What would it take to make the pay-by-bank option a no-brainer?

The last big leap in card payments happened only a couple of years ago when the missing incentive for consumers to go contactless at the point of sale was readily supplied by the pandemic.

However, card payment providers have had little time to celebrate or sit on their laurels, as there are already new challengers appearing on the horizon that can potentially lead to the Visa-Mastercard duopoly haemorrhaging clients.

The new alternative payment method that is often presented as a pretender is the open-banking-enabled iteration of account-to-account (A2A) payments – an instant bank transfer option at the checkout.

Account-to-account payments 2.0

The kind of A2A payment most people are familiar with is the manual bank transfer that may take several days to complete and can involve filling in lengthy authorisation forms.

A2A payment as we have known it is no rival to payment by card, although the latter wasn’t originally designed for online payment either.

But thanks to the rise of open banking and embedded payment – where payment processing is seamlessly integrated into an online platform or an application – A2A payment, increasingly referred to nowadays as pay by bank, shows potential as an additional online payment method.

Other technological advancements also contributed to A2A payment becoming an alternative payment method to be reckoned with, such as the growing ability of payment services providers (PSPs) to initiate and orchestrate payments and the increasing versatility of the checkout experience.

The primary business case for pay-by-bank adoption is disintermediation, which in this case means that there are only three parties to the transaction – the payer, the payee and the PSP.

In a card payment, by contrast, there are usually six to eight intermediaries, including the two banks and the payment gateway, which come with their corresponding fees, such as merchant service charges and interchange, card-not-present and authorisation fees.

Meanwhile, in the UK, where pay-by-bank transactions run on the faster payment rail – payment infrastructure that facilitates real-time payments of up to £1million – payments are free for UK personal customers.

Although businesses are charged for open banking-powered A2A transactions, the terms offered are typically more favourable than the 1.5-3.5 per cent that businesses accepting cards must pay on each sale.

It must also be noted that – in line with the objective of open banking to enhance competition – PSPs have already started undercutting each other’s payment processing fees, even within the A2A space.

Fragmentation – the major shortcoming of faster payments

Even variations in what payments made in real time are called under different jurisdictions reflect the disparate nature of this payment market. As of May 2024, there are 80 countries with live payment networks.

Labels already get confusing enough when we limit our scrutiny to the jurisdictions leading the A2A charge. What is called faster payments in the UK is referred to as SEPA Instant in the EU and as real-time payments in the US.

But terminological fuzziness doesn’t stop here. While open-banking-powered A2A payments in the UK, by definition, use the faster payment rail, real-time SEPA payments incur high fees and by January 2024, one-third of EU banks still didn’t offer this service.

Having realised how limited instant payment availability impacts the uptake of account-to-account payments, the EU now mandates all PSPs in the EU be able to receive instant SEPA payments by 9 January 2025, while the deadline for sending instant payments is set for 9 October next year. 

Considering that real-time payment networks emerged well into the digital age – faster payments were launched in 2008 and SEPA Instant in 2017 – it’s hard to see why integrability with other national systems wasn’t baked into them from the start.

Not unlike legacy payment infrastructure, the biggest challenge with national real-time payment frameworks is integration across countries and continents, even though these projects can only reach their full potential when they become capable of supporting fast and relatively cheap cross-border payments globally.

With integration only an afterthought, now it falls on PSPs to align and connect national real-time payment schemes to create global infrastructure.

How to make a compelling proposition to consumers

Although disintermediation and cost saving make a shift away from card payments to pay by bank a no-brainer, consumers may prove more of a challenge to win over.

Online customers seem to be rather content with their payment cards – and those using credit cards today particularly have much to lose with a switch to account-to-account payments.

Alluring though lower payment procession fees may sound to merchants, it’s harder to see the added value for online shoppers unless some of the merchants’ savings can trickle down to them.

If they give up their credit cards, they will also lose access to the security and safety features that come with them. In addition to the card network protection that any card users will relinquish by opting for pay by bank, credit card holders must also give up on financing their online purchases in 30-day cycles and getting cashback.

As for the customer experience, cardholders also have a lot to lose as every embedded A2A payment requires online customers to enter their banking credentials for each transaction, as well as the payee’s bank identifier and IBAN – which may feel to some like a blast from the past.

Moreover, in the age of easy returns, the irrevocability of A2A payments has limited appeal, too.

While the pay-by-bank option in online retail is still far from a common sight, in sectors such as hospitality, luxury retail and automotive, where large-sum one-time payments are the norm, it has already started to gain ground.

For A2A to take off in lower-value online retail, however, it must become a more attractive proposition for consumers than it currently is by offering comprehensive, low-fee cross-border payments, payer protection against scams or even frictionless point-of-sale solutions in the future – and ideally, other attractive features that payment cards can’t.