Will A2A payments move into the mainstream and reshape the payments landscape?

The noise around account-to-account (A2A) payments is starting to swell as people pick up on the benefits. FIS’ Global Payments Report 2020 predicted that A2A payments will account for 20% of all e-commerce payments, surpassing both credit and debit cards by 2023. But are we ready?

An A2A payment is simply where the payment moves directly from the payer’s bank to a merchant or service provider’s bank. They’ve been around for years, traditionally used by consumers to schedule regular bill payments, such as direct debits. Thanks to the maturing Open Banking movement, now a 3-year-old toddler rather than an infant, A2A payments have the opportunity to shift from an ‘alternative’ payment method to a mainstream one.

Muscling in on traditional payment methods

If you look at the wider payments industry, there’s a clear gap for A2A payments to fill. Cards and wallets, for example, are both intermediaries. They’ve become dominant forms of payment because they have the largest reach and provide the best conversion rates, but the downside is that they’re relatively expensive – and based on a percentage model that further penalises large transactions. 

A2A payments, which travel over national clearing systems like the UK’s Faster Payments, eliminate the need for intermediaries and therefore have huge potential to reduce friction, boost efficiency, and deliver at a much lower cost. 

The issue at present is that the world’s clearing systems weren’t designed for consumer-to-business commerce, let alone e-commerce, and so accessing these rails and settling over these systems can be difficult. This means that A2A payments, to date, have had a lower reach. Deciding whether to accept cards, wallets, or A2A payments has resulted in merchants making a trade-off between reach, conversion, and cost. 

Merchants have been willing to pay the higher costs of cards and wallets because of the unmatched reach and conversions they provide. While A2A payments can lower costs, they haven’t had enough reach or a high enough conversion rate to become more than a niche payment method. 

There’s been no easy way to execute A2A payments for a purchase. You can go down the route of a ‘disconnected’ bank transfer, but this is separate from the purchase flow and difficult to reconcile. Or there are Online Banking Electronic Payments, which consist of a single country’s national scheme that integrates deeply with the country’s clearing system – like iDEAL in the Netherlands. The problem here is that they’ll never be able to expand beyond a country’s borders. 

Open Banking will fuel the growth of A2A payments

The APIs that have come into play alongside Open Banking are a game-changer. They’ve removed the barriers put up by fragmented banking rails, making it much easier to consistently access bank clearing systems and embed an A2A payment at the point of purchase. 

Open Banking-enabled A2A payments can in theory be used by anyone with a bank account. There’s no need to sign up for anything. And because people will be authenticating in a banking app they likely use every day, it’s extremely intuitive and familiar for consumers. 

While expectations are high, and the potential growth in adoption is huge, there’s also healthy scepticism. Some believe that Open Banking is held back by a lack of fully functioning APIs. Whilst it’s true that if the foundations of the APIs aren’t stable then this won’t work, it’s also true that, thanks to the work of the Open Banking Implementation Entity (OBIE), the APIs as well as the UX in the UK are robust and ready. 

We’re seeing an increase in use cases for A2A payments as Open Banking takes a firmer hold. There are e-commerce purchases and paying bills, but the fastest-growing use case is debt repayments. In the UK, one in four credit cards can now be paid off using an A2A payment. 

At Token, A2A payments doubled every month between March and December last year, and transaction volumes this year are growing 20% month-on-month. Interestingly, the average transaction size is over £400, which suggests that early adopters include merchants selling high-end products, drawn in by the compelling cost savings on offer. In terms of conversion rates, after selecting ‘pay by bank’, 85-95% are moving forward with their payment selection. The drop-out rate has reduced over the last six months as consumers become more comfortable with A2A payments as a choice. Moreover, success rates are in excess of 98% for those that proceed with the payment type.

Considering the timelines

A2A payments will continue to grow, simply because they’re better. They eliminate the need for those trade-offs I mentioned earlier, meaning merchants can have it all – great reach (anyone with a bank account), great conversion rates (exceptional UX with no data entry), and lower costs (no intermediaries).

Another advantage is that merchants can now combine the power of data with the payment; they can harness Open Banking data to assess a customer’s creditworthiness, get insights, and track their loyalty. 

Merchants have to adopt en masse of course, but in the UK we’re already moving beyond the early adopters, and once A2A payments are available from all gateways and PSPs there will be a huge boost in numbers. In terms of consumers, we’re still at very early adopters, but I believe that similar to how TfL prompted the rise in contactless payments, the fintech explosion will encourage the use of A2A payments as people look to load their accounts at challenger banks, or trade stocks and cryptocurrencies. 

The question is when will A2A payments drop the term alternative? I was involved in internet banking in 2000 and mobile banking in 2010, and it took us 10 years to stop referring to these channels as alternative. I believe with A2A payments it will take half the time, and in five years they’ll no longer be an alternative payment method – just a form of digital payment.