What are A2A Payments?
Credit cards may have made freed us from the burden of carrying cash around and made e-commerce feasible, but merchants and consumers are alike are eager to break their stranglehold on the electronic payments ecosystem. Whether the issue is high interest rates, costly interchange fees, or the notorious chargeback process, everyone is looking for alternatives.
This is where account-to-account (A2A) payments come in. By allowing customers to send funds directly from their bank account to the merchant’s, A2A schemes handily bypass many of the most frustrating aspects of the payment card system. How do A2A payments work, and will they be a net benefit for merchants?
Born in a time before the internet, the credit card payment system has had to adapt itself quite a bit in order to be as fast, secure, and interconnected as the 21st-century economy requires. What we have ended up with is a complicated, costly system that is decidedly retrograde in many ways—such as the chargeback process that automatically holds merchants liable for subjective disputes that are not always based in fact.
Consumers have their complaints about credit cards too, and the newer generations of shoppers are increasingly disinterested in paying for goods with plastic cards that come with high interest rates and punitive late fees. Many consumers would prefer to simply transfer money directly to the merchant without having to use physical cash, and that’s exactly what A2A payments do.
In the past, banks would have been able to shut out third-party A2A providers that undercut their own payment schemes, but open banking regulations have taken this power away from them.
A2A makes it possible to send electronic payments without involving middlemen, but their novelty and lack of regulation means that we don’t yet have the full picture of the impact they will have. Let’s examine what that might look like.
What are A2A Payments?
A2A, or account-to-account payments, are direct electronic fund transfers from the buyer’s bank account to the seller’s. A2A payments bypass traditional payment rails and settle in the recipient’s account immediately.
While A2A payments have been available for some time in the form of the ACH system, they’re experiencing a renaissance in the wake of open banking regulations that allow third-party providers to connect to their users’ bank accounts through APIs.
Countries like Australia, Mexico, the Netherlands, and Sweden have already developed regional A2A systems that have been widely adopted.
The Netherlands’ iDEAL system, launched in 2005, now accounts for 65% of all e-commerce transactions made in that country.
A2A payments can be processed in a number of ways. The defining factor of A2A is that the funds are electronically moved directly from one account to the other. A2A systems can use various underlying frameworks, depending on where they originate.
In the EU, open banking regulations obligate financial institutions to make account information accessible via API, if the account holder wishes. This allows third-party providers to create A2A payment platforms and compete for market share by offering users minimal costs and excellent quality of service.
In the US, open banking has been mandated since 2008, but actual regulations are still a work in progress. For now, US consumers can make A2A payments with the old ACH system or its newer iteration, Real-Time Payments (RTP). The Federal Reserve is also set to launch a new instant payment system next year, FedNow.
A2A payments can be executed in one of two ways: either as push payments, or pull payments. Push payments are initiated by the sender, as in a typical purchase transaction. Pull payments are initiated by the recipient, and require prior authorization from the sender. Pull payments are used for things like recurring subscription payments.
What are the Benefits of A2A Payments?
A2A payments offer benefits to merchants as well as their customers. Here are a few of the reasons why they’re gaining such rapid acceptance:
- Accessibility. A2A payment systems can be used by anyone with a bank account. Consumers don’t need to apply for a card based on their good credit, or make a security deposit, or pay up-front fees.
- Lower costs. Credit and debit card transactions come with interchange fees, which are covered by the merchant, who typically passes on the cost in the form of higher pricing. A2A payments require no such fees, and because they are direct transfers and not consumer loans, the customer never gets charged interest or late fees.
- Instant settlement. Credit card payments and regular ACH transactions can take several days to settle to the merchant’s account. A2A payments are instantaneous by design, using the RTP system and other fast payment rails to move the money without delay, even on holidays.
- Increased sales. Customers who prefer A2A payment systems will be more likely to shop and spend with merchants who accept these payments.
- Better security. In the EU and other markets with modern regulatory frameworks for payments, A2A payments usually require Strong Customer Authentication protocols and other reliable protections. This greatly reduces fraud rates compared to payment cards, which often require third-party anti-fraud solutions in order to be considered secure.
Sounds good, but what about the drawbacks? It’s a little early to tell what kind of problems might arise from A2A payments. While the A2A is very secure, no system is perfectly fraud-proof, and attacks will get more sophisticated as time goes on and more people start using A2A.
For now, however, A2A payments are much less likely to end up fraudulent than credit card payments, and cannot be subjected to costly and unbalanced dispute processes.
Alternative payment systems are usually a positive development for merchants. By giving consumers more cashless payment choices, they broaden access to e-commerce and encourage competition among established providers. That said, it is always important to research new payment options thoroughly before implementing them.
In time, A2A payments may knock credit cards from their lofty position as the number one method for remote, electronic payments. By then, we may have a clearer view of the risks and unforeseen challenges they might bring, but at the present moment, the future looks bright for A2A payments.