Open banking is approaching a major regulatory hurdle in the United States. The Consumer Financial Protection Bureau (CFPB) has proposed rules that would allow third parties to access financial data held at banks, with customer permission. The CFPB proposal seeks to address data-privacy advocates’ concerns about third-party access and potential misuse of the data.
As regulators decide whether, how, and when to allow open banking, it is unclear how American consumers would react to a main feature of open banking in Europe: account-to-account (A2A) payments. These payments may be made from the buyer’s bank to the seller’s bank, or if the customer and merchant have accounts with the same institution, they occur within that bank.
In the United States, A2A payments have been slow to catch on. One reason is that, in the absence of a regulatory framework, banks have been at a competitive disadvantage in staking out a strong presence in the payments marketplace. Also, Americans love their credit cards and the rewards that come with them, so dislodging the popularity of cards is perhaps the biggest challenge to US adoption of A2A.
Although card companies have a dominant US market position, A2A could offer banks a more competitive and standardized way of making payments while giving consumers and merchants more options. For banks and other institutions, the data provided by open banking could help generate a wide range of financial services, including enhanced insights and analytics. Consumers could benefit from potentially lower costs and improved customer journeys.1 With these benefits in mind, our analysis of payments in North America estimates that A2A could handle about $200 billion in consumer-to-business transactions by 2026 and potentially much more in other types of payments. The impact may be limited for daily transactions with a retailer or service provider but larger for big-ticket and recurring payments such as utility bills, insurance payments, and more.
In this article, we examine the current banking landscape in North America, focusing on features of open banking that have been emerging even prior to the enabling regulation. We describe the potential role of A2A payments in this landscape, including considerations for financial institutions and merchants that are preparing for open banking. The article concludes by suggesting some general strategies that interested banks might want to explore.
From data aggregation to open banking
To many consumers, the idea of open banking might seem redundant. After all, some may already share financial data with platforms such as Mint, Quicken, and YNAB. Are payments not handled by Cash App and Venmo?
Some of these services do, in fact, closely resemble open banking and A2A payments. However, they are mostly the work of aggregators. Their significance for A2A involves the expectations they have created for efficiency and customer experience.
Aggregators have led the way
Aggregators collect data from consumers’ bank accounts when those consumers share their log-on credentials. Early data-gathering methods used by aggregators included screen-scraping bank websites, which raised security concerns for banks and privacy concerns for consumers. To address these issues, larger banks developed APIs that allow for a more secure and seamless data-sharing experience. This shift in the direction of API-based open banking improved the overall experience for consumers while enabling a new wave of US fintech innovation.
Aggregators contributed significantly to the demand for enabling and using this predecessor of open banking. Yodlee and other early providers of personal financial management (PFM) generated valuable insights into open banking’s potential. Over time, cloud-native aggregators including Finicity, MX, and Plaid—which European regulations refer to as account information service providers (AISPs)—have helped broaden the adoption of data sharing. Some of these services closely resemble open banking and A2A payments, but most are actually aggregators.
Cautious moves toward true open banking
Aggregator-led models moved larger banks closer to AISP-style open banking and already address most of the CFPB’s proposed regulations. But a regulatory green light would be a big change for banks, given the size of the market. Based on our research, payments revenues are projected to reach $800 billion in North America and $3.3 trillion globally by 2027.
However, the mood is cautious among smaller financial institutions, including credit unions and community banks, which represent 87 percent of US financial institutions and roughly 20 percent of assets held. Such institutions have called on the CFPB to consider a more gradual approach to implementation. While managing the expense of enabling APIs may be a motivator for some financial institutions, a phased approach could decelerate adoption.
The prospects for A2A payments
Europe and the UK provide examples for those seeking to understand the market for A2A in North America. In these markets, payment-initiation-service-provider (PISP) open banking enables third parties to move money from a consumer’s account to a merchant’s account, usually via a real-time rail. These A2A payments are typically for bill paying or e-commerce but could migrate to the point of sale (POS) over time.
This experience highlights some of the benefits of A2A and the challenges that institutions will face in providing alternatives to debit and credit cards.
The upside of A2A
Merchants welcome these payments because the transactions are low-cost, irrevocable, and more secure than other payment methods. Use of A2A can significantly reduce fraud and charge-backs, as well as eliminate interchange fees. These benefits accrue because every transaction is authenticated by a consumer’s online banking credentials and uses real-time rails. Merchants can elect to pass the savings on to consumers or improve margins by retaining them.
Consumer-to-business payments remain a key target for A2A. We estimate that US A2A payments—consumer purchases made remotely at the POS and excluding any type of bill payments such as utilities and mortgages—could surpass $200 billion in volume by 2027, representing a compounded annual growth rate of 19 percent and a roughly 5 percent share of US digital commerce spend (exhibit). Automated clearing house (ACH)–based A2A has traction in certain government and utilities use cases, where cards are often surcharged or not accepted.
The card networks have made investments to participate in A2A. Acquisitions such as Finicity by Mastercard and Tink by Visa aim to accelerate the card networks’ AISP capabilities and to embed the networks more deeply in the open-banking value chain.
Significant challenges remain for common transactions
Some of these benefits come at the expense of consumers. A2A payments involve the checkout friction of entering bank credentials and challenges in dispute processes. Consumers lose card networks’ protection against fraud—a highly valued feature provided by card providers. They also miss out on credit cards’ financing of purchases with a 30-day float. Debit card users may see a balance of benefits and drawbacks from A2A, but most credit card users will likely see only drawbacks.
As a result, movement to A2A has been slow. Some card volume has shifted to A2A through staged wallet transactions, where digital wallets operate in multiple stages, including a funding stage and a payment stage, to complete a transaction. But adoption of such wallets has slowed, and most of their transactions flow over cards in the background.
Consumers’ transition from cards is a significant challenge for A2A providers. More than $2.5 trillion of digital commerce spend was via cards in 2022, compared with just $160 billion for alternative payments (A2A and nontraditional card payments). Forecasts based on emerging trends show the gap narrowing slightly by 2027 but anticipate 90 percent of such payments still being made with cards.
Why? As previously noted, the A2A proposition lacks charge-back protections; provides no credit, float, or rewards; and can add friction by requiring consumers to enter their banking credentials for each transaction. Thus, they are more merchant friendly than consumer friendly.
Even in the EU, where regulators removed barriers for A2A payments, the PISP system is problematic. To date, there is no universal standard across the continent, and adoption remains low. PISPs’ differentiating features remain payment security and low cost of acceptance. While the potential of US A2A may be significant in noncard verticals, the business case outside those verticals is unproven.
A path forward for A2A
Our McKinsey US Payments Map provides insight into the trajectory of PISP open banking. The first takeaway is that A2A payments remain nascent in US commerce. The most familiar of these is Zelle, which has captured the person-to-person use case (a form of A2A) with an instant service directly accessing the consumer’s bank account. Zelle is initiated from a consumer’s bank, not a fintech service.
Similar services are available from fintechs, but they fund a stored value account rather than a bank account, so Zelle is outgrowing the market. Industry experts tell us that Zelle also is increasingly used for certain commerce use cases, particularly micro-merchant payments—for example, paying dog walkers, purchasing at farmers markets, and ordering from food trucks.
The card networks are not being left out. Many have captured business-to-consumer (B2C) disbursements with Mastercard Send and Visa Direct, which leverage debit rails. These are particularly prominent for gig economy payouts and marketplace payouts. Zelle and TCH’s real-time payments (RTP) network are also pursuing this use case.2
Where might A2A find a welcoming audience? The business-to-business (B2B) market is served by imperfect legacy payment methods. Among them are commercial cards, where the payer gets the financial benefit but the payee bears the cost; ACH, which has low costs but limited information content and slower settlement; and paper checks, which are widely accepted but slower than electronic payment methods and more fraud prone.
Value propositions for A2A payments
Those seeking to create a value proposition for A2A payments could begin with the method’s reduced cost of acceptance for merchants. Merchants could pass on the savings to consumers through rewards and incentives. Traditional merchant discount rates (MDRs) for card-based transactions are typically in the range of 2.0 percent to 3.5 percent, whereas the cost of an A2A transaction may be a fixed fee of 40 cents to 50 cents per API call. Larger-ticket transactions could therefore offer greater benefits from A2A. That said, it will remain challenging to match the cost-effectiveness of regulated debit transactions, 70 percent of which are capped at around 25 cents per transaction.
A2A payments can deliver operational benefits that may offset their costs. Card-based transactions require authorization, which can cut conversions, and A2A could avoid these false positives. This authentication process can also contribute to reducing fraud.
Merchants who want the benefits must be prepared to make trade-offs:
- Improving the consumer value proposition for A2A. How will the merchant offset the loss of credit card rewards, credit, and float? For debit users, what is the advantage of A2A? In both cases, can merchants differentiate legitimate disputes from criminal or friendly fraud?
- Reducing transaction costs. How much will A2A truly reduce transaction costs? A2A may be more expensive than regulated debit (70 percent of volume) but less costly than exempt debit (30 percent of volume). On credit, it may have little or no consumer uptake. What impact will the extra checkout friction have on conversion, basket size, and loyalty? And how much might need to be invested in creating new dispute processes?
Ultimately, merchants will have to decide what offers will entice customers into A2A and weigh the costs of such offers against the savings they might see with adoption.
Challenges and opportunities for incumbents
AISP open banking enables fintechs and banks to offer new services to consumers. Along with this comes a set of challenges and opportunities for institutions to weigh as they redefine their strategy for an open-banking context.
For incumbent banks, one challenge is that open banking allows some fintechs to become a primary point of contact for financial products, so it could reduce barriers that otherwise might discourage customers from unbundling their banking relationships. In addition, it can make pricing more transparent, which may erode margins if consumers use readily available information to earn higher interest rates on savings and pay lower rates on loans. This challenge is particularly acute for large universal banks offering a full suite of financial services, as it becomes easier for customers to take advantage of monoline financial solutions without losing the convenience of one-stop financial management at their primary banks.
Banks have opportunities in open banking as well. As long as the checking account defines the primary hub of a retail relationship, banks have a significant base on which to build broader and deeper services. They could aggregate data into a dashboard that includes customers’ other financial providers, such as credit card data from card issuers and investment data from asset managers. The resulting comprehensive view of the customer’s financial life could also inform personalized credit underwriting.
The API infrastructure also allows banks to collaborate with fintechs for specialized services that would otherwise be expensive to replicate. Banks could investigate becoming a value distribution channel for such niche financial products and earn revenue shares in return. This could enable them to serve their customers better without the big investment costs of developing and delivering services in-house. In other words, a bank can become a “virtual” universal bank while manufacturing only the products at which they are particularly skilled.
Open banking and the A2A payments it enables could benefit not only fintechs but also merchants, banks, and consumers. Possible advantages of preparing for this new approach to banking and payments include lower costs, faster settlement, and more secure transactions. The potential to drive growth and capture efficiencies makes A2A a worthwhile option for banks and merchants to explore.