Martha Southall, Economist at CMSPI: ‘Merchants need to be prepared for these methods to enter the C2B space. Such a shift could have huge significance for the payments mix, particularly if younger cohorts switch out their debit card usage for transfer options.’
Transferring funds from one account to another – or making an Account-to-Account (A2A) payment – is nothing new; consumers have been using A2A payments in the form of bank transfers for years. Why, then, is the method attracting so much attention? In this article, we explore the US in more detail – a country in which the A2A payment is quickly becoming a key consideration for merchants looking to future-proof their payment acceptance strategy.
The new generation of A2A
Whilst the umbrella term ‘A2A payments’ includes many methods that are commonplace such as bill payments (a form of C2B transaction), in the US one particular form has been drawing significant attention. Peer-to-peer (P2P) payments allow one person to send funds to another using the recipient’s email or other personal information. One 2019 survey found that 71% of US adults had used a P2P payment platform, with 24% of those interviewed saying they did so frequently. Providers of these services include the likes of Venmo, the PayPal-owned platform whose user base outnumbered that of both Bank of America and Wells Fargo in 2019. Figure 1 illustrates the growth that Venmo has seen since 2017.
Figure 1. Venmo payment volume over time
Venmo competes with the likes of Zelle, Cash App (Square), and Facebook Pay in the P2P space. However, in recent years we have seen these players make strategic moves towards the consumer-to-business (C2B) environment. Launches of products such as Venmo’s in-store QR code payment in 2020 suggest A2A payments are well on their way to the POS.
Could P2P shake up the payments landscape?
The introduction of QR codes at the POS alone is a significant change for retailers – and one that many have already begun to make since the start of the pandemic. However, a move by P2P providers into the C2B space has the potential to generate a lot of further-reaching impacts. Whilst not all are new to payments, many of the companies behind P2P payments in the US are part of a new generation of fintechs offering innovative payment solutions. The 2017 launch of Zelle, described by some as ‘the US banking industry’s answer to Venmo’, shows that they are already sparking change. There is also the use of ACH networks for many A2A payments, which has the potential to significantly reduce merchants’ costs through the avoidance of interchange fees. However, these developments do not mean legacy players are out of the picture. In fact, the instant settlement options of many P2P providers, often underpinned by Visa Direct technology, utilise traditional card rails and are only available for users who link their payment cards.
Making A2A instant
Visa Direct is not the only player looking to combine A2A services and instant payments. One of the Federal Reserve’s key initiatives in the US, FedNow, sees A2A operability as one of its core use cases. FedNow, an instant payments service that is currently under development in the US, is expected to launch in 2023. With the advent of FedNow, the Federal Reserve echoes a number of initiatives globally – such as the European Union’s SEPA Instant Credit Transfer – that see instant payments as a core tenet of the future payments landscape. However, FedNow presents an additional opportunity; the service’s website suggests that instant payments rails could also ‘help financial institutions capture a piece of the P2P pie’, placing traditional issuing banks back at the centre of the transaction flow for such payments. This contrasts with instances where the payer transfers from funds stored within their P2P provider account, leaving traditional financial institutions disintermediated. Although not part of its initial launch, if the Fed’s rails begin to support C2B transactions then this could generate additional opportunities for cost savings for merchants.
What does it all mean for merchants?
Whilst P2P developments are important for payments more broadly, CMSPI’s work focuses on merchants, and independently championing their interests within the payments ecosystem. So far, the A2A boom in the US has been largely focused on transfers between individuals, as well as traditional use cases such as bill payments. However, there is precedent for these solutions rapidly entering the retail payments space. China’s WeChat Pay, for example, has grown from a service allowing people to transfer money to contacts in their social network to a method of payment accepted by upwards of 72 million merchants. Providers in the US haven’t been so quick to swap out the old; Venmo, for example, launched its own Mastercard debit card in 2018, followed by a Visa credit card in 2020. It is possible that strategic alliances between legacy players and fintechs could limit the commercial appetite to make the current energy surrounding P2P as transformative as it could be for the US market.
Whilst A2A payments are not a new phenomenon, in recent years the US market has seen providers such as Venmo report exponential growth and particular popularity amongst younger cohorts. These developments reveal some interesting dynamics between actors within the payments industry; whilst many suppliers appear to be newer entrants, their underlying technology can be supported by long-standing players who, alongside the Federal Reserve, appear to be shifting towards a future in which instant and A2A payments are intertwined. Merchants need to be prepared for these methods to enter the C2B space. Such a shift could have huge significance for the payments mix, particularly if younger cohorts switch out their debit card usage for transfer options. With the current combination of state, fintech, and legacy-driven initiatives in the US, merchants must keep abreast of what each development could mean for themselves and their customers.
This article is part of the Payment Methods Report 2021 – Latest Trends in Payment Preferences, a comprehensive overview of the payment methods in scope for 2021, as well as best practices for checkout optimisation and customer conversion by addressing digital transformation, security, and localisation.
About Martha Southall
An Economist at CMSPI as part of its ‘Insights’ team, Martha’s focus is tracking payments market trends, as well as reporting on emerging payments issues and regulatory changes.
CMSPI is a global leader in retail payments consulting. CMSPI’s expert team works to empower the retail community with insights, expertise, benchmarking, and analysis to drive value in their payments supply chain. Specialties include cost reductions, approvals and fraud, and strategic insights.
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