A Look to the Future: A Deep Dive into Account-to-Account Payments

The world of payments is undergoing a significant transformation, with a strong emphasis on offering account-to-account (A2A) payments as an alternative to traditional card payments. This shift promises greater choice and control for consumers and businesses, and the UK is well poised to embrace this change.

Currently, the UK payments landscape is dominated by card payments, with 29.1 billion transactions processed in 2023. While card schemes offer benefits including consumer protection and dispute resolution, there's a growing need for alternative payment methods that offer increased flexibility and cost savings. This is where A2A payments come into play.

In the UK, most banks are open banking-enabled, as mandated by the PSD2 regulation. As A2A payments are viewed as an alternative to card payments, the onus of extending such an offering predominantly falls on businesses receiving payments from consumers and corporations for high and low value payments.

That said, A2A payments have an incredible potential to improve the customer experience at checkouts and simultaneously provide major operational cost savings to those organizations that leverage them.

Viewed through the eyes of the banks, A2A payments volume is expected to grow significantly year on year. To keep up with this demand, banks need to focus on ensuring the resilience and availability of APIs designed to process A2A payments traffic. More specifically, the infrastructure supporting these APIs needs to be able to scale and cope with the expected increase in traffic of API calls, requiring updates and modernization to vital core banking platforms.

How Do A2A Payments Work?

A2A payments enable consumers to make digital payments directly from their bank accounts to the beneficiary account without using a card. Imagine paying for groceries or online purchases simply by scanning a QR code or inputting your mobile phone number – that's the convenience A2A payments offer.

A2A payments work instantly using currently available open banking rails, which allow certain types of businesses to eliminate the need for preauthorization before completing a transaction. As an example, in the UK, some petrol stations require a minimum of £120 in a customer’s account as a preauthorization when using a debit or credit card at the pump, even if the customer only wants to fill fuel for £20. This inconveniences vulnerable customers, requiring them to pre-pay with a cashier as an alternative. A2A payments allows businesses to capitalize by offering a frictionless payment experience for their customers.

The UK's A2A Vision: Open Banking as the Key

The UK government recognizes the immense potential of A2A payments and has outlined a vision to make them a ubiquitous payment method. A key enabler of this ambition is open banking, a system that allows authorized third-party providers to access customer data and initiate payments.

In 2021, the UK tax authority (HMRC) partnered with a third party FinTech company to introduce an A2A payment option for receiving tax payments. It’s estimated that, to date, approximately 4.5 million tax payments, worth approximately £12 billion, were made via this A2A channel.

While open banking has proven successful in driving innovation within financial services, it needs to evolve to support wider adoption of A2A payments. As such, the UK government is committed to developing a sustainable long-term regulatory framework.

The Benefits of A2A Payments

Given the UK government’s commitment to fostering A2A payments, it should come as no surprise this open banking-fueled alternative offers consumers and institutions alike a variety of benefits, including:

Enhanced Security: The use of tokenization and encryption protects sensitive financial data; strong customer authentication offers improved protection against fraud and reduces the risk of card-not-present (CNP) fraud.

Cost Savings for Merchants: A2A payments have lower transaction fees compared to traditional card payments, as they bypass intermediaries like card networks. This can result in savings of up to 80% for merchants.

No Chargeback Process: A2A payments eliminate the complex and time-consuming chargeback process associated with card payments, saving businesses valuable time and operational cost. Instead, refunds are issued directly to a customer’s account.

Enhanced Accessibility: A2A payments cater to a broader audience by bypassing the need for physical cards or digital wallets.

Increased Conversion: With A2A payments offered as an additional alternative to card payments, they can help boost conversion rates and reduce cart abandonment.

Faster Settlement: Funds are transferred directly between bank accounts, often in real-time, allowing for quicker access to funds and faster reconciliation for merchants.

Key Focus Areas for A2A Development:

To enable A2A payments to reach their full potential, the following key areas of the framework still need to be developed:

Seamless e-Commerce Payments: The government has identified unlocking A2A payments for online transactions as a key priority. This focus is driven by the lower technological barriers compared to in-person transactions, allowing for faster implementation.

Sustainable Commercial Model: A fair and sustainable commercial model is crucial for encouraging data holders to invest in and develop open banking services beyond the basic requirements. The government is working on establishing such a model that incentivizes innovation and supports healthy competition.

Robust Consumer Protections: For A2A payments to gain widespread trust, adequate consumer protections are essential. The future open banking framework will address this by establishing clear liability rules and dispute resolution mechanisms, ensuring consumer confidence in the system. The framework should consider aspects of protecting consumers while allowing merchants to defend against fraudulent claims.

As these frameworks are developed in the near future, it’s likely A2A payments will see tremendous growth. In preparation, banks and businesses will need to start taking actions to future-proof their customer experiences to stay ahead of the competition. Those banks that proactively embrace A2A payments have the potential to build a lasting competitive advantage against their peers.

This will require banks to conduct a thorough assessment of their API stack to determine their ability to handle the expected surge in API calls. Changes may need to be made from a technology standpoint to enable seamless transactions and meet the expectations of consumers.

In addition, it will be vital for banks to ensure compliance with what is likely to be an evolving set of regulations. A2A payments are fueled by open banking, which itself is enabled through the processing of customer data. Banks will need to ensure compliance with the handling of this data, as well as any regulations around customer authentication. Failure to do so could result in fines, fees, reputational damage to the bank and more.

The Future is A2A

The shift towards A2A payments is gaining momentum, driven by the need for greater efficiency, choice and control within the payments ecosystem. With its focus on developing open banking and exploring a digital pound, the UK is paving the way for a future where A2A payments become the norm, empowering consumers and businesses alike. Now is the time to prepare for this next wave of innovation and disruption.