ACH, A2A and Marketing Incentives

(sorry for typos). I’m up at 5am this Saturday and have all kinds of things I’d like to write about: DeFi, PayFacs, Opportunities in B2B payments, Platform strategies of Shopify/Stripe/Adyen.. I’ve settled on a short blog surrounding ACH, A2A and Marketing incentives. The key question I will be answering today: will an ACH based A2A or ACH checkout option develop threatening V/MA?

The last company I founded (Commerce Signals) focused on bringing payment data to the advertising world. Our data supply was both network and processor data sets and customers US retailers. We delivered unique insight and value to retailers advertising efforts based on real time payment data. During those 6 yrs.. I was fortunate to speak frequently with retail CMOs about their goals, campaigns and the effectiveness of their marketing efforts (related blog 2018). 

As a payments geek I also have 20+ yr relationships with retailers on the finance/ treasury side, as well as their processors. Let’s just say that the CMO and payment folks don’t talk much, as marketing and payments are two very different worlds. In retail, marketers are the top line decision makers and decide everything the consumer will see. Let me start with 2 stories: MCX and Target Redcard. 

MCX was the retail consortium that worked for 7 yrs to create a V/MA alternative (2016 blog RIP MCX). By 2016, MCX was operational with a payments engine and mobile application. What did it lack? 1) a value proposition and 2) retailer buy in in how consumers would use it. MCX was viewed as a payment cost reduction effort. While all retailers agree on reducing costs within a common “payment infrastructure service” the certainly DO NOT agree on synchronizing marketing or CX. In other words, the treasury team’s value of “reducing transaction costs by 1%” takes a distant back seat to marketing goals (ex increased basket, customer acquisition, retention, loyalty).  In fact many of retail marketers core SYSTEMS depend on CARD payment integration (see data leakage). 

Obviously, MCX should have built a “Stripe like”  PaaS platform.. Or a new payment network (w/ card).. A ubiquitous payment service which would haved enabled retailers to consume and embed payment into many unique experiences (a stand alone payment application makes no sense). While the finance/payment teams were busy creating a “payment super app”, the marketing and channel teams were creating unique mobile experiences within their own branded apps. These branded Apps were focused on everything BEFORE the purchase, this is the HARD PART of commerce.. payment is easy. (see my WalMart Pay Blog).

Story 2 – Target Red Card

Target Redcard is the best decoupled debit product in the US.  Not only does Target have one of the best financial services teams (2 bank licenses) they also have one of the best marketing AND data teams in any industry (see 2010 blog). Target’s 2020 annual report shows RedCard penetration as 21.5% with $1.1B of discounts paid (5% of purchase). 

Note: RedCard penetration = percentage of purchases that are paid for using RedCards 

What most payment geeks don’t understand is that RedCard’s tremendous success has very little to do with payment. Payment does not deliver the value or change in consumer behavior, rather it is Target Circle (100M members, previously known as Cartwheel) which drives usage. The 500bps consumer discount is driven by 100bps reduction in payments costs and 600bps PLUS on data. Revenue on data? Target spun off its own media division (Roundel) with CPGs as primary customer base, revenue estimated at $4B (Amazon’s ad business is $15B). The remainder of the benefit comes in the form of loyalty and increased basket size.

My key points are: 1) the payment mechanism has very little to do with the success above, 2) the marketing team drives success in data and value 3) Loyalty is a key play in ACH no retail MARKETER wants a ubiquitous ACH scheme. They want increased conversion, achievement or marketing goals.. With ACH they lose data, increase consumer headaches, AND ‘lock in’ of having their own branded payment instrument. 

Internationally things are different, such as geographies where there is a strong domestic debit scheme or very low card penetration. China and India are obvious examples, also Canada  where 45% of all transactions under $100 are on an interac card. In Germany a similar dynamic exists with PayPal and Bank schemes dominating (see JP Morgan). It is important to note that there is NO EXAMPLE of consumers moving away from V/MA in a geography where it is established. Other schemes have only matured based upon either low card penetration or strong dometic debit network, PRIOR TO V/MA traction. Defeating the network effect of V/MA is really hard. There are hundreds of parties that have invested billions of dollars to make this work. 

eCommerce A2A – Plaid and Stripe

Per my blog last week on the decoupled debit, can Plaid create a functional decoupled debit? Absolutely yes. Can Stripe make it easy to use? Yes. They are the best at making payments easy. Will merchants “turn it on”? No… not after seeing conversions. (with some exceptions). 

Think about Stripe’s customer base.. They are start ups. Their primary tasks are 1) acquiring a consumer and getting them to select their product service and 2) getting them to check out quickly.. Can you imagine having a brand new merchant you never heard of asking for your ACH AND YOUR BANKING CREDENTIALS?  

US consumers know that if they want to pay directly from their transaction account.. they use a debit card. They also know never to give out their ACH information beyond trusted billers (like the power company). As I stated in the Debit+ blog.. the only innovation in an ACH based A2A is that the entity that makes the money is a fintech, leaving banks with the majority of the support and compliance obligations. It is just silly..

You can imagine what will happen when you create a business on the backbone of someone else’s infrastructure (with no agreement or economics). Banks will put friction in the process.. bet on it. Why? There none of the fraud controls on ACH that there are on card based debit and credit. In the debit/credit world Banks know the ID of the merchant requesting payment. This merchant was KYC’d and under written by and acquiring bank. It is the merchant and the acquiring bank that will be responsible for a fraudulent payment. In an ACH scheme the ODFI will hold this responsibility. But does an A2A ODFI underwrite each merchant? In the A2A model the ODFI is enabling a payfac like model with none of the underwriting.. all on ACH. This is not what ACH is designed for. When PayPal launched it required a good funds balance within PayPal.. later it required a secondary payment instrument. Banks have regretted letting PayPal ever get started. They won’t let it happen a second time.

Thus Banks are reacting quickly to this A2A scheme and use of banking credentials for instant authentication (see blog). As background, I ran 2 of the largest online banks (Citi in 27 countries, and Wachovia) and I know these teams very well. While banks want to support customer efforts to leverage their data in services like MINT.. they are not willing to support use of bank credentials in a competing product. 

What are banks doing?

  1. They will be forcing Plaid, MX and other aggregators to gain consumer permission for each use and communicate the WHO (ie the business requesting) the bank information to the bank for each request.  (ie MINT vs A2A authorization)
  2. The are creating a new instant auth service that will be available to any start up directly thru Akoya and EWS
  3. The will be changing rules shortly to prohibit storage of online banking credentials. 
  4. The will be charging for instant auth
  5. After these pieces are in place, they will be curtailing use of aggregation and forcing all aggregators to go through Akoya for direct feeds (thing about a new OFX hub.. Only based on FDX)
  6. Close monitoring of ODFIs that act as conduits for 3rd party transfers (think PSP in PSD2 context).

A2A momentum will not occur. Merchants will see the looming issues with PSPS like A2A transactions. There is NO SHARED ECONOMIC MODEL in this A2A structure. When no economic model exists.. There are strong incentives to create friction. 

Payment is the last easiest phase of any commerce experience. Only very mature businesses can take on ACH.. and it must be led by marketing. EVERY TIME a payment option is led by a finance team.. it fails.

Further reading. US Fed Study on payment instruments https://www.frbsf.org/cash/publications/fed-notes/2019/june/2019-findings-from-the-diary-of-consumer-payment-choice/

3 thoughts on “ACH, A2A and Marketing Incentives”

  1. Tom – I stumbled on your blog and really, really enjoy it. Thanks for sharing your expertise.

    “It is important to note that there is NO EXAMPLE of consumers moving away from V/MA in a geography where it is established.”

    Question: Looking at China, the incumbent China UnionPay was displaced by the super apps despite its dominant position. What mistake did CUP make that V/MA have learned from so that they don’t experience a similar result in markets where they are the incumbent. Or was the card market in China so immature that CUP not truly entrenched and thus vulnerable? Your thoughts appreciated.

    1. Great question.. “established” means very broad card acceptance. CUP was accepted at all large retailers.. but small merchants were still not on-boarded. Alipay / Wechat Pay started from low end. So from a consumer behavior perspective.. 1) CUP were “new” 2) minimal daily use 3) centered around a banking system which was not highly thought of by consumers, 4) not “mobile first”.. more of card present. (see https://daxueconsulting.com/payment-methods-in-china/) and 5) “investment” never made by China Processors..

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