EXCLUSIVE: ‘The Simple Logic of A2A’ – Todd Clyde, Token in ‘The Paytech Magazine’

CEO of Token, Todd Clyde, says it’s no longer a matter of if, but when, account-to-account payments move into the mainstream. And, once there, they will reshape the payments landscape

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

An A2A payment is one where money moves directly from the payer’s bank to a merchant or service provider’s. They’ve been around for years, traditionally used by consumers to schedule regular bill payments such as direct debits. But, thanks to the maturing open banking movement, A2A payments look set to shift from an ‘alternative’ payment method to a mainstream one.

And, if you look at the wider payments industry, there’s a clear gap for them 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 are 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 payments 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 in order to settle over these systems can be difficult.

This means that A2A payments, to date, have had a more limited reach. Deciding whether to accept cards, wallets or A2A payments has therefore resulted in merchants making a trade-off between reach, conversion and cost. They have been willing to pay the higher costs associated with cards and wallets because of the unmatched reach and conversions they provide. While A2A payments have the potential to lower costs, they haven’t had sufficient availability, or a high enough conversion rate, to become more than a niche payment method.

Up to now, there has 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 involve a single country’s national scheme integrating deeply with its clearing system – like iDEAL in the Netherlands. The problem here is that they’ll never be able to expand beyond national borders.

Open banking will fuel A2A

But the APIs that have come into play alongside open banking are game-changers. 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. So, 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 that they likely use every day, it’s extremely intuitive and familiar for consumers to use.

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. While it’s true that, if the foundations of the APIs aren’t stable, this won’t work, it’s also true that, thanks to the work of the Open Banking Implementation Entity (OBIE) in the UK, the APIs and user experience (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 include 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 by 30 per cent month-on-month. Interestingly, the average transaction size is more than €500, 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 per cent of consumers 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 per cent for those that proceed with the payment type.

A2A payments will continue to grow, simply because they’re better. They eliminate the need for trade-offs around priorities, 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 payment service providers (PSPs), there will be a huge boost in numbers. In terms of consumers, we’re still at the very early adoption stage, but I believe that, similar to how Transport for London 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 there’ll no longer be an alternative payment method – just a form of digital payment.

This article was published in The Paytech Magazine #09, Page 52-53