Cardzilla vs Instant Kong : The Reckoning
Credit cards are the dinosaurs of payments. They have been around for over 60 years and are now threatened by the imminent impact of two fast moving asteroids named “Account” and “to-Account” (A2A) payments.
Industry experts project simultaneous collisions off the coast of San Francisco, close to Visa headquarters, and Purchase, the home of Mastercard. Further A2A space debris is expected to scatter across mainland Europe, India and Brazil. Other payment methods have been advised to stay inside to avoid risk of injury.
With the Writers Guild of America (WGA) only just returning to work after a protracted strike, and with generative AI still learning how to write a blockbuster screenplay, I spotted a window of opportunity to write a genre bending payment-adventure-action-disaster-movie. My working title is Cardzilla vs Instant Kong : The Reckoning. Although I am also considering “The Disintermediation” given that middlemen like issuers, acquirers and schemes are set to lose their cut of the transaction now that a greater share of European payments are forecast to run on instant rails.
Here is the setup : A reptilian card duopoly is pitted against a big, hairy and very scary new force, backed by powerful European regulators and enabled by some very nifty underlying infrastructure. The two protagonists battle it out over processing volumes in a range of settings from e-commerce checkouts to the wild metaverses of crypto exchanges. Incumbent advantage comes face to face with lower transaction fees. Avarice encounters the hot breath of value for money. Skullduggery attempts to dull the sharp edges of progress. European, regulatory driven innovation takes on American free market capitalism. There really is something here for everyone. Over the course of two hours the audience is bombarded by gratuitous violence and given only momentary respite by a tenuous subplot love story involving an idealistic European bureaucrat and the CTO of a Open Banking startup.
As is often the case, moments of inspiration strike when you least expect them. Mine was prompted by a graphic put together by our Series A investors at Headline. Once you have seen the payment-adventure-action-disaster-movie potential in these yellow and green boxes, it is impossible to “unsee it”. So let’s unpack them, frame by frame.
Card Fraud And Costly Chargebacks — Understanding The True Costs
Chargebacks are more than a nuisance for merchants, they are one of their largest variable cost drivers with a material impact on operating margin. A portion of them come from dissatisfied customers, but the lion’s share are fraud. (Although it needs to be highlighted that the share of fraud in European card payments has declined by 12% since the introduction of Secure Customer Authentication (SCA) in 2020, something that is often overlooked by merchants grumbling about sales at risk).
Nonetheless, the ready availability of stolen credit card details on the dark web makes it very difficult to eliminate fraudulent purchases of goods and services online without also declining many non-fraudulent transactions. The rule of thumb is that a fraudulent chargeback costs the merchant 3x the value of the original transaction. So, if a merchants Average Transaction Value (ATV) is €100, they are looking at a total cost of €300 per chargeback. This is because they don’t just lose the value of the stolen goods, but are also hit with chargeback fees from schemes, administrative fees and headcount costs connected to the dispute management process. This chargeback multiplier represents the “true cost” of credit card fraud.
But while SCA has been successful in reducing the overall rate of fraud, it is not without its problems. It does add friction to the checkout journey, which can adversely impact the acceptance rate, and put sales at risk.
Lower Acceptance — Identifying The Root Causes
The acceptance rate calculates the percentage of successful transactions out of the total attempted transactions i.e.where the customer selects a payment method and clicks “pay”. Attempts will turn into successful transactions, or into failed transactions if declined.
The sources of failed credit card transactions are wide and varied, but the most common ones avoided by Open Banking powered A2A payments are:
- Human error : Mistyping the long number on the front of the card or CVV. This isn’t just fat finger syndrome, it’s an open invitation to make a mistake.
- Expired cards : Most consumers don’t set a calendar reminder for card expiration, and replacement cards might sit in unopened envelopes for weeks, so this cause of payment failure crops up more often than you might think
- Exceeded credit card limits : Either for a single high value purchase, or for multiple purchases within 24 hours, say in the lead up to Christmas.
- Additional authentication steps like SCA : Not much more to say other than the fact we all expect our payments to be smoother than a Barry White chat up line.
- Acquirer declines are their own beast, and it would be improper to discuss these in the company of silky Barry White meme. So all I’ll say is, if you cut acquirers out of the payment flow, you no longer need to worry about acquirer declines ;-)
Lower acceptance is especially painful for high value purchases. Disappoint a customer once, and they may never come back.
A relevant example that defies conventional wisdom comes from the travel vertical. Many consumers book flights on credit cards in order to earn air miles, benefit from additional payment protection in case of a cancellation and travel insurance (a standard feature of many premium cards). But when it comes to holiday rentals an A2A payment may convert better because of the causes of payment failure mentioned above. If the ATV is €2000 plus this will start to impact customers with lower credit card limits and drive failed payments.
The merchant could offer to collect half now and half later, but this means deferring full payment, with knock on cash flow effects. So why not offer A2A where acceptance rates are high?
In the majority of cases the customer has planned for this expenditure and will have the money in their account. If the average credit card transaction costs the merchant 1.5% and an A2A payment comes in at under 1%, there is only one winner.
Expensive Fees — Counting The Costs Ain’t Easy
Not only are A2A payments price competitive with European credit cards, where interchange fees are capped at 0.3%, but they come with far greater transparency. Blended rates are a black box, but even IC++ can get confusing. Why? Because there is a lot of adding up to be done. Here is an example:
- Interchange fee (IC) : 0.30%
- Scheme fee : 0.10%
- Acquirer fee : 0.20%
- Subtotal : 0.60%
A merchant now needs to add : Gateway fees, Auth fees and 3DS fees. After which they will need to wade through different transaction codes, card types, hyperventilate into a paper bag, and ask the existential question “Why are none of my different payment partners’ invoices presented in the same way?”. That’s before we get to the sleepless nights where you wonder what transactions will turn into chargebacks. Taken together, this presents a strong argument to switch traffic to A2A payments, where you pay a fixed percentage per transaction and merchants benefit from more transparent, predictable pricing.
But then I would say that.
That has been a quick canter through the yellow boxes, and we have touched on a number of the green boxes (merchant and consumer perks).
An Uncomfortable Truth For Advocates Of A2A Payments
But there is a problem in the narrative that needs to be resolved, and it’s an uncomfortable truth for A2A advocates like myself…
Why do I agree with this random dude sitting at his desko, al fresco? Because customers still have lots of incentives to use Credit Cards.
Exhibit A : Customer Incentives And Rewards By Payment Method
The only way that Instant Kong beats Cardzilla is by persuading merchants to push their customers towards Pay by Bank (A2A) payment methods out of enlightened self-interest.
There are lots of smart hacks merchants can adopt that are free: from an express checkout powered by an A2A payment method, to a dynamic checkout where Pay by bank (A2A) is preselected with a short info box explaining why this is a highly secure and convenient way to pay. Although in many cases it will still be more cost effective to offer a small discount or incentive to customers using Pay by bank to change purchasing behaviour in the medium term; the next time they checkout the merchant saves again on transaction fees, and eliminates chargeback risks. For those interested, there is a comprehensive implementation playbook we have developed at Brite to drive user adoption. It’s available to you if you book a Discovery Call. (Was that too much? Maybe, but my marketing team will love this strong CTA).
Consumers also like to feel safe, and despite appearances Cardzilla’s reptilian scales still provide more protection than your average A2A payment, something that was picked up by the team behind the excellent Future of Payments (Garner) Report (November 2023). One of their recommendations is that :
Consumer protection on payments made via Open Banking is enhanced with a minimum form of dispute resolution. This will create the trust and security that consumers need to adopt Open Banking solutions, (see p.11, Executive Summary).
I have adapted their table on page 82 of the report, which shows this gap. What I will say to nuance this picture is that instant settlement (compared to delayed settlement associated with credit cards) massively reduces fraud risks for both customers and merchants. The risk of making an unauthorised transaction is also very low, given the design of an A2A payment journey. In addition, Open Banking A2A payments operate at bank-level security meaning consumers do not face any of the risks associated with stolen card information.
Exhibit B : Consumer Protection By Payment Method
The Reckoning
The Swiss now TWINT , Swedes Swish and Spaniards send each other Bizums. These new generation, local A2A schemes take the friction out of many daily transactions, whilst reducing costs for businesses. When a payment method becomes a verb — “to twint / to swish” or even a noun “send me a Bizum” — it signifies that it has become an indispensable part of our everyday lives. It certainly changed this guys life, in the flash of an eye:
Instant Kong is the payment-adventure-action-disaster movie incarnation of both local A2A champions, and a growing number of Open Banking players solving the problem of paying for things directly from your bank account.
Unlike the aforementioned names, the players on this map are more focused on enabling businesses and merchants to operate C2B, across borders. As a result, I am confident that we will see the already healthy share of A2A transaction volumes continue to grow at the expense of credit cards and credit card-linked wallets across a range of verticals. Conveniently, this evolution paves the way for multiple installments of Cardzilla vs Instant Kong, and who doesn’t love a sequel?
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