Open Banking, Instant Payments, Account-to-Account

The Jury has reached a verdict.

Jul 17, 2024

Dateline: New York, 17th July 2024.

I always look forward to reading the Payments Innovation Jury report because it is based on a survey of practitioners around the world (including, as it happens, me) and tends to give a more practical and realistic view of the strategic horizon than that put forward by suppliers. I couldn't help but notice that a big focus of this year's report and subsequent discussions was account-to-account (A2A) payments. These are payments that shift money from the payer’s bank account to the payee’s bank account through the instant payment networks that are springing up around the world.

North and South

The Jury’s verdict on the medium-term future of payments was presented and discussed at the excellent European Card Payment Association event in Lisbon earlier this year. I was invited to present about the use of AI in retail financial services, and greatly enjoyed presentations and panels featuring practitioners from many different countries.

The report (which is sponsored by the World Bank, HPS, Interswitch and FIME) notes that back in 2022, almost half of the jury members said that within five years they would see A2A networks and mobile money compete sustainably with “traditional” card networks for domestic payments, although a third thought that cards would continue to dominate their home market. Only two years later, the picture has evolved faster than many expected. When asked to identify the fastest growing retail payment methods in their home market, more than two-thirds nominated either account-to-account or mobile money when asked to look another five years into the future then more than three-quarters pointed in this same direction. In fact only 8% of jurors thought that five years from now cards would dominate local payments.

These results, as you would expect, reflect different dynamics in developed versus emerging markets. When comparing Jury responses from the ‘Global North’ (Europe and North America) with those from the ‘Global South’ (Africa, Middle East, South America, Asia Pacific) there are clear differences.

In the Global North, expert opinion is evenly split between cards and the combination of A2A and mobile money: A third of Jurors affirm card’s dominance, a third predict that one of the newer methods will become dominant within five years and a third see ongoing competition between them with no clear winner. In Europe, A2A payments already have traction: Poland’s Blik is running at more than 140 million transactions per month, the Netherland’s IDEAL more than 111 million and Sweden’s Swish more than 73 million.

with kind permission of Helen Holmes (CC-BY-ND 4.0)

In the Global South, by comparison, where card networks are not necessarily the incumbents, the picture changes. Only 13% see cards as becoming dominant, while 54% see either A2A or mobile money dominating in the same time scale. Brazil’s PIX, to choose an interesting example, is already dominant. Its use grew by almost three-quarters last year to nearly 42 billion payments, exceeding the combined credit and debit card market shares by about 23%.

The report is bullish on digital wallets, as other recent reports have been, noting that 41% of Jurors predicted that banks were likely to dominate mobile wallets, far surpassing telcos and social media. This might seem surprising, given the structural shifts that have been described so far and banks’ efforts to date, yet there are some compelling reasons to support the Jury’s insight. Apart from anything else, it is reasonable to observe that banks are just doing what they do best: waiting for an innovation to prove itself in growth terms, then adopting it through acquisition, alliance or imitation in order to scale it. When you have the customer network (as banks do, at least in the Global North), you can afford to be a follower, even a fairly slow one!

If you compare the Jury’s predictions to the recently-released Worldpay global payments report then you will see a similar focus. The ubiquitous acceptance of digital wallets and is enabling greater consumer choice and control in this era of payments innovation and consumers are responding with steadily increasing use. According to Worldpay, digital wallets accounted for $13.9 trillion in global transaction value in 2023, representing half of all online and 30% of consumer spend at point-of-sale (POS). Their findings further suggest that digital wallet use is set for continued growth. By 2027, digital wallets are projected to account for more than $25 trillion in global transaction value, half of all sales online and at POS combined.

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Payments Change

When I wrote about the previous Jury report back in October 2022, I said it was clear that the shift towards A2A had begun. Now I think it has begun to accelerate, even in North America where cards are dominant. The management consultants McKinsey say that while Americans love their reward cards, which makes them hard to dislodge, A2A could offer banks "a more competitive way of making payments "while giving consumers and merchants more options”. They say that consumers could benefit from potentially lower costs and improved customer journeys (and I agree, especially with respect to merchant in-app payments) and that their analysis suggests that A2A could handle about $200 billion in North American consumer-to-business transactions by 2026 and potentially much more in other types of payments.

(That point about rewards is really interesting, because it is not at all clear that the current rewards model is sustainable. Someone, somewhere is subsidising the frequent flier miles I earn from my premium credit card and it’s not the merchants or the bank that provides it — it is other customers. A 2022 Federal Reserve paper estimates that in the US, credit card rewards induce an aggregate annual redistribution of $15.1 billion “from less to more educated, poorer to richer, and high to low minority areas”.)

Yes, But When?

It seems to me that the combination of open banking, instant payments and strong authentication will finally disrupt the 1960s paradigm in retail payments. If you think I am hyping up the combination, then note that the key players have already adjusted their strategies. Visa and MasterCard have been investing in A2A plays for some time and Visa, to choose just one example, recently invested in A2A payment platform Form3 in order to develop anti-fraud tools in that area. Meanwhile, TrueLayer's new A2A payments app is live in the Shopify App Store, allowing UK and EU merchants to add open banking payments to their checkout.

These kinds of moves give the merchant the potential to move customers to inexpensive, push-only credit payments and refunds that complete in seconds whether the underlying settlement networks are actually real-time (as in Australia) or net (as in the UK) and use the savings to provide their own rewards to customers. For some merchant categories, these dynamics mean that disruption may come sooner rather than later.

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