Account-to-account (A2A) payments are direct fund transfers from one bank account to another, bypassing the need for intermediary payment tools such as cards, thus reducing the number of parties involved in processing transactions.
But what are the different types of A2A payments?
The two main A2A payment methods are:
- Bank-to-bank payments – the traditional A2A payments that have existed for a long time. These include push payments (utilised to send one-off payments from one account to another) and pull payments (when the recipient initiates the payment, i.e., retrieval of payments from one account to another).
- Open Banking-enabled A2A payments – these use application programming interfaces (APIs) to allow fast A2A payments, providing a secure and cost-effective alternative to card networks. Some examples of Open Banking-powered A2A payments are instant A2A payments and Pay by Bank variations.
Transaction clearing and settlement for A2A payments
A2A payment processing can happen in various ways, namely through direct bank-to-bank transfers, clearing houses, or Open Banking APIs. Below, we summarise what each of these involve.
When we think about direct bank-to-bank transfers, A2A payments are processed directly between the payer’s and recipient’s banks, oftentimes leveraging payment rails like ACH/Faster Payments, which can lead to near-instant settlement.
In the scenario where clearing houses are involved, such as the Automated Clearing House (ACH) in the US or the Single Euro Payments Area (SEPA) in Europe, these facilitate A2A payments processing and settlement and can involve a batch processing model, where the settlement might happen within a few hours or days.
With Open Banking APIs, third-party providers (TPPs) can access bank account data and initiate payments via APIs, enabling the development of A2A payment solutions that have faster clearing and settlement.
How is Open Banking influencing A2A payments?
At its core, Open Banking is the practice of data sharing between banks and TPPs, and in the context of A2A payments, it helps remove the difficulties associated with traditional A2A payments, making the process of entering account details automatic and, overall, streamlining the (recurring) payment process.
Open Banking uses APIs to facilitate bank transfers, enabling direct money movement from the payer’s account to a merchant’s account, for instance. This happens almost instantly through the following services: payment initiation service (PIS) and account information service (AIS). PIS enables TPPs to initiate payments directly from the consumer’s bank account, thus creating more efficient online transactions. For consumers, PIS creates a secure and convenient way of paying online without sharing card details, enabling payments directly from the bank account. With AIS, TTPs have visibility over financial and selected account information of a customer's bank account, such as when a customer is onboarding while making a payment or applying for a loan.
Essentially, Open Banking enables the usage of A2A payments at the point of purchase, offering speed and simplicity, while removing manual data entry and intermediaries that would otherwise add to the cost of transaction processing.
Why are A2A payments relevant?
Globally, the adoption of A2A payments is growing, and their prevalence is expected to transform the financial landscape by reducing reliance on traditional payment methods, contributing to financial inclusion, and being a gateway to payment ecosystem innovation. Among the reasons for their increasing popularity, we can name:
- cost efficiency,
- speed and convenience,
- Open Banking,
- security – Strong Customer Authentication (SCA) and advanced security measures that reduce fraud and chargeback risks,
- government initiatives – worldwide, governments have been pushing for digital payments and financial inclusion, effectively laying the ground for the growth of A2A payments.
Keep an eye on The Paypers to see how this innovative payment method develops – read our industry news, interviews, thought leadership, and reports to stay informed.
