Azim CONCRYT

By Azimkhon Askarov, Co-Partner of CONCRYT

For decades, merchants have needed to accept cards from Visa and Mastercard to capture a larger share of consumer transactions. But today, these global giants could be on the verge of losing their global dominance in payments. Are Pay-by-Bank and A2A transactions poised to take the transaction top spot?

Firstly, it’s worth outlining the main distinctions between traditional card payments, and A2A or Pay-by-Bank transactions.

Pay-by-bank allows customers to make online payments directly from their bank accounts (including A2A transactions). The benefit of the payment method is the avoidance of using card intermediaries (e.g. Visa or Mastercard); customers can simply authorise payments by using their online banking credentials to transfer funds directly from their account to a merchant’s account which allows the merchants to stay on the better fee level and receive the settlements instantly.

Card payments, on the other hand, refer to cashless payments with the use of a bank card. The amount is either debited directly from the bank account of the cardholder or, in the case of a credit card, charged at a later date.

Pay-by-Bank is increasingly favoured over card payments due to enhanced security and streamlined user experience. Transactions are authorised directly through users’ banks, reducing fraud risk as unlike card payments, which require the entry of sensitive card details that can be susceptible to fraud, Pay-by-Bank transactions are authorised directly through the user’s bank. Additionally, Pay-by-Bank simplifies the payment process, which speeds up transactions and lowers cart abandonment rates.

It’s perhaps unsurprising then, that this method is being embraced the world over, but global adoption has been far from consistent.

How the world is embracing Pay-by-Bank payments

Pay-by-Bank (including A2A payments) is gaining traction the world over, but there are notable discrepancies between countries. According to the 2024 Global Payments report, A2A payments are growing fast in markets like Brazil and India on the back of PIX and UPI schemes respectively, with global A2A transaction values forecast to rise at 14% CAGR through 2027, gaining 1% global share during that time.

A2A payments are also the leading choice for online transactions in developed markets such as Norway, Finland, Sweden and the Netherlands, and according to Worldpay, they are more likely to be popular in emerging markets such as Malaysia, Nigeria and Thailand – not to mention India again, where government support has encouraged rapid adoption. In short, A2A and Pay-by-Bank are among the leading payment options in many regions.

But the real driving force behind A2A and Pay-by-Bank success is the implementation of Open Banking, which effectively gives these payments the boost they need to compete with card payments.

At one time, Pay-by-Bank and A2A payments would have struggled because bank transfers required payers to log into their bank accounts and manually enter account details to make a payment, meaning they would still fall a little short of today’s expectations of convenience. That’s where Open Banking comes in. It removes this friction by making entering account details an automatic process.

South Korea, Australia and India have developed their Open Banking systems, whilst Hong Kong, Japan, and further parts of Asia are currently preparing for Open Banking. In April this year, Canada, a country which launched Open Banking in 2019 but has lagged behind in user adoption, announced new measures that could allow consumers’ financial data to be shared, encouraging more uptake.

Could the US follow? Possibly, but as US regulators consider a decision on Open Banking, Pay-by-Bank and A2A payments face challenges in what is still a very card-dominated market. In the US, card payments account for more than two-thirds of point of sale transaction value and half of e-commerce spendings, according to the 2023 FIS/Worldpay Global Payments Report. But with the launch of the Federal Reserve’s FedNow instant payments service, joining the Real Time Payments network of The Clearing House, and other factors, FIS forecasts A2A payments specifically will see a compound annual growth rate of 14% through to 2026.

Benefit vs risk

The benefits of Pay-by-Bank and A2A payments vs card payments for merchants are clear:

• Reduced operational expenses by eliminating chargebacks and reducing the fees associated with traditional card transactions.
• Rapid funds settlement, with funds typically landing in the merchant’s account almost instantly. This is especially where faster payments schemes are in operation, for instance the Faster Payments Scheme in the UK, or SEPA Instant Scheme in the EU.
• As an accessible and preferred payment method for a wide range of customers, it can attract and help retain loyal customers.

But, crucially when it comes to customer retention, these payments offer a big advantage over card payments; a friction-free experience.

Using the U.S. as an example, where fewer than 50% of consumers have a bank card number saved on a mobile payments app, the other 50% has to either physically have their card in order to read off the numbers, or have the number memorised. Other payment methods may require them to create an account, or pose additional challenges. Some will stop a purchase due to complicated checkout processes, or even avoid a retailer if they have to re-enter their card information.

Thirty two percent of North Americans are already using Direct Debit, and bank transfer as their primary payment method online, it’s not unreasonable to expect this trend to continue to grow in popularity in the coming years.

But there are downsides. As with all financial transactions, there is a fraud risk. With stolen account information, criminals can easily take advantage of the vulnerabilities of Pay-by-Bank and A2A services and rails, and lawmakers are calling for better protection for the account holders.

That said, since these payments don’t involve any intermediaries, there is less opportunity for fraudsters to intercept or steal funds. Additionally, because they are typically initiated through a bank’s online banking platform, security measures such as two-factor authentication help to effectively protect accounts.

Changing the face of payments

Pay-by-Bank and A2A payments are changing the way financial institutions operate and impacting the broader payments landscape in many ways, from increasing competition among payment providers and financial institutions to creating opportunities for innovation in the payments space.

For now, some countries are still playing catch-up, a fact keeping Visa and Mastercard on top of the payments pile. But as global adoption increases, we could soon see a significant reversal of fortunes.