Global commerce has gone digital. By 2027, total e-commerce sales are expected to exceed US$10 trillion, of which $2.7 trillion will be cross-border. That’s at least 27 per cent of all e-commerce sales worldwide.
Where retail goes, payments go too. The inexorable rise of e-payments has been accelerated by the rapid digitalisation of the global economy, itself turbo-charged by the pandemic. Cash is expected to account for just under 10 per cent of all transactions by 2025, as alternative payment methods become more mainstream. Even in notoriously card-averse Germany, cash has ceased to be the most commonly used payment method.
That said, there is still a firm reliance on debit and credit cards worldwide. Among the alternatives, digital and mobile wallets are currently the most popular, but both are highly intermediated and costly.
Until now, merchants have borne the financial expense because it is balanced by the reach and conversion rates offered by cards and wallets. But it’s worth remembering that interchange fees are based on a percentage of the sale value, and for many businesses, every euro, yen, dollar, or pound counts more than ever as post-pandemic inflation pushes wage and supplier costs higher.
Many are beginning to see a better alternative in direct account-to-account (A2A) payments, which will, before long, leapfrog cards by allowing more consumers and merchants to buy and sell online.
Easy and authenticated payments
The advent of open banking and API connectivity has enabled A2A payments in a much wider range of circumstances – and they are theoretically available to anyone with a bank account. API or ‘application programming interface’ refers to the rules that bridge two or more pieces of software together, and they essentially open up a given system to third-party innovation – in this case, bank transfer systems.
The immediate advantage for consumers is that there’s no need to sign up to or be onboarded to another service provider. Their bank app provides authentication in a way that is familiar and intuitive. That’s the first tick for A2A payments.
That also means A2A payment services come with fewer barriers to entry for many consumers. Those who cannot or will not pay additional fees for a debit card, who do not meet the qualifying criteria for a credit card, or who have no experience with card use in their immediate community may find A2A the ideal payment method.
A2A payments are also easy. Consider that by 2025, 59 per cent of e-commerce transactions will take place on a mobile device. Now consider how fiddly and error-prone it can be to enter payment details on a mobile keypad. A2A payments dispense with all that, and because they are also reliable, resilient and – critically – do not fail at the point of transaction, they create a much smoother and happier customer experience.
Instant and controlled payments
With real-time payments infrastructure launching in Canada, Peru, New Zealand and Indonesia in 2022, almost three-quarters of the world’s population will have access to faster payments.
That gives the customer something important: control over their finances. Real-time payments and real-time account visibility make it all but impossible to overspend. Consumers can budget effectively, see precisely how much they have available, and understand the impact of a single payment on their overall finances. They know where their money is at all times. These are powerful, often underestimated, considerations for many people.
For merchants, instant settlement improves liquidity and cash flow. It enables smaller retailers to develop stable supply chains when shipping and selling goods between countries.
It also reduces costs. With Mastercard set to hike interchange fees, Amazon’s abandoned threat to stop accepting UK-issued Visa cards because of fees, and UK retailers spending £1.3 billion to accept payments in 2020, cards may be losing their appeal.
Next up: cross-border payments
There are already plenty of examples of open banking A2A already in play. iDEAL in the Netherlands and Sofort in Germany have been with us for some time. In Poland, the real-time, bank-backed payment app BLIK has played a significant role in increasing bank transfers, to the point where they now account for 54.5 per cent of e-commerce transaction value.
In Brazil, Pix, introduced by the Central Bank of Brazil, has enabled a large volume of both P2P and consumer-to-business A2A payments. Consequently, bank transfers in Brazil are expected to rise from a 10.9 per cent share to nearly 18 per cent by 2025.
We can realistically expect many more examples to arrive. Variable Recurring Payment (VRP) capabilities, for example, will create additional use cases for A2A, including subscription payments, and replacing ‘card on file’ with an ‘account on file’ function for regularly used e-commerce sites and marketplaces. The demand for strong customer authentication for all online transactions above €50 in Europe is another driver, since A2A payments already require multiple authentication factors.
The next frontier for A2A is cross-border capability. Many services and apps are deeply embedded within their host countries’ national clearing systems. They cannot expand beyond the country’s borders without support from fintechs. This requires a connectivity solution that can join these individual systems to create a cross-border payment ecosystem – part of our raison d’etre at Volt, in fact.
An example is Brazil, where card ownership rates remain relatively low. If someone wants to purchase from an international merchant, they generally need a US dollar-denominated credit card.
But if, say, a Portuguese airline integrated open banking payments with Volt, it could suddenly accept bookings from people in Brazil, who could pay directly from their accounts in their local currency, via Pix.
Volt would handle the forex and settle the payment to the airline in euros. With that kind of tech in place, A2A payments have the potential to open up e-commerce to more people and more businesses – especially in areas where card uptake is comparatively limited.
Our industry has seen the leapfrogging effect before – most obviously in Kenya, where the M-Pesa mobile payments scheme bypassed traditional banking infrastructures almost completely. This time, the potential impact on individuals, businesses, and the broader economy could be just as significant.
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About the Author:
Jordan Lawrence is the Co-Founder and Chief Business Development Officer at Volt.