Builds Momentum into 2024

Driven by a combination of at least five converging trends: the growing availability of real-time payment rails; increased interest from businesses seeking to avoid card processing fees and gain faster access to funds; increasing democratisation of payments; a move away from subscriptions to micropayments, and even a potentially big push. Compared to much of the world, has lagged on adoption of pay-by-bank, which is also commonly called “account-to-account,” or “A2A,” payments. Pay-by-bank entails payments being sent directly through the banking system from one deposit account to another, no checks, no cards. Consumers display a remarkable attachment to the use of cards, accounting for more than two-thirds of point of sale transaction value and half of e-com spend up marginally.  By late 2024, hundreds more banks globally and payment service providers will launch account-to-account faster payment capability, urged on by merchant sensitivity around card fees and banks delivering payment solutions to complement open banking. It behooves traditional banking institutions to consider the possibilities on both the consumer and business banking fronts sooner rather than later as pay-by-bank isn’t completely in their control.

Pay-by-bank will fit into payments Mix: Pay-by-bank enables people to make payments directly from their bank accounts, bypassing even debit cards. As currently practiced A2A transactions generally use the automated clearinghouse. This access is promoted by online retailers who work with consumers to obtain their payment credentials, with safeguards built in, so payments can subsequently be run through the ACH system, much like sending through a check. The funds come out of their deposit accounts. Unlike a debit card, no interchange fee is charged. To get consumers to try this alternative to their familiar cards, merchants often offer incentives, such as immediate cost savings or loyalty rewards.

Payments in ‘Account Age’ and beyond: In its 2023 global payments report, calls the age we are in the “Account Era,” leaving behind the “Plastic Era.” The roots of this new age lie in the beginnings of ecommerce. “Internet and mobile technologies made it possible for users to direct funds from their accounts repurposing infrastructure such as automated clearing houses. It is suggested it may be what it calls the “Decoupled Era,” in which “payments may be increasingly disconnected from accounts and other fixed repositories of value the exact opposite of getting a stack of checks and a debit card when you opened a bank account. The consulting firm predicts that banks will seek more partnerships and M&A in the payments space in response to this decoupling. From the consumer perspective, the A2A will appeal to people who like to have complete control over their funds and like to pay as they go, rather than incur charges or actual debt.  It’s having virtual ways of managing your money to the minute. For some this will be a matter of paying bills close to the wire because they live on tight budgets and others will come around in time.

Pay-by-bank and digital wallets: It is observed that the increasing adoption of digital wallets will encourage use of pay-by-bank because they wean consumers further away from plastic. Penetration will take time, however. the card habit runs deep among consumers and retailers continue to lean into it as an automatic payment option. Incentives from merchants will help, but use will be transitory because of the cost.

Driving Demand for Pay-By-Bank: Even more appeal for businesses. It can start to build services that manage cash pooling or intraday balances using real time money movement capabilities. This has the potential to make small business financial tools more sophisticated. Indeed, business use of pay-by-bank will drive much of the shift in 2024. Many applications will be “win-wins” for the bank and the business, when they work together. This is where the most energy is being directed now, especially for international transactions and cross-border payments. This method becomes more mainstream more creativity will be applied. The use of digital wallets and QR codes, among other steps, has sped and smoothed A2A adoption. Those, simplify the consumer side of the transactions, he explains, avoiding account number entry errors, for example. Income taxes can be paid via A2A and QR code,

Strategies may not be So dumb: The banking system often finds itself having built the plumbing system that others come along and profit from. That the pay-by-bank trend has elements of that challenge. Banks worried about becoming dumb pipes. The response of many was, and sometimes continues to be, to not allow their payment cards to be used that way. It’s a way of controlling what banks can control, but in the long-run it isn’t a great strategy. First in wallet is important but institution needs to be in the wallets in order to be used. If it is not present in the platforms, the ecosystems, the marketplaces and the digital wallets, customers won’t be able to use. It’s as simple as that.

A real option: Consumers may become dissatisfied with a card issuer who keeps them from using a digital wallet to pay. Many younger consumers only pay with digital wallets these days. So, to successfully pass into the next period, dominated by the decoupling of payments, banking players need to think differently. Finding ways to capitalize on owning the pipes will help. Capital one figured out how to do this with card transactions by capturing rich transaction data that digital wallets like Apple Pay or Google Pay didn’t. Customers could access the data in the bank’s own app. So if you wanted to have the kid gloves experience you went into the bank’s app, rather than Apple’s or Google’s.

Payments may drop of water in a wave: Increasing use of “micropayments” spurring more account-to-account payments. Just as the concept of subscriptions to nearly everything from toys to shaving cream took off a couple of years ago, there’s been a boom in apps and other technology to undo subscriptions because of their ongoing costs. Some of these, and other products and services — such as reports and articles and even movie rentals, could be sold with micropayments enabled by A2A service, says Morgan. For the consumer, it is paying just for the content that you consume. As a business it might lose the regularity of the subscription, but it doesn’t lose all of the business as customers now have a cheaper, on-demand payment method they can use just for the content they want. From the seller’s perspective, such micropayment possibilities using A2A eliminate much of the cost that would be involved if they chose credit card payments for such small charges.

The writer is Company Secretary, The City Bank Ltd