Account-to-Account payments: What main challenges we have to solve?
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Account-to-Account payments: What main challenges we have to solve?

Account-to-Account payments: What main challenges we have to solve?

Henrik Hodam

SENIOR PRODUCT MANAGER OPEN BANKING

Account-to-Account (A2A) payments enable account holders to transfer money directly from one bank account to another without the need for additional intermediaries, schemes or payment instruments such as cards. In our last blog, we highlighted the advantages this payment method offers consumers and merchants compared to traditional payment methods. Like for all new payment methods, we also see multiple challenges before this type of payment method will become mainstream. Let's take a look at the main challenges.

1. User Experience

While the introduction of strong customer authentication - as one of the most important results of the PSD2 regulation - is intended to reduce fraud, it also strongly impacts the user experience. When shoppers proceed to pay, they are prompted to verify the payment with a Strong Customer Authentication (SCA). They must authenticate themselves by providing 2 of 3 independent authentication factors– knowledge, possession and inherence in order to authorize a payment. Depending on the maturity and user friendliness of this SCA process, it can add significant friction to the checkout experience.

On the other side, this part of PSD2 also applies for card payments. So, it can be  expected that, by doing more and more payments with and without cards, consumers will get  familiar to this additional process during the checkout.

It has to be mentioned that the responsibility and the detailed implementation of this SCA step is fully under the control of the consumer banks. Today we still observe very different levels of frictionless and user friendliness of this SCA step, but we expect that in due time all banks will improve this crucial part of their user experience to remain attractive and avoid customer churn.

PSD2 offers the possibility of exemptions from executing a SCA for each payment, e.g. for small value transactions. In such case, the bank will not require SCA from the consumer, but only every five times, for example. Currently, many banks still do not apply such exemptions, probably because they lack experience with these new account-to-account payments. However, by properly identifying risks around these payments and applying exemptions, the friction can be drastically reduced.

2.  Payment guarantee

The banks’ new APIS for Account-to-Account payments in general support traditional SEPA Credit Transfer (SCT) and instant credit transfers (SCT Inst) for most banks. The disadvantage of traditional SCT transactions is the fact that the funds will be only available at the beneficiary account within the next 24 hours.  The Payment Initiation Service (PIS) can only respond that the payment has been successfully initiated. In general, these SCTs are irrevocable, but during the nightly clearing there could be still a small chance that some other guaranteed payments (e.g.cheques payments in France) take the available funds and the SCT will fail in this case.

In some cases, like if the shipment is not immediate or when the consumer is well known to the merchant, this delay is no problem for the merchant. But especially for purchases in physical stores, this remaining risk will sometimes not be borne by the merchant. In such cases, there is the need for an additional payment guarantee, like we all know e.g. for SEPA Direct Debit (SDD) payments. For A2A payments the risk is much smaller because we are mainly talking about one day, whereas for SDD the payer can cancel the payment during a period of multiple weeks. The optimal solution would be the usage of instant credit transfers. Here, the guaranteed processing duration for the complete cycle (until funds are really available at the beneficiaries bank account) will only be a few seconds and the merchant could wait for the confirmation. Currently, we still observe that not all banks support instant payments and many of the banks that support it sometimes charge significant fees from the account holders for each SCT Inst. We hope that the regulatory institutions will motivate all banks to support instant payments and to include potential fees into the monthly account subscription. Only when the financial risk of an A2A payment is manageable for the beneficiary they will start pushing this new payment method.

3.  Consumer protection

Refunds are an important part of the existing shopping experience, especially for fashion articles. Card schemes offer easy ways to get the money back in such refund situations. Furthermore, they also offer support to the consumers in case of any conflict with merchants. With A2A, such refunds are possible by just transferring the money back from the merchant to the consumer account. The difference is that the consumer bank is not able to cancel or revoke the credit transfers, so the consumer has to manage refunds with the merchant. In case of returning goods this process will be similar to the process for cards payments. The merchant will do some basic checks like checking the returned goods and see if the funds have arrived. After that, the merchant can initiate an SCT from the merchant’s account to the consumer account. Such payments naturally will need an appropriate SCA for the merchant account, which will be more difficult for larger merchants. A solution could be to collect refund transactions and authorize them as bulk payment together. In case of conflicts between merchants and consumers, A2A cannot offer additional support for dispute management like in case of credit cards due to the missing underlying commercial payment scheme.

4.       Consumer education and motivation

Open Banking has been pushed by the PSD2 regulation and A2A payments (SCT) are based on the SEPA scheme. Besides all these technical functionalities, it is crucial not miss an important point: educating the consumers how to use this new payment method. For the consumers, this new payment method is different to the traditional card payments, and education is essential. In this case the consumer should be informed about the flow including the way how to use the mobile device including a pre-installed banking app.

Normally, a successful introduction of a new payment method is achieved through huge marketing efforts by the underlying commercial scheme. This includes advertisement and specific training material for merchants and consumers. Since A2A has no such commercial scheme, the consumers education has to be done mainly by the merchants. They, with the help of the Payment Service Provider for A2A payments, need to accompany the consumers in their payment journey and additionally potentially motivate them to use it over other existing methods. Only the merchant can do this important step because he/she has the consumer contacts and on the other side is the one who can gain the most advantages of this new way of paying (e.g. much lower fees). 

For more information please visit  Account-Based Payments.