I was catching up with a friend from Brazil recently who mentioned that Pix, the instant payments platform developed by the Central Bank of Brazil, has become so ubiquitous there that it is now a verb (Pix me?). This got me thinking if something similar would ever happen in the US.

With the launch of FedNow, the new instant-payment service backed by the Federal Reserve, 2023 is shaping to be a pivotal year for account to account payments that could transform how companies and consumers move money.

Below I will walk you through the history and current state of Account to Account payments (A2A) in the U.S., the growing adoption of digital wallets and how they are taking advantage of A2A, and how A2A and new instant-payment services such as FedNow could impact not only how consumers and businesses pay and get paid, but also how the large payment networks operate.

What are account to account payments?

Account to account payments (A2A) enable money to be transferred directly between bank accounts instead of using a credit or debit card, bypassing the traditional payment networks like Visa and Mastercard.

There are two types:

Push: A consumer initiates a payment. Normally used for transferring one-off sums.

Pull: Pull payments are initiated by the business, this is common with subscriptions.

A brief history

Checks were the original form of account transfers, Automated Clearing House (ACH) was the next evolution, essentially digital checks. It powers direct deposits, bill pay, auto-pay, and various peer-to-peer payments. Both remain the most popular A2A payment rails. While low cost, they can take days to settle, creating risk and uncertainty for all parties in a transaction.

Real time payments

Real-time (also called instant) payments represent the next evolution of A2A payment rails. Real-time payments are payments made between bank accounts that are initiated, cleared and settled within seconds.

Real-time payment rails include, The Clearing House’s Real-Time Payments (RTP) network, Zelle, and most recently FedNow.

FedNow overview

FedNow is the Federal Reserve’s new instant payments service. It is the first new Fed payments rail in 50 years! FedNow will provide the infrastructure for instant payments, linking banks and credit unions. It will not be offered directly to individuals and businesses, but it will allow the customers of financial institutions to send and receive payments within seconds 24/7.

I am particularly excited about the potential for FedNow to simplify cross border payments in the future if legal, policy, and operational challenges can be solved, but this is a topic for another time!

How real time payments such as FedNow compare to Account to Account payments such as ACH:

Processing (Batch vs. Transaction)

• ACH payments rely on batch processing, where financial institutions compile transactions in bulk before sending them through clearing houses once daily. This is done to manage massive volume moving through ACH while keeping costs low.

• Real time payments settle transactions on a per transaction basis as they are received.

Settlement times

• ACH relies on deferred settlement at designated times or on a specific schedule.

• Real time payment clear and settle instantly, meaning customers have access to their funds immediately.

Pull vs push

• ACH transactions can be reversed or returned.

• Real-time payment rails only support push payments. Since they enable instant funds transfer, all payments are final when completed and cannot be reversed. This eliminates payment failures due to insufficient funds, which is common in ACH.

A2A Adoption by merchants and digital wallets

Merchants:

While Zelle has succeeded in peer to peer payments and The Clearing House’s Real-Time Payments (RTP) has gained share of business to business payments, neither has emerged as big players in U.S. person to business payments.

For merchants, account to account transactions are cheaper than credit card rails, especially for high value items, while offering instant settlement of funds. For consumers, A2A payments are fast and easy, and potentially cheaper. It seems like a no brainer for both sides, so what is the problem?

Merchants today are still reluctant to adopt A2A payments more broadly due to perceptions around speed, security, and consumer adoption. Card networks provide real-time settlement assurance, robust fraud protections, and ubiquitous consumer usage of cards for payments. As a result merchants are willing to pay their fee.

In theory, if a merchant were offered fast settlement speed, certainty that settlement will happen, and a payment method consumers are interested in using, then bank payments could become as ubiquitous as cards are today. Solving these barriers is key to unlocking the potential of A2A for consumer-to-business transactions. Nevertheless, adoption is growing, according to Worldpay, they predict A2A will increase to at least 11% of U.S. e-commerce transaction value by 2026.

Digital wallets:

The growth of digital wallets is changing the way consumers pay. Penetration has increased from 18% to over 30% in five years across all commerce according to Worldpay. This growth is shifting the consumer relationship away from physical cards towards digital wallets, such as Apple Pay, Google Pay and Venmo. This is critical because it shifts pricing power from the card network and banks to the digital wallet provider.

Once digital wallets own the customer relationships, they are heavily incentivized to move away from a debit network to an account-to-account network, and capture a larger percentage of margin. Improved account-to-account payment capabilities, combined with open banking and ongoing regulatory attention on debit transactions, are providing wallets and by extension consumers with more payment options beyond traditional debit cards.

Visa and Mastercard

Right now, well over two-thirds of digital wallets are linked to a debit card. Nevertheless, the networks themselves are not unaware of this threat and have been diversifying their revenue pools. Both Visa and Mastercard have shifted towards a strategy that is no longer focused on card rails but on a variety of rails. For Mastercard, this is its ‘multi-rail’ strategy and for Visa a ‘network of networks’ approach.

An example of this are their account to account products. Visa Direct allows real-time push payments to bank accounts. Mastercard Send, which is similar to Visa Direct, enables real-time account-based payment services for partners.

Prediction about the future of A2A

2023 will be a critical year for account to account payments and the ecosystem at large. It seems likely that, over time, payments that are time-sensitive will shift from the traditional payment rails of check, ACH, and wire to the instant payment rails of FedNow and RTP.

Furthermore, with a variety of rails available, people and companies can choose what best meets their needs. Both e-commerce adoption and the growth of digital wallets seem to be one of the key forces behind the growth of account to account payments.

It will be fascinating to see what impact, if any, FedNow has. How Visa and Mastercard continue to respond, and the impact instant payments could have on existing debit volume.