Account-to-account (A2A) payments are a method of transferring funds directly between two bank accounts, bypassing intermediaries such as credit card networks or payment processors. This direct transfer can occur between accounts owned by the same individual or between accounts owned by different individuals or businesses.

A2A payments are faster, more convenient, and more cost-effective than traditional payment methods. They’re often used for peer-to-peer (P2P) transactions, online purchases, bill payments, and salary payments. With the rise of open banking and the increasing availability of A2A payment infrastructure, this payment method is expected to continue gaining traction.

Below, we’ll explain the different types of A2A payments, how they work, what they’re used for, and their advantages and disadvantages.

What’s in this article?

• Types of A2A payments
  
• How do A2A payments work?
  
• What are A2A payments used for?
  
• Advantages and disadvantages of A2A payments
  
• The influence of open banking on A2A payments
  
• Global impact and market adoption of A2A payments
  

Types of A2A payments

There are many different types of account-to-account (A2A) payments, and each meets the needs of different transactional relationships and scenarios. Here are the main types of A2A payments.

• Business-to-business (B2B): These transactions occur between companies and typically involve large payments for goods, services, or operational costs. A2A payments simplify cash flow management and can often integrate with enterprise resource planning (ERP) systems to automate and reconcile payments.

• Business-to-consumer (B2C): These payments are used by businesses to quickly and easily transfer funds directly to consumers, usually as refunds, rebates, or payroll.

• Peer-to-peer (P2P): Commonly facilitated by mobile apps and online platforms, P2P payments allow individuals to transfer funds directly without using traditional financial institutions. This type of payment is popular for splitting bills, gifts, and other transactions among friends and family.

• Consumer-to-business (C2B): Consumers use these payments to pay businesses directly from their bank accounts, such as for online shopping and bill payments. C2B payments have lower fees than those associated with card payments.

• Me-to-me: Also known as intrabank or interbank transfers, this is when an individual moves funds between their accounts across different banks or within the same bank. This type of payment is useful for managing personal finances, savings, and investments.

How do A2A payments work?

Here’s how A2A payments facilitate the transfer of funds between accounts.

Transaction initiation

• Push payments: The payer initiates the transaction in a similar way to a standard bank transfer, by providing the recipient’s bank account details and authorising the payment through their online banking platform or a third-party payment provider. Push payments are typically used for one-off or irregular transactions.

• Pull payments: The recipient initiates the payment, often with the payer’s prior consent. This is common for recurring payments such as subscriptions or bill payments. Pull payments can be authorised through direct debit mandates or by using payment initiation services (PIS) provided by third-party providers under the open banking framework.

Transaction authentication and authorisation

• Strong customer authentication (SCA): In compliance with regulations such as the revised PSD2 in Europe, A2A payments often require SCA to verify the payer’s identity and authorise the transaction. This typically involves two-factor authentication such as a combination of password, fingerprint, or one-time passcode.

• Consent management: For pull payments, the payer’s explicit consent must be obtained, either through a direct debit mandate or through a real-time consent mechanism facilitated by PIS providers.

Transaction clearing and settlement

• Direct bank-to-bank transfers: In some cases, A2A payments are processed directly between the payer’s and recipient’s banks, often using existing payment rails such as ACH or Faster Payments. This can lead to near-instantaneous settlement.

• Clearing houses: In other scenarios, clearing houses such as the Automated Clearing House (ACH) in the US or the Single Euro Payments Area (SEPA) in Europe facilitate the processing and settlement of A2A payments. This might involve a batch processing model with settlement occurring within a few hours or days.

• Open banking APIs: With open banking, third-party providers (TPPs) can access bank account data and initiate payments through APIs, allowing for the development of innovative A2A payment solutions with a faster clearing and settlement process.

What are A2A payments used for?

A2A payments have many uses, in a variety of industries and sectors. Here’s how they’re commonly used.

E-commerce and retail

• Online payments: Customers can use A2A payments to make purchases directly from their bank accounts, bypassing the need for credit or debit cards.

• Instant refunds: Businesses can quickly issue refunds directly to customers’ bank accounts, improving customer satisfaction and reducing the hassle of processing returns.

Employment

• Salary payments: Businesses can pay salaries directly to employees’ bank accounts, reducing the need for paper checks and simplifying payroll processes.

• Gig economy payments: Freelancers and gig workers can receive payments directly from clients or platforms.

Insurance

• Claims payouts: Insurance companies can disburse claim payments directly to policyholders’ bank accounts, improving the customer experience and reducing administrative overhead.

• Premium payments: Policyholders can pay their insurance premiums directly from their bank accounts, often with the option for recurring payments.

Government and public sector

• Tax payments: Individuals and businesses can pay their taxes directly from their bank accounts, often with the option for instalment payments.

• Benefit disbursements: Governments can distribute benefits such as social security or unemployment payments directly to citizens’ bank accounts.

Personal finance

• Crowdfunding: Platforms can use A2A payments to collect funds from backers and disburse funds to project creators.

• P2P payments: Friends and family can easily send money to each other, split bills, or repay debts without relying on cash or checks.

• Bill payments: Consumers can pay their utility bills, subscriptions, or loan instalments from their bank accounts, often with the option to set up recurring payments for added convenience.

• Travel and hospitality: Travellers can pay for flights, hotels, or other travel-related expenses directly from their bank accounts.

• Investment platforms: Investors can use A2A payments to fund their investment accounts or withdraw funds from their portfolios.

• Charitable donations: Donors can make direct contributions to charities from their bank accounts, often with reduced processing fees compared to card payments.

• Real estate transactions: Buyers can make down payments or final payments directly from their bank accounts.

Advantages and disadvantages of A2A payments

A2A payments come with the following benefits and challenges.

Advantages

• Lower costs: A2A payments eliminate the intermediaries involved in traditional payment methods, reducing transaction fees.

• Faster transactions: Because these transactions are facilitated by banks that use up-to-date technology, A2A payments can move funds much quicker, often instantly. This is ideal for urgent or time-sensitive transfers.

• Strong security: These payments benefit from the high security standards of banks, which use encrypted channels for safe transfers and reduce the risk of fraud.

• Customer experience: A2A transactions can be integrated smoothly into digital banking apps, making them easy to use for routine payments like shopping online or paying bills.

• Compliance: A2A payments automatically align with banking regulations, ensuring legal compliance through secure and transparent processes.

Disadvantages

• Integration difficulty: For some businesses, especially those with older systems, integrating A2A payment solutions can be difficult and require substantial technology updates.

• Standardisation issues: There’s no global standard for A2A payments, which can make dealing with international transfers complicated and less efficient.

• Bank dependence: The effectiveness of A2A payments is limited by whether all banks in the transaction chain support the necessary technology and protocols.

• User adoption: Moving customers away from familiar methods, such as cards, to A2A payments involves a learning curve and change in habits, which can slow down adoption.

• Fraud risks: Although generally secure, A2A payments are still susceptible to fraud – especially to sophisticated scams aimed at intercepting these transactions.

The influence of open banking on A2A payments

Open banking, the practice of data sharing between banks and third-party developers, has influenced the development and adoption of A2A payments in the following ways:

Increased competition and lower costs

Open banking has enabled third-party providers to create innovative payment solutions that directly access bank accounts for A2A transfers. The open banking framework creates an environment in which traditional banks and new financial service providers compete to offer the best services. This competition leads to better financial products and drives down costs associated with A2A payments, benefiting both consumers and businesses.

Better user experience

With open banking, A2A payments can offer a smoother and more intuitive user experience. Customers can manage their finances and make payments directly from their bank accounts without switching between different financial platforms, increasing the attractiveness of A2A payments for everyday financial activities.

Improved financial transparency

Open banking increases transparency in financial services. It gives customers greater visibility and control over their financial data, which they can share securely with third-party providers. This transparency helps users make informed decisions about using A2A payments.

Facilitation of real-time payments

Open banking frameworks often support real-time data processing, which enables A2A payments to be processed instantly, making funds immediately available. This capability is beneficial for urgent transactions, such as emergency bill payments or last-minute purchases.

Global impact and market adoption of A2A payments

A2A payments have increased in popularity, growing from $463 billion in global e-commerce transaction value in 2021 to $525 billion in 2022. The widespread adoption of A2A payments is expected to change the financial landscape by reducing reliance on traditional payment methods, improving financial inclusion, and promoting innovation in the payment ecosystem.

Here are some reasons why A2A payments are becoming more popular.

• Cost efficiency: A2A payments typically have lower processing fees compared to card payments, which makes them an attractive option for businesses and consumers.

• Speed and convenience: A2A payments have faster settlement times and a simpler user experience compared to traditional payment methods.

• Security: A2A payments use strong customer authentication and bank-grade security measures, reducing the risk of fraud and chargebacks.

• Open banking: The rise of open banking has facilitated the development of A2A payment solutions by TPPs.

• Government initiatives: Several governments worldwide are actively promoting digital payments and financial inclusion, which has created a favourable environment for the growth of A2A payments.

Despite this progress, A2A payments still face challenges such as limited consumer awareness, merchant acceptance, and interoperability issues across different regions and payment systems. Here’s a closer look at the global usage of A2A payments.

Regional adoption

• Europe: A2A payments have gained traction in Europe due to the implementation of PSD2, which mandates open banking and enables TPPs to initiate payments directly from customers’ bank accounts. Countries such as the UK, the Netherlands, and Germany use A2A payments for e-commerce, bill payments, and P2P transfers.

• Asia Pacific: The Asia-Pacific region is witnessing greater adoption of A2A payments, particularly in India, Singapore, and Malaysia. This growth is fuelled by government initiatives that promote digital payments and the rise of mobile. A2A payments are used in this region for e-commerce, bill payments, and remittances.

• Latin America: In Latin America, A2A payment usage is driven by the need for financial inclusion and the increasing penetration of smartphones. Countries such as Brazil and Mexico have launched successful instant payment schemes based on A2A technology, facilitating real-time payments and promoting financial inclusion.

• North America: While A2A payments are relatively new in North America compared to other regions, they are steadily gaining traction. The launch of the FedNow Service in July 2023, a real-time payment rail developed by the Federal Reserve, is expected to accelerate the adoption of A2A payments in the US.