It’s been five long years since the UK introduced its “open banking” reforms, promising that new technologies would help consumers and small businesses get better deals with financial services. The reforms have taken time to deliver on that promise, but innovation is now gaining momentum, courtesy of companies like Atoa Payments, which is looking to get the expensive Visa and Mastercard out of the payment loop.
Announcing today the completion of a $2.2 million pre-seed funding round, Atoa is fully focused on the two payments giants. Every time a customer makes a payment with their debit card, the transaction goes over rails controlled by Visa and Mastercard, says Sid Narayanan, co-founder of the company.
“That means the merchant has no choice but to pay fees of 1.5-2% on the transaction,” says Narayanan. “There are other issues as well: Merchants don’t receive the money for one to two days, causing cash flow problems, and card payment service providers typically want them to sign extended contracts that lock them in.”
To add to merchant frustration, the UK has a perfectly good payment alternative that costs nothing and settles the transaction instantly. The Faster Payments Service enables holders of UK bank accounts to transfer funds directly to beneficiaries at no cost to either party. In an ideal world, therefore, merchants would ask all their customers – whether in store or remotely – to pay by bank transfer instead of by card. But this isn’t practical, as setting up a bank transfer requires the customer to initiate and manage the transaction in their banking app; consumers would recoil from the inconvenience of having to do that every time they make a purchase.
Enter Atoa. The technology enables consumers to pay at the point of sale via bank transfer instead of card – and do so instantly, without all the usual administration required to set up such a payment. To make that possible, the merchant downloads Atoa’s app and then shows a QR code to customers; when the customer wants to pay, they just need to scan the code, which then automatically sets up the payment in their banking app – they just need to authorize it.
Consumers themselves need nothing more than a UK mobile banking app on their phone. Atoa’s technology uses a payment initiation API to connect the app to the merchant’s bank account to issue a payment order.
“We can reduce merchant costs by as much as 70% by eliminating Visa and Mastercard,” Narayanan added. “We also save retailers money because there is no need to buy payment hardware up front or pay monthly fees to lease it; moreover, they receive their payment immediately and they do not have to be tied to a long-term contract.”
In practice, Atoa’s fees start at 0.6% per transaction, which is significantly lower than the card payment fees that merchants currently have to pay. Merchants processing large volumes of transactions qualify for even lower fees – potentially as low as 0.3% per transaction.
There is a huge market for the company to enter. There are over 4 million small and medium-sized businesses in the UK that currently rely on card payments from customers. They all lack the size and power to negotiate better rates from Visa and Mastercard, and could benefit from moving to wire transfer-based payments. In the longer term, Atoa also sees larger companies using its technology.
The question is whether consumers will accept this new form of payment. Paying by card is such an ingrained habit that some customers may not like paying any other way. However, Cian O’Dowd, co-founder of the company, believes that customers who understand seller frustrations are eager to help. “We need to raise awareness, but people know how tough the high street is right now and they’re eager to support small businesses.”
Sure, the company seems to be gaining traction with traders. Signups have grown 100% per month since the company began offering its technology in June. “It’s new to customers and it will take them a while to get used to it, but it’s very simple,” says O’Dowd. Atoa is regulated by the Financial Conduct Authority, he points out, which should reassure consumers; in any case, the company never touches their money – it simply instructs the bank to move money to the merchant.
The key will be getting people comfortable using bank transfers rather than card payments. While there is already significant competition in the small business payments market, newer providers such as Zettle and Square, which have grown rapidly, rely on card payments; this inevitably exposes merchants to Visa and Mastercard fees.
The company’s fundraising should help Atoa spread the word. The pre-seed round was led by Leo Capital and Passion Capital, as well as UK investors such as Matt Robinson, co-founder of GoCardless and Nested, and Moon Capital Ventures. Anil Stocker, the co-founder and CEO of MarketFinance, works as an advisor to the company.