would benefit from increased fraud protection, maybe get a lower price on the merchant’s goods or services (because the merchants would be paying less through A2A), and possibly receive loyalty rewards directly from merchants. Absent any response, banks and credit unions would lose at least some credit and debit card interchange income and credit card interest.
Even as interchange revenues decrease from A2A payment use, banks and credit unions could wrest back control over their payment relationships with customers.
This is already happening in a significant way in Europe and Asia. For example, in Europe the market for Pay by Bank payments is estimated to reach $43 billion by 2026, according to Allied Market Research. In the U.S., all the major card companies, as well as other players, have invested in A2A third parties, or have developed such systems in house, to position themselves for future domestic implementation.
In early 2022, for example, Discover became the latest major card company to align itself with an A2A service provider. It partnered with Buy It Mobility Networks (BIM) whose technology allows consumers to pay directly from their checking accounts using merchants’ apps. More on this and other payment company developments further down.
A New Era of Payments
It’s still early in the game but a general consensus is that A2A will be yet another seismic shift in the payments arena. If it develops as expected, the loss of interchange and credit card interest revenue would be inevitable. However, A2A and Pay by Bank might benefit financial institutions in other ways.
“It is clear that the legacy technology is not going to meet the needs and demands of the consumer in the future,” says Philip Benton, senior analyst with tech research firm Omdia Informa Tech, writing in FinTech Futures. “Change is inevitable, predicated by open banking, which banks, merchants, and ultimately consumers will adopt.”
Benton notes that one plus of A2A payments is that they automatically meet multi-factor authentication requirements. “Issuer banks may see a fall in card revenues but a reduction in fraud losses will have a transformative impact on the business model of a retail bank,” the analyst states.
By relying on their own access credentials, financial institutions can avoid payment company licensing fees.
Looked at another way, “A2A payments in Europe, and real-time payments in the U.S., may prove to be a good solution to speed up the rollout of open banking innovations,” says PYMNTS.com. “It may also eliminate one of the biggest challenges for banks and fintechs in how to expand their network without engaging in endless negotiations with the additional risks that creating multiple APIs entails.”
“There is a big upside from financial institutions using their own proprietary digital banking access credentials for payment,” says Richard Crone, CEO, Crone Consulting. By using issuing their own user name, password, embedded cookie and other supporting data points, Crone explains, institutions can validate the authorization for payment — avoiding licensing fees to access Visa, Mastercard and other payment company customer credentials.
Further, “when customers check-in it creates a window of opportunity to offer new services such as buy now, pay later, buyer protection services, promotional offers and complementary products and services,” says Crone.
Why Non-Card Digital Payment Growth Is Inevitable
The potential for A2A growth in the U.S. is definitely on the industry’s radar. It could realign how billions of people pay for goods and services, just as checks supplanted cash, cards supplanted checks, and mobile payments are transmuting cards. Not completely, of course, but significantly. The rapid growth in acceptance and use of Venmo, Zelle and Cash App P2P payments among consumers — mostly as a cash or check replacements — indicates the potential that A2A payments between consumers and businesses has.
A2A payments are part of the rebundling of services within open banking, which could help put incumbents back in the payment driver's seat.
Todd Clyde, CEO of open banking payments platform Token, predicts in an Open Banking Expo blog, that 2022 will see A2A payments become a key part of the world of unified commerce, as well as becoming the primary payment method for loading digital wallets.
“The potential for a rebundling of services around A2A is … good news for banks,” he says. “After all, open banking is an opportunity for banks to go beyond data access and reclaim their position as the center of the payments universe, which should be firmly on banks’ agenda in 2022.”
Don’t Panic, Interchange Will Linger
So interchange might disappear? Not so fast, says Sarah Grotta, Director, Debit Advisory Service, Mercator Advisory Group.
“This type of transaction [A2A] is a lot like a debit card,” she says. “From the consumer perspective, whether a transaction goes through a debit card network or hits their checking account through some other payment method, they probably don’t care all that much.”
More significantly, Grotta believes consumers generally would be hesitant to give up their legacy cards, not only because they might not understand the new system (which would require a quick learning curve) but for more down-to-earth reasons. These include bank loyalty rewards (paid for by interchange revenue), an established system of dispute resolution, and zero liability supported by the card networks.
“All that goes away [with A2A],” says Grotta.
Card Companies Hedging Their Bets
As mentioned, legacy card networks are taking the threat of A2A payments seriously by pursuing strategic acquisitions and product launches. That should indicate to the rest of the industry the direction this is heading, observes Omdia’s Phillip Benton. Below is a rundown of where things stand:
Card companies and issuers are positioning themselves for anticipated payment system upheaval.
Discover Financial Services is the latest major card company to align itself with an A2A service provider. It partnered with Buy It Mobility Networks (BIM) to allow consumers to pay directly from their checking accounts using merchants’ apps.
Discover is accepted at almost 12 million U.S. merchant locations, as of 2020, accounting for just 2% of card transactions — fourth out of the four major card companies. The alliance with BIM will “give us at Discover another arrow in the quiver,” Jason Hanson, Senior Vice President of global business development at Discover, told The Wall Street Journal. Shell and Phillips 66 are among the companies using the BIM technology. Customers who opt to pay by checking account at gas stations pay as much as 25 cents less a gallon that those who use cards.
“Discover may be using the integration to improve its positioning as a payment provider,” observes Insider Intelligence. Increased use of the ACH network is set to open a pathway to use that system for retail payments. Insider notes that ACH volume grew 8.7% year over year in 2021.
In 2021 Visa agreed to acquire Tink, a European open banking platform (not to be confused with Russian neobank Tinkoff). Tink is integrated with more than 3,400 financial institutions that connect more than 250 million bank customers across Europe. Through one of its APIs Tink allows customers to initiate payments.
The move follows Visa’s failed attempt to acquire U.S.-based Plaid, whose proprietary application and API is similar to that of Tink’s. The acquisition was disallowed by the Department of Justice. “The DOJ characterized Visa’s existing market share of the U.S. online debit space as monopolistic,” says Adam Hark, Managing Member of Investment Bank Wellesley Hills Financial. “[DOJ argued] that by acquiring Plaid, Visa would all but eliminate the largest, contemporary competitive threat to its U.S. online debit business.”
So far there’s been no indication of when Visa might extend Tink’s services to the United States.
In 2020, Mastercard acquired Finicity, a provider of real-time access to financial data, based in Salt Lake City. The move was meant to strengthen the existing Mastercard open banking platform.
“It’s through the use of next-generation open banking APIs and clear consumer approvals that this financial information can deliver streamlined loan and mortgage processes, rapid account-based payment initiation, and personal financial management solutions,” said Michael Miebach, president of Mastercard in a press statement. Specifically, Finicity will deliver “an improved ACH and real-time payments experience to consumers, merchants, and businesses.”
American Express launched its homegrown “Pay with Bank transfer” in 2019 for U.K. customers to make payments for online purchases using bank transfers. It allows account holders at U.K. banks to make real-time payments regardless of whether they are American Express cardholders. Consumers click on the “Pay with Bank” transfer button displayed on the merchant’s payment page and select the bank they want to pay from.
Again, there’s been no indication if such a service might be introduced in the U.S.
Bank of America is the latest entrant to the A2A arena. It invested $20 million, along with several other investors, in Banked Ltd., a U.K.-based mobile banking payment provider. Through this service users choose their existing bank at checkout and are securely connected to their mobile banking app to biometrically authenticate the purchase.
“2022 will see some really big brands go live with Pay by Bank, driving at the heart of delivering innovation at point of purchase to both the merchant and consumer,” says Brad Goodall, Banked CEO.
The buy now pay later provider Klarna expanded its partnership with A2A payments provider GoCardless so U.S. users can make payments from their bank account. The solution is available for Pay in 4 and Klarna financing.
“Klarna’s A2A integration reflects a broader battle for consumer spending between credit card issuers and BNPL providers,” Insider says. “BNPL players are attracting customers with their interest-free installment solutions.”