Pay by Bank: A Roadmap to Adoption

Pay by bank solutions are taking the payments industry by storm, thanks to the expansion of open banking, faster payments networks, and behavioral analytics to manage risk/fraud. Pay by bank uses account-to-account transfers and is becoming a popular alternative to card payments due to its cost-effectiveness.

While paying from a bank account is not new, the "pay by bank" branding is certainly driving awareness and expanding in non-traditional use cases, such as e-commerce, retail, and mobile payments. The FDIC reports that a record 95% of Americans now have access to a bank account, offering an unprecedented level of ubiquity and opportunity in payments.

The fact that market leaders - Uber, Airbnb, Walmart, JPMorgan, Stripe, Bank of America, and Adyen - have deployed new pay by bank offerings is a clear indication that this payment method is here to stay.

The billion-dollar question remains: will consumers adopt pay by bank?

Let's take a closer look.

Consumer preference

Accenture has reported that a growing number of North Americans already use A2A, direct debit, and bank transfer as their primary online payment method. Interestingly, many of today's leading consumer fintechs such as PayPal, Venmo, and Robinhood, also encourage consumers to transact from their bank account.

This trend is set to continue with the 2023 FIS Global Payments Report predicting that A2A/ACH payments will account for 11% of all US e-commerce transaction value by 2026. Meanwhile, Zelle, the bank-owned peer-to-peer payment app, transacted 2.9 billion A2A payments in 2023, valued at $806 billion.

Anyone who has digitally sent money to a friend, made a micro investment, or purchased cryptocurrency, has likely used a form of pay by bank to complete the transaction.

It's clear that pay by bank is already a part of our everyday lives.

Infrastructure readiness

Pay by bank relies on the ability to transfer funds through the banking network without card, checks, or wire networks. At the forefront of this movement is the Automated Clearing House network, which processed 31.5 billion payments (valued at $80.1 trillion) in 2023. ACH dollar volume has grown by more than $1 trillion each year for the last decade.

Recent developments in faster payment rails have also propelled the adoption of pay by bank solutions in the US. Today, the 95% of Americans with a bank account can settle funds the same business day via Same Day ACH, while 78% of U.S. bank accounts are enabled for real-time credit settlement via RTP and FedNow.

The introduction of faster payment rails globally has also accelerated A2A transaction volume, and is expected to increase by 13% through 2026 according to the 2023 FIS Global Payments Report. FedNow and RTP are expanding request for payment capabilities and are expected to power instant settlement for pay by bank transactions in the future.

The infrastructure is evolving, but the foundation is already built.

Past lessons

Walmart, Target, Best Buy, CVS, and Shell unveiled mobile payment network CurrentC in 2014, which allowed consumers to enroll a bank account to pay via ACH at the point of sale. They terminated the program in 2017 after a half-hearted rollout that resulted in limited adoption.

Target, on the other hand, rolled out its own proprietary pay by bank solution, Target RedCard, and incentivized usage with a 5% discount on purchases. Today, Target reports 20% of total revenue from its RedCard program.

GasBuddy, Circle K, and Cumberland Farms have also successfully rolled out pay by bank solutions and incentivize usage with fuel discounts. Additional every day spend retailers are introducing similar programs that reward shoppers and reduce payment processing fees.

Reward programs incentivize consumers to adopt pay by bank.

Open banking

Pay by bank solutions have become more accessible with the rise of open banking. Open banking gives consumers an easy way to connect their financial accounts and securely share payment information. With over 80% of bank accounts in the U.S. accessible via secure OAuth/API connections, both consumers and providers benefit from the increased security and authentication protocols.

Open banking allows providers to assess a consumer's financial health and transaction history to better evaluate risk. A recent CFPB interagency statement endorsed the use of cash flow data for risk decisioning, giving providers like ValidiFI the ability to instantly evaluate consumers’ ability to pay before accepting payment.

With payments fraud accounting for $102 billion in the Americas each year, retailers are increasingly turning to pay by bank solutions to mitigate fraud losses. Open banking piggy backs on the security of trusted financial institutions, giving retailers more confidence when accepting pay by bank transactions.

Open banking is a leading driver for pay by bank expansion.?

Account enrollment

Visa reports that 87% of U.S. consumers use open banking, but only 65-75% are willing to provide their online banking credentials for pay by bank transactions.?

ValidiFI has found that pairing an instant, non-credentialed enrollment option with open banking empowers any consumer to adopt pay by bank. Consumers can choose to manually enter account and routing numbers OR their online banking credentials.

Effective non-credentialed solutions instantly assess payment performance and identify fraud signals using a consortium of payment behavior. For example, a bank account is 58% higher risk when it has transacted with 3+ phone numbers or emails in the last 30 days. Consumer payments are nearly 60% higher risk when they have transacted with 5+ bank accounts in the last 90 days.

Finding a balance on how a consumer provides their bank information while effectively managing risk is fundamental to the success of pay by bank.?? ?

Consumer choice for enrollment makes pay by bank more accessible.

The tipping point

The convergence of new technology, consumer awareness, and industry fatigue to card fees has brought us to the tipping point of a pay by bank revolution. Retailers can now incentivize pay by bank and influence shopping behavior, a win-win for the consumer and retailer alike.

Only time will tell if pay by bank comes and goes as a new trend, or if it’s here to stay.