One of the biggest differences in the way US and European consumers pay for goods and services is the credit card: Americans rely on their credit cards as a way of life, and European consumers do not. In fact, Europeans seem to have an aversion to credit cards. As a result, over the last decade, A2A (account-to-account) payments, also known as Pay by Bank, have caught on as a popular method for consumers to pay merchants across the EU. The US, lagging behind Europe, is just starting to dabble in A2A, but it’s expected to catch on in the next five years.
European aversion to credit cards: An explainer
It’s important to note that credit works very differently in many European countries than it does in the US.
In Germany, for example, consumers start with a credit score that gets docked as they take on credit. Therefore, the need to establish credit becomes null. In the US, consumers need credit to build credit.
Additionally, credit card fees – which enable card companies to offer loyalty points – are capped in Europe. Without loyalty incentives, the consumer doesn’t see the value in accumulating points.
Lastly, as a culture, Europeans prefer to have better control over their spending. They look to avoid debt, and if they must finance, they prefer spreading out their payments with methods like Buy Now Pay Later (BNPL).
European A2A payments by the numbers
According to Forbes, Poland’s leading A2A processor runs “more than 140 million transactions per month;” the Netherlands’ more than 111 million; and Sweden’s “more than 73 million.”
Across the globe, the A2A trend has caught on, with A2A payments representing “US$525 billion in 2022 e-com transaction value alone… and projected to grow at 13% CAGR through 2026, resulting in a global e-com market size of nearly $850 billion,” according to FIS Global.
It’s clear how and why A2A became a hit in Europe as it stole market share from credit cards, but where and why would it have a place in the US where there is such a high dependence on credit cards? Three trends that have the power to shift the dynamics are emerging: tension between merchants and credit card companies regarding fees; Gen Z and its views on the economy; and digital payments trends.
Due to capped card fees, credit card companies do not offer favorable incentives to European card holders. They do in the US, but there’s a shift emerging.
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The early 2024 Visa Mastercard settlement favored merchants by lowering fees by 4bps. However, more importantly, the settlement put an end to anti steering regulations. The result is that US-based merchants can now add a surcharge fee depending on the type of card being used to transact. Consumers transacting with premium cards will be charged fees to steer them away from using them, and the fees will essentially cancel out the value of the points they stand to earn.
The Visa Mastercard settlement is only the beginning of this shift in power dynamics. As merchants incorporate surcharges, they will need to provide alternative payment methods like A2A. By doing so, they will see benefits that include slashed transaction fees and gaining on the fraud and chargebacks front. Since A2A can only be transacted via bank account via a secured and verified login, it makes it very hard for consumers to create a fraudulent dispute.
The second trend is in the way Gen Z is reacting to the economy and how they are transacting. When looking at the data, “about half of Gen Zers currently… can’t qualify for a credit card under traditional scoring methods because they lack sufficient income,” according to Payments Dive. There are many factors contributing to this, including graduating riddled in student loan debt, inflation and a job market that isn’t paying them enough to match inflation.
This is a generation that “is feeling financial stress in a more acute way than millennials did a decade ago,” according to Charlie Wise, head of global research at TransUnion. Much like the European consumer, GenZ is more financially cautious than millennials were at the same age and prefer to spend money they have rather than rely on credit. Gen Z also doesn’t place importance on brand loyalty – including loyalty to a card provider. Rather, they are “highly intuitive with technology, are values-oriented and prize diversity, and use peer-to-peer payment apps like Venmo or Cash App heavily,” according to Sonya Lutter, director of research and education at consulting firm Herbers & Company, to Payments Dive. This is also why we are seeing options like BNPL appeal more to the Gen Z consumer; it gives them optionality and more financial control.
While the Gen Z market demands more digital payment options, banks, merchants and card companies are adjusting to meet this demand. Visa has introduced Visa Installments, its own form of BNPL. Mastercard is pivoting to include BNPL and shifting its strategy, offering its cardholders more payment choices. Walmart recently announced that it built its own A2A internally. Revolve offers a plethora of payment options, and Amazon and Poshmark launched partnerships with Venmo to enable consumers to pay by bank or debit card. This shift towards wanting the purchase to be top of mind – not the instrument being used to transact – is in an effort to be seamless and full of optionality.
A shift happening in payments across the US is underway, and the groundwork for A2A to catch on has been laid. According to McKinsey, “analysis suggests that A2A could handle about $200 billion in North American consumer-to-business transactions by 2026,” with “potentially lower costs and improved customer journeys” as a key driver.
We are already seeing pay by bank providers in the checkout flows of prominent merchants and expect to see increased traction from the top providers by the end of this year. The technology behind the product will be a key differentiator for who will become the market leader.
For a scalable A2A solution in the US, a strong decision engine is necessary to be able to guarantee funds from consumer to merchant.
Eric Shoykhet is CEO of Link Money, a US-based open banking payment platform.
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