Last Updated: March 2022

Hi it’s Martijn from HPE Growth. I am investing Series B and C European start-ups in verticals including FinTech, Climate Tech, SaaS, and Digital Health. My articles uncover the emerging fintech trends in the European tech ecosystem. Today I am sharing a piece on the A2A payments space in Europe🇪🇺

Starting with the basics

The payments ecosystem is a very complicated phenomena. Before we deep dive into account to account (A2A) payments, we will touch upon the main payment method families. Payment methods can be integrated directly via merchants or payment service providers (PSP) such as Stripe, Adyen, and Mollie. The usage of a specific payment method is dependent on the payment infrastructure in each individual country. For example, bank redirects such as iDEAL is a popular A2A payments scheme in the form of Online Bank ePayments (OBEPs) in the Netherlands for online payments. This is indicated by their 69% market share in 2020 and is expected to increase through the years (source). Whereas, in Latin America (LATAM) vouchers are a common payment method for online purchases in physical store as cash remains king in the region. We will briefly cover vouchers below alongside the other main payment method families (non-exhaustive).

Payment method families:

  1. Cards (e.g., Visa, Mastercard, American Express)

  2. Bank Debits (e.g., SEPA Direct Debit)

    Bank debits prevail when an individual uses their own funds for a transaction. Hereby, funds are directly debited from their bank account. Bank debits are considered as a pull payment.

  3. Bank redirects (e.g., iDEAL, Giropay, Bancontact)

    Bank redirects enables an individual to complete transactions using their own bank through a secure and straightforward checkout flow. iDEAL and Giropay is a traditional A2A payment scheme in the form of OBEPs. Bank redirects are categorized as a push payment.

  4. (Manual) Bank transfers (e.g., SEPA Bank Transfer)

    The payment method is also referred to as a wire transfer. The payment allows individuals to transfer funds to another bank account. The method is considered a push payment.

  5. Buy now, pay later (e.g., Klarna, Billie)

    Buy now, pay later (BNPL) allows consumers and businesses to make a purchase and receive the good immediately whilst paying the purchase amount in instalments. Find my previous article on BNPL here.

  6. Vouchers (e.g., OXXO, Boleto)

    Vouchers are used for online purchases in retail stores. The consumer chooses a voucher as a payment method at the checkout online and receives a digital voucher in their email. The consumer uses the voucher code in the physical store and usually completes the payment with cash. The payment method is often used in LATAM countries where the card authorization rates are low.

  7. Digital / Mobile Wallets (e.g., Apple Pay, Google Pay)

    The payment method is in the form of an app whereby virtual credit and debit cards are digitally stored.

  8. Open banking payments (e.g., Yapily)

    Open banking payments are a form of bank transfers powered by open banking which are initiated by third parties on behalf of the customer. Open banking payments include A2A payments and leverage the open banking infrastructure of the third party. Therefore, it is critical for A2A payment players to have a large network of connected banks to gain traction.

What are account to account payments?

A2A payments is a form of digital payments. It is the mechanism enabling the movement of funds from one account (consumer / payer) to another (merchant / recipient) without the need of an intermediary or financial instrument like a card. A2A payments provide various benefits for individuals and merchants including instant payments and low costs related to the processing of transactions, respectively. The lower costs stem from the fact that there are no third parties involved in the transaction hence the interchange fees are significantly reduced. Interchange fees are common for certain payment methods such as cards.

The ‘mechanism’ referred to above refers to the way payments are being settled (i.e. executed). The settlement process differs per payment method. A2A payments are settled through the payment rails of national clearing systems (e.g. Interpay in the Netherlands and Fasterpayments in the UK). Whereas, other payment methods such as cards (e.g., Visa) settle over traditional card payment rails networks. Each payment rail network results into varying costs being incurred by merchants.

Payment flow with an intermediary (source)

Payment flow with an intermediary (source)

Payment flow without an intermediary (source)

Payment flow without an intermediary (source)

The infrastructure powering the movement of payments

Payment rails is a critical component in the payments infrastructure. The rails are the complex networks enabling the movement of funds from one account to another. There are various types of payment rails including card networks and national clearing systems (e.g. ACH and RTP in the US). Concerning the national clearing systems, each country is usually responsible for the development of their own payment rails. In most countries the entity in charge are national central banks. SPEI is the payment rail used in Mexico and it is developed by their national central bank. In recent years, central banks have been investing heavily in the development of payment networks to remain competitive in a digital world, enable real time payments and reduce fraudulent transactions. For instance, P27 is an example of an investment by the Nordics and their respective leading bank (Nordea, Danske bank and the like). They are developing their own cross border A2A payments infrastructure enabling real time domestic and cross border payments.

Why are various A2A payments players leveraging existing national clearing systems? The payment rails are already established, reliable, secure, and fast. Besides that, it removes the need to build their own payment rail. However, this does not stop companies from developing their own infrastructure with the goal to own the entire value chain.

The types of A2A payments

There are two types of payments and differ based on the input required from the individual.