Long reads

What is pay by bank?

Sehrish Alikhan

Sehrish Alikhan

Reporter, Finextra

2024 might be the year that pay by bank hits the mainstream. Pay by bank is a direct account-to-account payment methods that many fintechs have been increasingly been drawn to as open banking has become more established in Europe.

Pay by bank may be on track to replace card payments, as it is an alternate payment method that requires no log-in or authentication factors for the user. The pay by bank payment method is not be confused with account-to-account payments apps such as Venmo and PayPal, which offer peer-to-peer payments. Pay by bank is often used for bills, subscriptions, and loan repayments.

There are benefits and challenges to the method. For merchants, there are lower transaction fees on sales, for networks there is the reduced risk of fraud and disputed transactions, and for customers the clear benefit lies in the ease of a frictionless experience. Pay by bank also allows issuers to avoid interchange and scheme fees.

In the US, pay by bank can operate through instant payments services such as the Automated Clearing House, Real Time Payments network, or FedNow. By transferring funds directly from their bank account to the retailer, customers are able to pay instantly in a secure manner.

By paying directly from bank accounts rather than through cards, banks also have the opportunity to offer users rewards to achieve savings.

The ease and convenience of the pay by bank payment method is seeing an increase in usage across Europe and the US, marking a potential shift towards instant transactions over card-based ones. Compared to card payment transactions, pay by bank will have less risk associated with it as bank accounts do not expire or acquire debt.

The real-time visibility aspect of pay by bank is what appeals to users and retailers alike. The figure below illustrates how willing consumers are to adopt the new payment method.

Source: Plaid

More and more banks and fintechs have been embracing pay by bank solutions. JP Morgan Payments rolled out its pay by bank offering through Mastercard’s open banking platform in late 2023.

In April this year, Paysafe launched a pay by bank solution for iGaming and sports betting in the US market. In May, Australian incumbent NAB partnered with Banked to launch a Pay by Bank capability, expected to go live in the first half of 2024.

Splitwise, an app used to organize expenses and track balances partnered with Tink for a pay by bank offering. Tink has been tapped by several European fintechs for its pay by bank solution, with Berlin-based payment processor Micropayment also planning to deploy the service, and Payop working with Tink to provide pay by bank across Europe including France, Germany, Spain, UK, and the Netherlands.

Pay by bank could be a new frontier for fintech, with larger adoption opening up new capabilities such as paying for your groceries or deli sandwich through a pay by bank QR code instead of your debit or credit card.

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