Card vs direct bank payment flows

Credit and debit cards are among the most popular payment methods online. Nearly every e-commerce shop accepts this type of payment, even if it’s not the most convenient and cost-effective option for businesses. There was simply no better way to pay for goods and services online for some time.

Open banking, however, has challenged traditional payment methods. It introduced a more convenient payment option with fewer fees and better data security. Account-to-account (A2A) payments, also known as direct bank payments, have the potential to overtake the popularity of card payments.

A close analysis of a card payment flow can help understand companies how A2A transactions surpass the advantages of traditional card payments.

Card payment flow

Card payment flow consists of two stages: authorisation and settlement. Each stage contains various fees, and a failure at any stage may result in a sale not being deposited.

The key parties involved in the authorisation and settlement processes are:

Consumer - a cardholder who obtains a bank card from an issuing bank.
Issuing bank - consumer’s bank.
Card networks - card-issuing companies, such as Visa, Mastercard, American Express, etc.
Merchant - a business that sells goods or services.
Acquiring bank - merchant’s bank.

There may be more parties involved in the payment flow, such as a payment gateway provider, a payment processor, a fraud prevention provider and a 3D Secure (3DS) provider.

Card authorisation process

In most cases, a card authorisation process goes as follows:

The consumer initiates a transaction and provides their card details (card number, expiration date, CVV/CVC code, etc) to make a payment.
The payment gateway receives the card data from the merchant and transfers it to the acquiring bank.
The acquiring bank submits the authorisation request to the card network.
The card network submits the authorisation request to the issuing bank, which confirms or denies the transaction.
The card network sends the response to the acquiring bank.
The acquiring bank sends a confirmation to the merchant.

Depending on the parties involved, the process may be extended and have even more steps. While it may look like a lengthy cycle, in reality, the transaction takes a few seconds. However, the more parties are involved in the process, the more fees may be incurred.

With a card payment flow, the consumer’s funds travel from the consumer’s bank account to the card network and only then to the acquiring bank. Meanwhile, the consumer’s data is shared between all parties involved in the transaction - the merchant, the acquiring bank, the card network, issuing bank and all the other players in the flow (payment gateway, 3DS provider, etc.)

Clearing and settlement process

Clearing and settlement is the second part of the card transaction flow and takes place after the authorisation. The usual payment settlement process looks like this:

The merchant sends a batch of approved payment requests to their acquiring bank (or a payment processor). This typically happens at the end of a business day.
The processor sorts the transactions and submits them to the card networks. Transactions from Mastercard cards go to Mastercard, Visa card transactions go to Visa, and so on.
Card networks pass the transaction information to the appropriate issuing banks (consumers’ banks).
The issuing bank debits or charges the consumer’s account. It subtracts the interchange fees and sends the remaining amount to the merchant’s bank (or the payment processor).
If a payment processor is involved, they’ll route the funds to the merchant’s bank. The merchant’s bank then subtracts fees and deposits the remaining funds in the merchant’s bank account.

The settlement time depends on a few factors. One of them is the merchant’s agreement with their payment processor. The funds can be deposited into the merchant’s account days later, depending on the service agreement. Another factor is payment disputes or card chargebacks - consumers may dispute their card payments or reverse the transactions. These can be done up to six months or even a year after the transaction.

Account-to-account (A2A) payment flow

Payment initiation, or direct bank payment flow, defines open banking-powered payments, also known as account-to-account (A2A) payments. This flow enables money to travel directly from the consumer’s bank account to the merchant’s bank account.

These are the key parties involved in the A2A payment process:

Consumer - an account holder who makes a purchase.
Merchant - a business that sells goods or services.
Payment initiation service provider (PISP) - a company like kevin. that enables A2A payments.

This is what an A2A payment flow looks like:

The consumer selects their bank and starts the payment process.
The consumer logs in to their bank account and gives the permission to the PISP to process the payment.
The consumer confirms the payment and is returned to the merchant’s website.
Merchant receives the payment instantly.

The direct bank payment flow is shorter than the card payment process. In most cases, the funds reach the merchant’s bank account instantly. The funds travel directly from the consumer bank to the merchant, eliminating all unnecessary intermediaries. Meanwhile, consumer data is only shared among the three players - consumer bank, merchant, and payment initiation service provider.

Card payments vs direct bank payments

The A2A payment flow outweighs the benefits of the card payment flow in many ways:

Payment processing fees

One of the main differences between card payments and A2A transactions is the number of fees these flows incur.

Card processing includes various fees such as administration, interchange and others, which can all add up to a significant portion of the total payment. The merchant must cover all these fees, which may result in higher prices for goods and services.

A2A payments eliminate bank cards from the payment flow, which means avoiding card processing fees.

Settlement time

The settlement time for card payments varies depending on the payment processor and other factors. The funds may reach the merchant’s account in days or even weeks, which results in decreased cash flow for the businesses.

Instant settlement is one of the open banking benefits. Fast payment validation enables companies to fulfil their orders quickly, which can result in higher customer satisfaction and increased retention rates.

Data security

Online payment fraud is a pressing issue for many online businesses. Companies take action to protect themselves and their clients from potential fraud. Employing direct bank payments is an effective way to protect consumers from payment fraud.

For example, kevin. greatly reduces the risk of online payment fraud by eliminating unnecessary intermediaries from the transaction process. Moreover, kevin. uses a robust payment tokenization system to ensure consumer data is secure. A2A payments also use Strong Customer Authentication (SCA) to securely authenticate users and minimise the risk of potential fraud.

A2A payments - the way forward

Card payments have been around for a long time. Since there wasn’t a better and more convenient solution, merchants have relied on this payment flow and had to pay fees to every party involved in the payment process.

Open banking has enabled A2A payments, a payment method that can offer a shorter and more convenient payment flow, which eliminates unnecessary intermediaries and significantly reduces transaction processing costs.

In addition to reduced costs, the A2A payment flow is shorter, which means fewer players have access to consumer data. Instant settlements give merchants access to their cash flow quicker, and enable them to fulfil orders faster.

Payment service providers, platform providers and payment integration partners can partner with kevin. and become an open banking provider in the A2A payment flow. Partners can start offering businesses a better, shorter and more secure payment flow with undeniable benefits.