Real-time account-to-account (A2A) payments, also known as pay-by-bank has been adopted in many parts of the world. While sending payments directly from one bank account to another has become ubiquitous elsewhere, Americans have been hesitant to adopt the practice.
In the new report, Room for One More? Global Real-Time Pay-by-Bank Lessons for the U.S., Javelin Strategy & Research Director of Debit Payments Elisa Tavilla explores the reasons pay-by-bank has been so well-received abroad, the obstacles to U.S. adoption, and the future of the real-time payments landscape.
Government Backing
In countries like Brazil, Thailand, and India, A2A payments have achieved widespread adoption by consumers, merchants, and financial institutions. One of the key reasons for the rapid acceptance is government support.
Central banks and governing bodies have promoted both real-time payments and pay-by-bank to foster financial inclusion and to establish a digital payments ecosystem. Those countries had previously been largely cash-based economies, which smoothed the transition to digital payments. The Brazilian government has gone so far as to mandate rails for RTP and A2A.
Those governments also worked to standardize common financial technology like APIs, and the digital infrastructure makes new payment types easy to implement. Lawmakers in many countries have put QR code standards in place which promote interoperability.
“Standardized QR codes are essential to ease of adoption,” Tavilla said. “Especially with smaller businesses, QR code-based pay by bank solutions give them a more cost-effective way to move from cash to digital payments.”
A Card-Centric Market
Because of the established payment system in the U.S., A2A payment methods have been slow to take root. Although pay-by-bank options are emerging for both in-store and ecommerce transactions, American consumers still prefer to use their credit and debit cards.
“The U.S. is a very card-centric market from the consumer end,” Tavilla said. “Merchants may complain about the high cost of acceptance, but at the end of the day it’s the standard for purchases.”
Even with the high interest rates and late fees often associated with credit cards, Americans have been unwilling to switch.
“Consumers like using cards, especially rewards credit cards,” Tavilla said. “There’s also the purchase protection that comes with cards. if you order something and it doesn’t get delivered, you’re protected. That same level of protection doesn’t currently exist with pay-by-bank transactions.”
Opportunities for Growth
While A2A transfers aren’t likely to overtake cards in America, the comfort level is increasing. That acceptance has been fueled by peer-to-peer platforms like Venmo and Cash App, which three-quarters of Americans have used.
“Those platforms have grown substantially in recent years,” Tavilla said. “It wasn’t that long ago that cash and checks were the only ways to pay your friends and family.”
Pay-by-bank transfers are increasingly used to pay bills. Many smaller municipalities and utility companies don’t take card payments at all or charge a service fee to process card payments. In those instances, Americans are increasingly moving away from checks to pay-by-bank, which is mostly completed by ACH.
“As FedNow and RTP adoption continue to grow, real-time A2A use cases will also continue to grow,” Tavilla said. “When people use instant payments to pay their electric bill, they will appreciate the speed of the transaction. They’ll also see the added benefits of real-time payments because it allows for more transaction data to be included. It’s much easier for merchants and customers to identify what the payment is for.”
Irrevocable Transactions
Consumers will still be concerned about purchase protection. As with peer-to-peer platforms, once a real-time pay-by-bank payment is sent, it’s irrevocable. That puts the burden on the customer to verify the money is going to the right place.
“Consumer education will have to increase, which is another barrier to adoption,” Tavilla said. “As a consumer myself, why would I choose to pay this other way where if something goes wrong, if I’m not going to be made whole again? There isn’t any standard policy for protection like what exists with cards today.”
Another barrier to A2A adoption is the lack of rewards. Credit card rewards are funded with interchange fees that merchants pay.
“Rewards programs could be implemented for pay-by-bank solutions,” Tavilla said. “If merchants want customers to use a credit card alternative, they could offer incentives to pay-by-bank.”
The Drive to Real-Time Pay-by-Bank and Open Banking
In the U.S., there are two real-time payment rails FedNow, which launched last year, and the Clearing House’s RTP. Still, most pay-by-bank transactions use ACH.
“There aren’t any government mandates for real-time payment adoption in the U.S., participation is voluntary.” Tavilla said. “Governments in the UK and Thailand disburse social benefits and accept tax payments via real-time payment networks, which have accelerated adoption. The U.S. Treasury is a FedNow participant, and could potentially speed up real-time A2A payment adoption in the U.S.”
ACH will likely continue to be the standard for now, but it has its drawbacks. The major downside is the time it takes for transactions to clear. The delay can lead to payments failing for insufficient funds. Customers don’t know exactly when the money will be taken out, so when the transaction occurs the money might not be there. That can create a less than ideal customer experience.
“With real-time payments, the money is moved with more certainty and precision,” Tavilla said. “It also improves the pay-by-bank customer experience, when coupled with open banking technology, which is still in early stages in the U.S.”
