Check the financial history books and you’ll see that A2A payments have been with us for centuries.
Yet, according to one fintech expert, they may be the driving force behind a brave new world of instant payments in the USA and Canada.
Kartik Kamat is the Vice President of Payments, Fraud Mitigation and Analytics at EQ Bank, one of the leading digital banks in Canada. EQ Bank is powered by Canada’s Challenger Bank, Equitable Bank, and has a mission to drive change in Canadian banking to enrich people’s lives. The bank - Canada’s seventh largest - has advocated for change at all levels of customer touchpoints including open banking and payments modernization in its over 50 year history.
His job is to make sure EQ Bank is ready to embrace emerging payment systems, which means keeping a close eye on industry trends and consumer behavior – and A2A payments are one of the several payment methods at the forefront of his mind as we head into 2024.
“The evolution of A2A payments has the potential to change the way payments happen in North America,” he says. “There are lots of opportunities for service providers to come in and really disrupt the space - especially as open banking finds its footing in Canada.”
Yet, the USA and Canada have some catching up to do.
In 2022, only 13% of North American consumers regularly used A2A bank transfers, compared to 31% in the Asia-Pacific region, according to Statista. The continent also lags behind in the use of A2A direct debits and payment apps.
How North America lags behind other regions in A2A payments
Source: Statista
Kartik believes A2A payments can become as universal as card payments. But how can North American companies ride the A2A transactions wave and stay ahead in this changing payment scene?
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How do A2A payments work? A quick recap
So what is an A2A payment and how does it work?
Account-to-account payments are electronic payments that go directly from one bank account to another, with or without the need for intermediaries.
“Checks were the first form of A2A payments,” points out Kartik. “In the US, they evolved into Automated Clearing House (ACH) payments while in Canada they began as EFTs. Both of which are used to power transactions on orders of magnitude like payroll payments.”
The internet age ushered in online A2A (OA2A) payments, spearheaded by PayPal, which let consumers carry out the transfer of funds quickly and safely.
P2P payment services, like Zelle and Venmo, have since made this process quicker, cheaper, and more user-friendly.
Users consent to their secure sharing of account data with other financial institutions via APIs, also known as open banking, so they can approve a transaction with a single click. These can either be “pull payments”, where the recipient requests the transfer, or “push payments”, where the payer starts the action.
Payment volume for the top 3 P2P financial services (Zelle, Venmo, and Square) topped $1 trillion in 2022, but most of the transactions were from consumer-to-consumer (C2C) transfers.
The next A2A phase is set to see consumer-to-business (C2B) payments flourish, and this, according to Kartik, is where the real opportunities lie.
The benefits and opportunities of A2A payments in the C2B sector
Any entrepreneur not well-acquainted with this payment evolution may be tempted to ask the question “What is A2A payment adoption going to do for my business?”
The simple answer is cut costs.
Merchants in developed economies typically use card networks like Visa and Mastercard to collect consumer payments, but these cost money.
A $100 credit card purchase costs a merchant around $3 in the United States. The ACH (the A2A network in the US), meanwhile, charges $0.60, amounting to a $2.40 saving on each transaction. This would be worth billions of dollars a year for major organizations.
Source: Checkout.com
Companies might even offer consumers special offers or discounts to encourage them to make an A2A payment, resulting in a win-win scenario.
A2A payments also reduce the chances of payment churn. At present, credit card failures from theft or loss are a huge problem for businesses. Consumers, however, can hardly ‘lose’ their bank account, plus they tend to switch banks far less frequently than they do their debit or credit cards.
Direct A2A payment debits are also much easier to set up than with cards.
Yet, despite these huge potential advantages, the US and Canada are some way behind other countries when it comes to integrating consumer-to-business A2A payments at scale.
A2A global payments: the countries leading the way
Go to India in 2024 and you’ll find it almost impossible to use cash or a debit card in grocery stores, small shops, and even on the street.
A payment revolution is rapidly shifting the subcontinent toward a mobile payment economy, and it’s also about to take off in North America.
“Every time I go back to India, I’m just amazed by the transformation,” says Kartik. “Small shops and street vendors don’t accept cash. They prefer to be paid via digital wallets and they display QR codes that they urge customers to use”.
Merchants love them as there are no third-party fees to pay and they know they’ll get the money right away. Customers just need to scan the code and away they go.
A2A bank payments have now overtaken card transactions and cash as the primary payment method.
But how has this happened?
“The National Payments Corporation of India (NPCI) set up the United Payments Interface (UPI) in 2016, which helped them push through their mandate for all banks to work with A2A payments,” Kartik informs us. “This has been a model payment rail for real-time bank transfers, and has embodied the push from a central payments authority that these payment systems need.”
This development isn’t just restricted to Asia. In the European Union, A2A payments are predicted to more than double by 2027 should regulators proceed with anticipated rule changes in major countries like Germany, France, and The Netherlands.
A2A Payments are set to take off in Europe
Source: McKinsey
Until now, North America has been on the outside looking in, but Kartik believes that eventually it will experience a similar paradigm shift.
The A2A Leap in North America
July 20, 2023, was a big day for A2A payments in North America.
It was the launch date for the US Federal Reserve’s FedNow service, a real-time payments (RTP) rail that will allow major banks and financial institutions to build their A2A payment platforms atop its infrastructure.
It’s a major step that will “fundamentally change the way payments happen,” according to Kartik. But there’s still work to be done, both in the US and Canada.
“North of the border, we’re excited to see the Bank of Canada and Payments Canada implement Real-Time Rails (RTR). In both Canada and the US, there’s a lot of demand from fintechs to leverage the real-time A2A-based payment systems for the benefit of the consumer, and implementing RTR in Canada will go a long way in unlocking innovation in the broader payments ecosystem, while also maintaining safety, privacy and security. ”
Once this happens, then we could really see A2A payments take off, including in the B2B payments sector where cross-border payments are a frequent occurrence.
“An interesting use case is international money movement,” Kartik points out. “Currently the way the SWIFT network is set up means that cross-border payments can take a few days, and transparency is a challenge. The new era of A2A payments could see us make these foreign B2B payments in real-time, much like Wise is doing for the C2C market. Think of a future where FedNow and RTR can talk to each other and consumers can move funds cross-border in real time with little to no FX markup.”
Large transactions, too, done via wire or check payment, could be about to improve significantly, in terms of lower costs, higher security, and saved time.
“Wires for large amounts can often be expensive and tend to require in-person visits to banks to complete. A2A payments will likely dramatically reduce this cost and allow us to send these wires in real time, helping both sides with their cash management.”
All the tools are in place, then, for this new era of payments. Once North American regulators determine framework and legislation, then we could really see the real-time payment industry soar.
Tomorrow’s world: Diverse A2A payment options are emerging
So, what will a North American financial industry with a dominant A2A payment system look like in a few years?
Well, the launch of the likes of FedNow is set to lead to a multi-A2A-rail payment industry with banks and fintechs able to build their own products into the payment infrastructure.
Instant bank-linked payments will compete with, if not overtake, card payments. Businesses will get their bank transfers immediately, at a low cost, and will also be able to issue instant refunds directly into the customer’s bank account.
Businesses, especially e-commerce retailers, will offer apps that award special offers and discounts to people who use these cheaper A2A payments, improving the customer experience further.
As we stand at the dawn of a new era of open data finance (including open banking), A2A payments look set to be a cornerstone of a progressive and more customer-centric financial industry for years to come.
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