Pay-by-bank holds promise | Payments Dive

To claim that pay-by-bank has not taken off in the United States is incorrect — or at least premature.

This potentially game-changing payment method is still in its early stages. There are just a few companies that have recently developed — or are in the process of developing — true pay-by-bank payment solutions, and it is only available as a checkout method at a small (if increasing) number of merchants. There is also still a long way to go with respect to consumer adoption, as U.S. consumers habitually reach for their credit cards.

Unlike many other countries, the U.S. does not have widely-adopted instant payment rails. For example, in the United Kingdom, open banking legislation kick-started innovation around account-to-account payments powered by third party providers that leverage bank APIs. In January 2021, there were 1.2 million transactions per month. By January 2023, there were over 8.5 million — close to 700% growth in transaction volume in just two years.

In India, the National Payments Corporation developed an instant real-time payment system, Unified Payments Interface (UPI), digital payments network. As of October 2022, UPI was handling around 6.5 billion transactions per month. And in Brazil, Pix is an instant payment platform created and managed by the Central Bank of Brazil (BCB). It was launched in 2020, and by September 2022, $200 billion was being transacted on its rails monthly. 

While FedNow is being slowly adopted in the U.S., it remains to be seen whether it can work as an e-commerce solution.

Instead, pay-by-bank in the U.S. relies on the robust, but old-school ACH rails. ACH currently processes more than thirty billion payments totaling more than $70 trillion annually. However, because ACH payments do not settle immediately, the value of pay-by-bank in e-commerce has been limited; there has been no way to determine whether an account has sufficient funds to pay, for instance. Similarly, there has not been a viable method to reliably prevent fraud, until now. As such, ACH rails have found most use in utilities payments and other recurring payments with very little fraud risk.

With the advent of open banking — which is still waiting for more regulatory clarity — immediate and reliable customer-permisioned bank connections can provide the necessary information for payment providers to process ACH reliably and to prevent fraud.

This technology is new — until just a few years ago, only screen-scraping was available; understandably, both banks and consumers dislike this method, as it requires the consumer to share their bank log-in credentials with the payment company. Now, persistent, secure API connections are available to most banks, though this space is still evolving.

It’s important to note that the U.S. has a much more fragmented banking system than anywhere else in the world — it has around 10,000 banks and credit unions — while the U.K., India and Brazil have only a comparative handful. As such, pay-by-bank needs to solve the problem of ensuring many more reliable bank connections than in other countries.

However, the value proposition of pay-by-bank is clear: merchants win from drastically lower payment costs and consumers win from lower prices, as the cost of doing business is permanently lowered for online merchants, and savings can be passed on. The U.S. economy wins through more spending power for consumers and more efficient use of capital.

Pay-by-bank will continue to evolve and increase market share in the United States. Hopefully, we will eventually see pay-by-bank underpinned by the combination of instant payment rails and a well-regulated open banking infrastructure.