Yesterday, The Wall Street Journal reported that large banks in the US are considering whether to expand the Zelle network into merchant payments at the point of sale. According to the article, some banks are keen, while others are against it. At the heart of the argument is a question whether to launch a service that could potentially cannibalize the revenues banks earn from card transactions.
At Celent, we are very familiar with this dilemma and have been following this topic for over a decade:
- We wrote the first report on this back in 2010, when the UK was considering launching a similar solution, eWise payo.
- Then again in 2013, when Vocalink in the UK was launching Zapp, later re-branded by Mastercard as Pay by Bank app.
- Then in 2018, when Open Banking was becoming a reality and everyone was getting excited about the potential for account-to-account (A2A) payments.
- Finally, in 2021, when we declared that 'now is the time for Open Banking Payments', and highlighted five main use cases.
The adoption of A2A payments vary widely by market, mainly because of regulatory requirements and historical conditions how those markets developed. For example, A2A payments are huge in the Netherlands, where iDEAL has a leading market share in e-commerce, because in the past the local debit cards were not suitable for e-commerce transactions. It’s also been gaining traction in the Nordics, where many of the local debit schemes had little or no interchange. In the UK, we’ve been talking about it for 10+ years, but cards here are very popular, and A2A payments are only now slowly starting to become a reality with merchants, mainly for e-commerce transactions. Some of the additional use cases include topping up an account, paying an invoice/ bill, charity donations, etc. A2A payments at the physical POS are still a relative rarity outside of Asia and selected European markets.
There is a reason why cards have been so successful - they have many attractive features to all ecosystem participants, from consumers to merchants to banks. Any new payment method hoping to displace cards needs to deliver as much, if not more. Yes, cards have fees, but A2A payments are not free either. Cards offer a payment guarantee to merchants and piece of mind to consumers – if anything goes wrong, there are established rules about returns, disputes, and fraud liabilities. Furthermore, the risk of fraud transfers from the merchant (being presented with fraudulent card details) to the consumer (being duped into sending money to a fraudster), a challenge that banks and consumers in the US are now increasingly familiar with. Then you also have to think about the user experience and changes needed to the acceptance infrastructure - is QR codes the answer? At Celent, we have a framework to evaluate new payment solutions - see below (you'll need to be registered/ logged-in).
It will be very interesting to see how this develops in the US. As the WSJ article points out, many efforts to bypass the card networks have been tried there already over the years, but without much success. If Zelle and its owner banks are serious about it, they will have to invest and address a number of challenges above. A real-time payment network is a great start, but it's a pre-requisite and not sufficient to make A2A payments a success it can be.