Account-to-account payments pose fresh threat to credit card networks

Greetings readers, on a foggy day in London.

Much has been written about Big Tech taking on financial services, but what about fintech moving in the direction of Big Tech? Klarna’s UK launch of its price comparison search tool had me thinking about this sort of ambition.

David Sandstrom, Klarna’s chief marketing officer, said that the service, available via its app and website, was the company’s “big play” to help shoppers find the right price.

“This holiday season specifically, and next year more generally, is going to be centred around consumer value and being smarter with your spending,” he said. “It’s clear that the financial outlook for next year is grimmer than for many, many years . . . [but] it does not mean people are going to stop shopping for things.”

Sandstrom added that the service, which builds on Klarna’s $1bn acquisition of price comparison service PriceRunner, provides another revenue stream, with the potential to offer competitors to Amazon’s “sponsored products”.

Klarna’s move reflects the blurring of lines between formerly distinct players in the payments and ecommerce space. As the economic situation tightens, expect more players to build new revenue-generating verticals.

As ever, drop me a note at [email protected] if you’ve got thoughts and ideas for upcoming Future of Money newsletters. Happy reading.

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Are account-to-account payments the future?

Card networks, notably Visa and Mastercard, are parts of the modern finance infrastructure that we don’t really think about unless something goes wrong — for example, if Amazon gets into a spat with one of them over credit card fees.

Their dominance has in part relied on their widespread acceptance by banks. Financial institutions collect a cut of the fees that card networks impose, making them quite lucrative.

But in an interview with the FT, Brad Goodall, chief executive and co-founder of Banked, a fintech that offers an alternative to card schemes, said his company had just secured a more than $15mn extension to its Series A funding round led by Insight Partners and supported by Citi and National Australia Bank Ventures. The fresh capital reflects the challenge that account-to-account payments could pose to card networks.

“I think the schemes are scared [of account-to-account payments],” said Rodney Bain, co-founder and US president of payments fintech APEXX Global. “It fundamentally makes sense to be able to push a transaction between two authenticated accounts.”

Account-to-account payments, enabled by open banking — a framework for consumers to consent to share data with third parties — could become an alternative to card-based networks (although both Visa and MasterCard are developing their own account-to-account payments).

Bain of APEXX Global said that account-to-account payments have been successfully rolled-out in some markets, such as Brazil. There, domestic payment system PIX offered a much faster alternative than traditional payments systems, where the standard term for money to settle is 30 days after a transaction.

But progress has been slower in other markets, especially the US, where the average interchange fee banks collect for card transactions is as much 1.4 per cent. JPMorgan’s chief executive Jamie Dimon discovered the resistance to change in his push to build a “pay-by-bank” feature.

When I last spoke to Goodall in February 2022, the company had just raised $20mn in a funding round led by Bank of America and Edenred Capital Partners. He said that account-to-account transfers had only become more relevant since then.

“I believe that with things like inflation, there’s a real focus among merchants on identifying how to reduce the cost of sale,” Goodall said. “We think that Pay by Bank [account-to-account] transactions are cheaper, higher conversion and offers more of a loop between merchants and consumers.”

But for Bain, the general design of account-to-account payments currently lacks the familiar and simplified user experience of paying on card rails for day-to-day spending.

“The cards built these complex systems because they work and they’re needed,” he said, adding that he saw more value in open banking for high transaction value items. “I think [for smaller purchases] you’ll have to associate loyalty or some sort of benefit to get consumers to choose account-to-account payments.”

Goodall, who relocated to Silicon Valley from London six months ago, remains sanguine about the outlook for business.

“We’re looking to scale a number of resources here in the US,” he said. “There’s very much a build and hiring focus right now.”

Deal Tracker

The last few months have seen a paucity of US fintech deal activity, slowing markedly from the first half of the year — a reflection of rising inflation and a growing wariness around fintech as valuations of some of the biggest players have taken a hit.

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