In recent years, Pay by Bank has entered the US payments industry and is now set to disrupt the point-of-sale experience. With each new payments technology that has entered the market, users are always apprehensive at first and eventually the technology becomes commonplace. Today credit cards, debit cards, and now contactless wallets are all as universal and mundane as cash. Soon, payments direct from customers’ accounts – without the use of a debit card will also be an everyday option for shoppers. Let’s take a closer look at what Pay by Bank is, where it differs from other payments, and what difficulties it might face before widespread adoption.

How Does Pay by Bank Work?

Pay by bank transactions are initiated by the customer and three steps follow: authentication, fraud checks, and money movement. In the first step, the consumer account information is verified either instantly through API or through micro-deposits. This first step is only required the first time a new customer-merchant relationship is established. For subsequent transactions with the same merchant, this step will not be repeated. Once the fraud checks are complete, the money is moved using a payment rail such as ACH. The money is transferred directly from the customer’s account to the merchant’s, and the transaction is complete.  

Pay by Bank may sound similar to Account-to-Account (A2A) transactions, however there is a key difference. Transactions sent via A2A refer to money that is exchanged between two users and their bank accounts. While the money is being transferred from bank accounts rather than credit or debit cards, A2A does not involve a business or merchant. With Pay by Bank, consumers are able to pay bills and purchase items or services directly from their bank account. Thus, the main distinction is that Pay by Bank enables money to be exchanged directly between a consumer and business bank account.  

How is Pay by Bank Being Used?

As it stands, Pay by Bank is most commonly used for large-scale bills such as rent and utilities. These recurring transactions with known merchants are a promising first step for adoption. Consumers are already comfortable with rent payments coming from their bank account, and now as Pay by Bank is becoming more widely utilized, the next push is towards ease of user experience. The industry is working towards an even more seamless process, particularly removing the need to manually enter account details at every transaction. As Pay by Bank becomes more widely used and new features are added, consumers and merchants are seeing the benefits of more options and lower fees.  

On the topic of widespread adoption and added features to Pay by Bank, the continued adoption of RTP and FedNow will only increase the possibilities for Pay by Bank. As point-of-sale interface for Pay by Bank is further developed, the option for instantly settled payment is a great incentive for merchants onboarding. While at the moment Pay by Bank is mainly driven by ACH for its universal adoption, one could envision a future use case utilizing point-of-sale RTP.  

Obstacles for Adoption

The main obstacle for enticing new users towards a point-of-sale model of Pay by Bank is the lack of a universal dispute process. For this reason, the adoption of recurring Pay by Bank transactions such as rent, or utilities has been successful. Consumers can feel confident paying bills with merchants with whom they already have a relationship. However, there is a hesitance to purchase goods or services from an unknown entity using Pay by Bank, as users rely on the credit card companies’ charge dispute protocols if issues arise. The industry must provide a clearer indication of the charge dispute protocol for Pay by Bank to further entice consumers to the point-of-sale use and universal adoption.  

Pay by Bank offers a variety of benefits both for consumers and merchants, but the most notable is the reduced fee. As merchants pay significantly lower fees, they can either pass savings off to the consumer or grow the business using the increased margins. Either way, the consumer sees the benefit, whether that’s monetarily or through an increased product or service availability. Additionally, the consumers themselves benefit from the ease of use of Pay by Bank. Many consumers prefer to make large expenses such as rent directly from their bank account to avoid high credit card fees and more readily track spending. Pay by Bank allows users to do so with ease. The user experience promises only to improve in the coming days as the industry focuses its energy and capital around adoption.