The problem with payments

 Sarah Kocianski photo
Sarah Kocianski Head of Competitor Strategy
4min read

"Mastercard to push up fees for UK purchases from EU" was the headline we all wanted to see last month amid lockdowns, vaccine shortages and Brexit debacles.

Because the UK is no longer part of the EU or EEA, rules limiting the fees that card networks can charge European retailers (“interchange fees”) for accepting payments from UK customers no longer apply. Mastercard has taken advantage of that, and upped fees by an eye-watering 400%, from 0.3% of a transaction to 1.5%.

The card conundrum 💳

But these aren’t the only fees sellers have to fork out for when accepting card payments, and amid the pandemic forcing up card usage, the costs imposed on retailers have come in for greater scrutiny.

The problem for retailers is that card payments are a hugely popular payment method in many regions, and most people understand how to use them. There’s also very little competition in card networks, which is particularly relevant in Europe. This means retailers are forced to accept payments from the two or three of the biggest providers or risk sacrificing lots of customers. So fees end up pretty similar across the board.

Retailers have a choice:

  1. Take the hit and absorb the fees (really bad for profits)

  2. Pass the cost onto customers (likely to result in going out of business pretty quickly), or

  3. Look for alternative payment mechanisms

The cash quandary 💷

One alternative to cards is, of course, cash.

It has many downsides, one of which being it's not considered hygienic, which partly explains the increase in the decline in its usage over the past year. But it does still have a place in society, particularly amongst the most vulnerable and as a back up when technology fails.

I mention cash at this point, because while it's okay to get excited about innovative alternatives to card payments, we do need to find ways to preserve cash acceptance until we find a replacement that's as universally accessible.

Cut out the go-between ✂️

Card payments aren't going anywhere just yet, but it's time to question whether they should remain the go-to payment mechanism.

One alternative that’s been around for years but is recently gaining more traction is account-to-account (A2A) payments.

A2A payments remove the need for card schemes, taking a player out of the chain and offering the opportunity to create safer, simpler and cheaper payment mechanisms. They are widely used in some places — the Netherlands' iDEAL, which enables A2A payments for a huge range of payments both on- and offline, has been around since 2005 and is now used by 99% of Dutch people with digital banking.

But the problem with iDEAL is that it's owned by Dutch banks, which means only customers of those banks can use it. Plus, it doesn't handle refunds, resulting in merchants having to manually process them.

These issues are being addressed by the new guard of A2A innovators, which are taking advantage of rules implemented in some regions that allow APIs to facilitate payments and require all banks to enable them.

The APIs enable the creation of an infrastructure which can handle one-off payments, repeat payments, refunds and more. The rules mean that banks have no choice but to participate and let customers use A2A payments where they are offered by a retailer or service provider. Brands like Klarna and Trustly have seen rocketing use of their payment services which are powered by these APIs.

But there are still some bridges to cross:

  • Customers are wary of the unknown, so providers have work to do in building trust in A2A payments under new circumstances, as well as in their own brands.

  • Not everyone has a bank account or a smartphone to enable offline A2A payments.

  • Merchants can see the advantages of cutting out card schemes (mainly the reduction in fees) but they won't invest in installing new payment methods until they know at least some customers will or can use them.

  • Banks are unlikely to promote a payment system that brings them less revenue until there are other proven benefits.

  • Processes must be put in place to allow for easy dispute processes in the event of fraud, and a standardised approach to refunds and repeat payments.

But you get a sense of how threatened card networks feel by growing interest in A2A payments when you consider that Mastercard and American Express, two of the biggest global players, have launched their own A2A functionalities.

Will A2A payments be the card killer? 🥀

There are still a lot of kinks to be worked out, but the growing swell of interest in the payment mechanism suggests that cards (like cash) have had their time at the top.

The world is changing faster - and in more unexpected ways - than ever before. So something as crucial to the functioning of society as a universally accepted payment method needs to keep up. The technology is there to help us make that happen, but we need to make sure that whatever replaces cards is actually accessible by everyone.

If we’re driving ancient mechanisms into extinction, how can we make sure that their replacements perform the same function without excluding a single member of society?

 Sarah Kocianski
About the author

Sarah Kocianski

Sarah is Head of Competitor Strategy in Consulting & Research at 11:FS, unearthing fascinating insights on diverse subjects throughout the finance and tech industries.

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