Insight & Analysis

Taking a direct approach to payments

Published: Dec 2022

In these difficult financial times, account-to-account payments represent an opportunity to reduce the cost of receiving payments without compromising on security.

Some observers may look at the concept of account-to-account payments and wonder what all the fuss is about – after all, direct debits have been in existence since the early 1960s. But there are many reasons why account-to-account systems facilitated by open banking are appealing to companies facing escalating card payment processing costs.

Lower fees are the obvious advantage. “Card schemes like to argue that they are still competitive purely when considering interchange fees, but neglect to include peripheral costs such as scheme fees, gateway fees, fraud tool fees, and tokenisation fees,” says Paiak Vaid, Global Head of Product Partnerships at TrueLayer. “Account-to-account is priced much more transparently.”

Jordan Lawrence, Co-Founder and Chief Business Development Officer at Volt observes that card processing fees can be as much as 3.5% for credit and 1.75% for debit, whereas open banking account-to-account payment fees are usually less than 1% – or a fixed price per transaction.

There are additional cost savings generated through the absence of chargebacks and the elimination of the fraud losses associated with card payments. Account-to-account payments also circumvent the unpredictability of card processing costs, which vary depending on the card mix – for example, debit versus credit cards, private versus corporate cards, and processing across multiple global and local card schemes.

“What’s more, the nature of account-to-account payments means there are fewer ‘toll takers’ in the payments flow,” explains Lena Hacklöer, CEO & Founder of Brite Payments. “Unlike with card payments, there are no issuers, acquirers, card networks or aggregators required. All this means that even in Europe – where card interchange fees are capped and considered relatively ‘cheap’ – account-to-account payments offer a way for merchants to reduce their costs.”

As well as eliminating interchange fees, account-to-account payments remove additional costs associated with card payments such as authorisation fees, card terminal hire fees, and PCI-DSS compliance costs adds Peter O’Halloran, VP, Head of Enterprise & Digital Commerce at Fiserv in EMEA.

According to Esther Groen, Head of Payments Consulting at Icon Solutions, account-to-account payments have the potential to dethrone card-based payments if regulation keeps pace with the innovation and creates the right conditions for competition to flourish.

In the simplest terms, credit card transactions and account-to-account payments are separated by the services that issuing banks offer their customers that other banks can’t or don’t – revolving credit, the ability to dispute transactions, and insurance against loss in the event of fraud.

“Yet these services are extended at a steep price, requiring merchants and customers to pay high interchange fees in exchange for the promise of security and reimbursement of fraudulent transactions,” says Groen. “Without regulation of account-to-account payments schemes, non-issuing banks simply won’t be able to offer the full range of services and guarantees (like security) that would allow them to compete with cards.”

Vaid also accepts that there are regulatory actions needed to increase the uptake of open banking payments, such as making instant payment rails more ubiquitous. “However, the EU Commission’s recent proposal to mandate SEPA Instant across all banks will go a long way towards this,” he says.

At the beginning of this year, Chris Hemsley – Managing Director of the UK Payment Systems Regulator – said one of his priorities was to unlock the potential of account-to-account payments to provide credible alternatives to card payments.

And this is not just a UK or European issue. Lily Varon, a Senior Analyst at Forrester, predicts that bank-based payment methods will have their first ‘big’ debut in the US in 2023 as businesses seek to avoid costly interchange fees, an issue that has been discussed in Congress this year.

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