Are we on the brink of a revolution that displaces Visa and Mastercard from their pole position in payments?
For decades, merchants have needed to accept these cards to capture a larger share of consumer transactions. But
Azimkhon Askarov, Co-Partner of CONCRYT, asks; are Pay-by-Bank transactions poised to take the transaction top spot?
Pay-by-Bank is increasingly favoured over card payments, and in many ways it’s easy to see why.
From a consumer perspective, fraud risk is reduced because, 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.
But crucially, Pay-by-Bank simplifies and streamlines the payment process, which speeds up transactions and lowers cart abandonment rates.
Research underscores how important this is.
One study found speed and convenience are among the chief expectations of consumers, with more than three quarters (77%) now expecting payments to be instantaneous and more than half (58%) expecting online payments to be completed with one click.
But the benefits of Pay-by-Bank vs card payments for merchants are also 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, it all comes down to being able to offer a friction-free experience, which means simplifying the payments process as much as possible.
In this respect, Pay-by-Bank really does pay dividends.
One piece of U.S. research has revealed how likely consumers are to stop a purchase due to complicated checkout processes, or even avoid a retailer if they have to re-enter their card information.
This is not to say there are no 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 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.
It’s perhaps unsurprising then, that this method is being embraced the world over, albeit to varying degrees.
Where Pay-by-Bank is gaining ground
Pay-by-Bank (including A2A payments) is gaining traction the world over, but there are notable discrepancies between countries.
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.
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.
In short, A2A and Pay-by-Bank are among the leading payment options in many regions.
But the real driving force behind their 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 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.
The US could follow suit, but as 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.
The end of card dominance?
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, the payments landscape could soon see a significant shift that puts Pay-by-Bank on top.
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