The Crucial Race for Account-to-Account Payments

The market for direct transfers between bank accounts is attracting fintechs—as well as the two global card networks—as real-time payments loom.

While account-to-account transactions—think the automated clearing house—have been around for years, the shift to real-time payments is giving them a new boost.

Little happens overnight in the payments industry. While account-to-account payments appear to be building momentum quite quickly, the concept has been implemented in reality for some time. Consider ACH transactions. The first ACH association formed in 1972 and today, as of the 2021 third quarter, the ACH network had 7.3 billion transactions, all flowing from one account to another.

Broader forms of account-to-account transactions now are surfacing, capturing the attention of fintechs, payment providers, and the card brands. Questions abound, including which use cases stand the best chance of success, what is the growth potential, and how to develop a large market for A2A transactions.

“Let’s start with what merchants want to get done,” says SiamacRezaiezadeh, director of product marketing at GoCardless Ltd., a London-based specialist in account-to-account transfers. Sellers want payment methods that convert well, have high success rates, and enable them to get their money quickly, Rezaiezadeh says. “And they want the transaction to be highly visible and secure and have low cost.”

Buy now, pay later provider Klarna AB recently enlisted  GoCardless to enable direct transfer from a bank account. Consumers typically use a debit card to fund their BNPL purchases.

Rezaiezadeh generally classifies account-to-account transactions as push and pull types. Pull is like an ACH debit, such as when a biller withdraws funds from a bank account to pay a utility bill. The push type is more dependent on the payer moving the money transfer.

One appeal of account-to-account transactions is they can yield high success rates. For example, one areawhere A2A transactions might fit well is recurring payments, Rezaiezadeh says.

“A lot of merchants today have moved to a recurring-revenue business model, like subscription or card-on-file,” he says. These transactions may generate as much as a 10% failure rate because of various factors, such as insufficient funds, an expired card, or the issuer blocked the transaction. (Capital One Financial Corp. began in 2020 blocking buy now, pay later transactions made with its credit cards, but permits them with debit cards.) “When moving to billing the account directly, you have a lower failure rate, like 2.5%.”

Consumer Choice

Though it might seem incongruous, card behemoth Visa Inc. sees opportunities for it in account-to-account transactions, especially when powered by the speediness of real-time payments. Many account-to-account transactions have been processed as a batch at the end of the day or similar period. Adoption of real-time payments means these payments can process as they happen.

“As more countries move to real-time payments, it makes account-to-account a little more usable,” says Mark Nelsen, Visa senior vice president of open banking. “One challenge with legacy account-to-account transactions, because it was batched, there was a chance with batched there may not be funds available when processed.”

Best known for its card payments—Visa’s U.S. card transactions tallied 21.9 billion in the 2021 third quarter—the card brand has taken notable steps to strengthen its position in account-to-account payments. In 2021 it announced Visa Direct Payouts, which enables users to send funds to either a recipient’s Visa debit or prepaid card or to his or her bank account. The transfers can be made to more than 170 countries.

It has also long offered Visa Direct, which enables real-time or near real-time transactions between Visa card accounts. And its competitor, Mastercard Inc., continues to build its foundations for account-to-account transfers.

“We see [A2A] as an opportunity, a way to get volumes we’ve not historically been involved with,” Michael Miebach, Mastercard chief executive, said in October. Addressing an analyst question then, Miebach denied the race to build A2A capability will hurt his company’s core card business. “We don’t see a disintermediation risk. I see a way to form partnerships and improve our [transaction] flows,” he said. “It’s still early days.”

Similarly, Nelsen dispels the notion that account-to-account transactions will harm Visa’s core business, though he acknowledges there may be use cases where the payment method is a better fit than a card. That’s why Visa is involved now, in the early days, he says.

The example he cites is when an individual has a $10,000 tax bill to pay, but the person’s bank may have a daily debit ceiling limit. There are two possible ways to accommodate this situation. One is to enable account-to-account transactions. The other is to make card-based payment as seamless as possible, Nelsen says. “Ultimately, Visa wants to give consumers choice,” he says.

‘Very Optimistic’

And there is inertia to contend with. Consumer payment behavior is well known for being difficult to change absent something like a pandemic—contactless payments finally took off in 2020 after 15 years—and a large migration from cards to account-to-account transactions, overall, is expected to take time. Consumers may not even realize they completed an account-to-account transaction at times, Nelsen says.

Consumers, too, have grown accustomed to card-based benefits, such as fraud protection and the separation of their own funds from the card’s credit limit. In scenarios where the consumer trusts the merchant, there could be some change, he says. “It’s hard to get consumers to change something if it’s working really well,” says Nelsen. “There’s always going to be competition. We’re going to make sure the card payment process is as seamless as possible.”

Consumer willingness to use account-to-account transactions already may be developing. “What’s interesting is that we’re seeing an overall shift in the mindset and actions of consumers toward payment methods in the last few years,” Rezaiezadeh says.

A 2021 survey from GoCardless found that 76% of respondents would like to decrease use of credit cards. Debit cards and no-interest installment payments found a lot of favor. In the 18-25 age group, 89% would rather use a debit card as would 87% in the 25-40 group, Digital Transactions News reported in July. That dips to 54% for those 57 or older. Regardless of age group, 78% would choose a debit card instead of a credit card.

“Consumers are looking for payment methods for the way they’re interacting with things online today,” Rezaiezadeh says. “Account-to-account has been built specifically to enable payments online. It’s less about the underlying rails, more about the service enabled.”

That echoes Nelsen’s thinking about the importance of real-time payments. “Over time, we’re very optimistic there will absolutely be benefits in going from batch to real time,” he says.

Dealing With Disputes

And that speaks to the state of account-to-account transactions riding on real-time payment rails. It’s early days for the United States. The two prominent real-time payments networks—Early Warning Services LLC’s Zelle focuses on peer-to-peer payments and The Clearing House Payments Co. LLC’s Real Time Payments Network is commonly used for bank-based transactions—only launched in 2017. A third major one, the Federal Reserve’s FedNow, is expected to launch in 2023.

Much needs to be worked out before account-to-account transactions could be a wholesale replacement for some card transactions. One issue is fraud and chargebacks. Today, issuers lean toward aiding the cardholder in these situations and the process is mostly the same across cards, despite differences among issuers.

Account-to-account transactions have no shared fraud or chargeback process. “There really isn’t one well-defined scheme at  scale to support some of these more complex e-commerce flows,” Nelsen says. Not much is needed for very simple use cases, but e-commerce can be complex, involving subscriptions, delayeddelivery, multiple recipients, and shipping addresses.

Real-time payments work well for P2P payments or sending money from one bank account to another, Nelsen says. With e-commerce purchases involving non-digital goods, however, funds can be sent, but the consumer may have an issue with the product or service. “If something doesn’t work, you have to have a way to reconcile that,” Nelsen says. “You need some way to handle the cardholder dispute.”

Consumers may know some merchants they trust to make them whole, but other sellers may not be as likely to accommodate refunds or make-goods. That could mean consumers are less likely to provide direct account access to merchants outside of that trusted circle.

Despite issues like these, GoCardless is not shy about its ambition to build a global network for account-to-account transactions, Rezaiezadeh says. The card networks already have global networks. “The question for me is whether [the card networks] can make these things work together,” he says. “The second part is can they do that while maintaining their market share and profitability for the card products.”