That A2A Thing Again
Retailers, open banking and instant payments.
Dateline: Woking, 19th December 2021.
(This is a revised and slimmed down and updated version of a piece that appeared here on 19th November 2021.)
Account-to-account (A2A) payments 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. These are inexpensive, push-only credit transfers that complete (for consumers and businesses) in seconds whether the underlying settlement networks are actually real-time (as in Australia) or net (as in the UK).
A good example of a well-established A2A scheme is iDEAL in The Netherlands. The first billion iDEAL payments were recorded in mid-2016, a decade after the launch of the scheme. The second billion iDEAL payments was recorded just two years later, at the end of 2018. The latest figures show that iDEAL is running at more than a billion transactions per annum and will hit five billions transactions at the start of 2022. More than two-thirds of Dutch e-commerce payments are made using iDEAL. iDEAL QR codes are now a common sight on invoices, in stores and on screens.
The British market seems set to shift in a similar direction. More than half of all business-to-business payments are already made through instant payments (volumes rose more than a fifth last year) and the consumer-to-business, consumer-to-government use is starting to grow as well.
The Payment System Regulator (PSR) recently published its report into the acquiring market. It says that the cost to businesses of processing card payments is “greater than it should be”, and it is too difficult for those businesses to switch between intermediaries that link them into card payment systems. The regulator also identified a lack of transparency around prices, and that the nature of many acquirer and point-of-sale (POS) terminal contracts discourage merchants from switching providers.
(The review, by the way, also found that businesses that record annual sales from customer card payments of between £15,000 and £50 million are not benefitting from the regulator’s interchange fee caps, confirming my longstanding view that more competition, rather than more regulation, is what is needed to reduce the cost of payments for business.)
A recent survey found that more than half of UK consumers (and more than two-thirds of mobile banking users) would be willing to pay A2A via open banking if presented with that choice. I note also that a third of consumers said that a trusted brand would encourage them to use A2A instead of cards (double those who said they could be incentivised through loyalty schemes, which I frankly doubt), especially since 42% of consumer said they would pay for groceries this way and 39% said the same for flights and holidays. Interestingly, 44% say they would pay the government this way. I already pay my taxes this way and I can tell you it is very convenient.
The Year of A2A
I am hardly the only person looking in towards A2A to see the next generation of payments coming together.Payments giant Worldline has flagged the shift to A2A as one of its “megatrends” for the coming year. In Europe, where the PSD2 push to payment initiation services through open banking APIs is gathering steam, they predict A2A reaching 10% penetration within five years (personally, I think this is an underestimate because retailers will tender-steer with incentives). Account-based payments are very attractive to the retailers because of lower costs and faster, irrevocable settlement that remove the need for the payment guarantee central to the card network proposition.
Similarly, the new CapGemini World Payments Report says that A2A transactions enabled through open banking are a “pressure point” on bank payment strategies and according to the management consultants McKinsey, instant payments are playing an “increasingly important role” in the global payments ecosystem, with transactions up by 41 percent last year alone (often in support of contactless/wallets and e-commerce). PwC call attention to what they call the parallel trends of evolution in the payment systems (eg, A2A instant payments) and structural change in the payments ecosystems (cryptocurrencies and central bank digital currencies).
New connections via open banking are a significant driver for change. I wrote recently about the move towards Variable Recurring Payments (VRPs) in the UK. VRPs allow customers to safely connect authorised third parties to their bank account so that they can make payments on the customer's behalf (within agreed parameters). The first bank (NatWest, working with the open banking service provider Truelayer) is now live and the first payments has been made, although the full roll-out has been delayed by six months because the banks were not ready.
Along with VRP, request-to-pay (R2P) schemes are under development in the UK and Europe. PayUK estimates that an R2P service could save the UK economy in the region of £1.3bn each year, by providing a lower cost, secure alternative to cards, “traditional” invoice payments and direct debits.
(The way to think about these alternatives to cards is by the time of authentication. In other words, R2P is the “customer is present” payment mechanism whereas VRP is the “customer was present” payment mechanism.)
Anders la Cour, the CEO of Banking Circle, is surely correct when says that R2P is one of the alternative payment mechanisms that “could actually revolutionise the way payments are done” in Europe and I am sure he is correct because, as Dan Scholey, COO of Moneyhub, said recently, “open banking powered payments are a much quicker and cheaper alternative to regular card payments”.
(Note that with my consultant hat on, this does make me wonder how advanced the “middleman” strategies are for dealing with the shift from POS, ISO 8583 and settlement to SCA, PISP and consent.)
Retailer Realities
Amazon and other major retailers have been slow to play their hands in a world of open banking, APIs and strong authentication but it seems to me that they will push for change soon. If retailer apps become the front end to instant payments via open banking, the benefits could be significant. As Julian Niblett of Loyalize (who is an expert in the field - he used to run retail operations development for Boots) told me recently, data from UK retailer studies indicates that connecting customers to retailer loyalty schemes via open banking would save between six and eight seconds per transaction (similar to card-linked loyalty schemes).
I’ve been a Waitrose customer forever, I go there several times each week (it’s just around the corner from my house and we are very bad at planning) and every time I go I present a Waitrose loyalty card and then separately present a Waitrose credit card. Every single time for the last however many years. And every single time I wonder: why am I presenting both of these cards separately? Why can’t I just scan my Waitrose app at the self-checkout (much as I can do with my Tesco app!) and have everything taking care of at once.
Loyalize data also shows that in-app A2A savings over card fees would be in the region of 50% which is why it seems to me that A2A is set to shake things up in the near future and industry commentators that I greatly respect are pointing in the same direction. From a US perspective Tom Noyes says that the next step for Amazon is to ask customers for their ACH information and then give them cash back on every purchase. From a UK perspective Louise Beaumont says that is is “surprising” that Amazon has not already gone down this route and that she expects to see it implemented soon, perhaps into Amazon Pay.
They are surely correct. If we are approaching peak credit card and if the rise of A2A means more transactions flowing over the new rails, then “cardmageddon” may be closer than we think.
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