As both Visa and Mastercard announce higher charges for e-commerce transactions and almost two-thirds of Europeans now bank online, it seems the popularity of alternative payment methods, or “alt-pays”, continues to grow as consumers seek faster, safer payments and merchants look to reduce the cost of payments.
This rise in demand for alternative payment solutions – whether as instant account-to-account payments or platform specific closed-loop solutions – comes when card payments are under increasing scrutiny from regulators.
The advent of Open Banking in the UK and EU has enabled payment firms to provide new opportunities to compete for customer attention, supported by payment modernisation initiatives such as the proposed New Payments Architecture in the UK or the new FedNow instant payment service due to launch in 2023.
Closed-loop cuts fees … but will it work?
New research from regulatory intelligence specialists VIXIO suggests half of major merchants in American and Britain plan to launch their own “closed-loop” payment schemes in 2022.
“Closed-loop” schemes work by keeping the entire payments ecosystem – issuing an own-branded card, acquiring and processing transactions, loyalty and customer management – within the merchant’s control.
This helps to reduce costs and, proponents argue, provide greater customer benefit. In particular, merchants are looking at launching affinity payments cards which can be used at participating partner merchants.
Examples of this already exist, with France’s Lyf Pay digital wallet permitting payments at Total (petrol stations) Auchan (groceries) and BNP Paribas (banking).
“The growing prevalence of ‘closed-loop’ says more about merchant dissatisfaction with fees than anything else.”
In creating such ecosystems, merchants remove interchange fees and – so the argument runs – can encourage cross-selling between partners through shared loyalty schemes and other promotions.
The challenge of such “closed-loop” schemes is wider acceptance outside the partnerships created by merchants.
That said, the growing prevalence of such schemes, especially in North America, perhaps speaks more to merchant dissatisfaction with high fees and limited service options from acquirers than it does to the benefits of issuing payment cards to regular customers.
A2A all the way
VIXIO’s research also says just under half of payment firms in the US and UK want to launch account to account (A2A) payments at the point of sale (POS).
Their study claims 45% of payments FinTechs and PSPs plan to launch a closed-loop payment product in 2022, with 53% saying they will develop A2A capability by the end of 2023.
A2A payments promise instant settlement, a feature that makes them especially popular with “gig” economy workers.
“Less than one in five banks currently offer an A2A product – half say their systems are too limited.”
Alternative Payments – Curb your enthusiasm
If consumers are overwhelmingly positive about A2A payments, with some 87% of respondents to a recent Icon Solutions survey saying they would prefer A2A payments over direct debits and debit cards, then there are problems.
Icon’s research also shows that less than one in five banks currently offer A2A solutions, with just 27% more planning to offer them in the next 18 months.
In part, this can be explained by the comparatively low fee income compared to interchange, and also by the emergence of A2A specialist providers such as Tink, Trustly and Zimpler.
However, Icon’s work reveals a more familiar and disturbing pattern: 54% of bank and PSP respondents say their existing technology and systems are just too limited.
This reflects existing infrastructure that simply does not have the flexibility to bring differentiated services to market quickly and safely.
As Louise Shorthouse, Senior Payments Consultant at Icon Solutions puts it: “Account-to-account services require a transformation of the underlying technology, as well as embracing agility.
These limitations are compounded by an absence of direction. A pragmatic path to upgrading existing technology that is aligned with business objectives is critical to accelerating adoption and remaining competitive. But less than half of respondents reported having a clear strategy in place.”
There’s no denying today’s retail banks face a huge raft of competing challenges, none of which are easy to solve. As they face these problems, there’s an inevitable trade-off between the size of the opportunity and an urgent need to change.
Most banks are likely to ask themselves the question of whether to build, buy or partner when looking to introduce closed-loop systems and A2A payments – that said, reported growth rates in the multiple hundreds of percent from players like Trustly and Zimpler suggest they can’t afford to wait too much longer…
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