Cut fees, Reduce Costs, Change Mindsets: Why Merchants Need Instant A2A Payments
The payments industry has long been dominated by payment giants who profit from complexity. Today, businesses, especially smaller ones, are caught in a system where high interchange fees and network fees eat into their profits. However, with the rise of open banking, a new generation of payments is emerging that can finally challenge this status quo.
Step forward instant account-to-account (A2A) payments. Read on to learn how these payments are set to break the hold of traditional card networks and large digital wallet providers, offering merchants a faster, more secure, and far more cost-effective way to handle transactions.
However, first a brief history lesson…
Payment giants and the costly burden of interchange and network fees
For decades, large card providers such as Visa and Mastercard have reigned supreme in the payments world. Yet, change is afoot. In recent times, the US Department of Justice has sued Visa, accusing one of the world’s largest payment networks of antitrust violations that affect “the price of nearly everything”. What’s the story? Why the need for an intervention?
Along with others, a system has been crafted where merchants are forced to pay fees on every card transaction – the biggest of these being interchange fees. Alongside acquirer fees, scheme fees, gateway fees, authentication fees, etc., these act as hidden costs that businesses must accept to access the card networks.
Indeed, although these fees may be small, they add up slowly and methodically, creating a significant burden, particularly for small and mid-sized businesses. Worse, these fees are largely non-negotiable.
In the US, merchants have little choice but to pay them while watching their profits shrink, while EU merchants are somewhat protected thanks to the interchange cap. Indeed, the EU antitrust legislation sets interchange fees for consumer debit cards to 0.2 % and consumer credit cards to 0.3 % of a transaction’s value. Yet, in Europe, it is the sheer complexity of fees that EU merchants must understand that undermines them.
Added to this, the dominance of global giants and businesses feel trapped in a system they can’t escape.
Merchant concerns: surcharges and alternatives
Then, there was the false dawn of digital wallets. Far from being payments giant killers, they have simply adopted the same methodology, with interchange fees, in some cases of 2%, per transaction.
This presents another notable hit on merchant bottom lines.
Digital wallet services, such as PayPal (alongside) card payments, have become the go-to options for many consumers, particularly in countries such as Germany (28% of all transactions, according to recent reports). Still, they, too, offer significant downsides for businesses.
With its combination of interchange fees and network fees, PayPal’s pricing model makes it an expensive choice for merchants. Indeed, in response, some businesses have even started adding surcharges to transactions involving PayPal.
In addition, PayPal has become notorious in recent years for freezing funds over payment disputes, an action that ultimately impacts businesses’ cash flow and working capital.
But change is happening.
Changing the payment narrative directive by directive
Regulators, businesses and consumers are no longer passively accepting the high costs associated with cards and digital wallets as the inevitable price for convenience.
Regulatory bodies in the EU, UK and US are raising alarms over these escalating fees and have implemented regulations such as the Payment Services Directive in the EU (currently in its third update, PSD3) – pushing the industry to seek alternative solutions.
Regulators, merchants, and consumers alike have reached a tipping point; a call for a new type of payment system echoes loudly.
Currently, open banking and instant Account-to-Account (A2A) payments stand out as the most promising innovations in payment technology. They offer merchants the infrastructure necessary to facilitate secure, real-time payments that completely bypass traditional card networks and digital wallets like PayPal, thereby reducing costs for both businesses and consumers.
Instant A2A Payments and open banking for merchants
This next-generation payments solution leverages the full power of the secure infrastructure of open banking. These payments allow funds to move directly from the customer’s bank account to the merchant’s via secure APIs and proprietary networks, such as Brite IPN – bypassing traditional card networks and, crucially, avoiding overly costly fees.
Unlike card payments and specific digital wallets like PayPal, which involve intermediaries who each take significant cuts, instant A2A payments occur directly or via API networks, slashing transaction costs for businesses.
This isn’t just an incremental improvement; it’s a fundamental shift in how payments can be processed. No more paying a premium for the privilege of using card networks. Instead, merchants can rely on open banking infrastructure for a faster, more secure, and much cheaper transaction experience.
Reducing costs with instant A2A Payments
For businesses, directing customers towards instant A2A payments powered by open banking and APIs significantly lowers transaction fees. By encouraging customers to use these real-time transfers instead of traditional card-based payments, businesses can offer a quicker checkout experience while saving on fees and improving cash flow.
Moreover, by providing incentives such as discounts for using A2A payments, businesses can gradually steer customers away from expensive payment methods like credit cards. Indeed, often these types of payment methods are categorised as Pay by Bank at checkout (depending on the local market).
A game-changing payment processing combination
This combination of open banking and instant A2A payments represents a big shift in payment processing. Open banking provides a secure, regulated infrastructure that allows banks, payment providers, and consumers to communicate directly and securely via APIs. This enables the efficiency and speed of instant A2A payments, making them the most powerful application of open banking technology to date.
Instant A2A payments significantly reduce fees, streamline payment processes, and offer improved security. Payments are authenticated directly between banks through secure APIs, eliminating the risks associated with credit card fraud or chargebacks and further protecting businesses and consumers.
Advantages of instant A2A Payments for merchants:
Merchants who adopt instant A2A payments benefit in the following ways:
Reduced fees: By bypassing traditional card (or pseudo-networks like PayPal) networks, A2A payments significantly reduce interchange and network fees, allowing businesses to retain more revenue.
Instant (or virtually instant) payments: Funds are transferred virtually instantly between accounts, allowing merchants to benefit from immediate payment reconciliation and improving cash flow and operational efficiency.
Enhanced security: Built on the robust foundations of open banking regulation, with its Strong Customer Authentication (SCA) methods and improve Know Your Customer (KYC) checks, instant A2A payments offer increased protection against fraud and chargebacks.
Customer convenience: Customers benefit from a faster, more streamlined checkout experience, increasing satisfaction and loyalty. According to Brite and YouGov’s Instant Economy Report 2024, speed and ease of use were two top reasons for selecting and trying a new payment method.
By promoting instant A2A payments as a primary payment method over cards and digital wallets, businesses can reduce their overall fees and offer customers a fast, reliable, and secure payment experience.
Leveraging open banking and instant A2A Payments
However, to successfully implement these new payment solutions with consumers, businesses should also focus on:
Educating customers: Communicate the benefits of instant A2A payments, such as lower costs, visibility of available funds, security, and faster processing times.
Incentivise A2A payments: Position A2A payments as the main Pay by Bank option ahead of all other payment methods at checkout.
Use next-generation open banking solutions: Work with providers like Brite Payments, an expert in instant A2A payments, which offers enhanced features such as instant refunds and account information services (AIS) – e.g., account creation and payment all in at once.
By embracing these payment innovations, businesses can create a more cost-effective payment structure while meeting the growing demand for faster and more secure transactions.
Embracing instant A2A payments and open banking for lower costs and improving margins
As the payments landscape continues to evolve, instant A2A payments are a prime payments solution for merchasnts looking to reduce costs and improve efficiency.
These payments provide a real-time, secure alternative to traditional card payments and digital wallet giants, eliminating unnecessary fees and offering businesses and consumers a better overall experience.
By promoting instant A2A payments and incorporating open banking into payment strategies, businesses can reduce interchange fees and network fees to create a faster, more secure, and more efficient payment process that benefits everyone.
Get in touch with Brite’s payments experts to find out if you can add our Instant Payments to your payment mix.
