“Pay-by-bank” services will accelerate in 2024 in the U.S., driven by a combination of at least five converging trends: the growing availability of real-time payment rails; increased interest from businesses seeking to avoid card processing fees and gain faster access to funds; increasing democratization of payments; a move away from subscriptions to micropayments, and even a potentially big push courtesy of Elon Musk’s banking ambitions.
Compared to much of the world, the U.S. has lagged on adoption of pay-by-bank, which is also commonly called “account-to-account,” or “A2A,” payments. Pay-by-bank entails payments being sent directly through the banking system from one deposit account to another, no checks, no cards.
“U.S. consumers display a remarkable attachment to the use of cards, accounting for more than two-thirds of point of sale transaction value and half of e-com spend,” according to the 2023 FIS/Worldpay Global Payments Report. In 2022 pay-by-bank represented 9% of ecommerce payments in the U.S., up marginally from 8% in 2021. With the launch of the Federal Reserve’s FedNow instant payments service, joining the Real Time Payments network of The Clearing House, and other factors, FIS forecasts that A2A payments will see a compound annual growth rate of 14% through 2026.
In much of the world, “A2A is disrupting payment value chains with lower costs of payment acceptance versus cards,” FIS reports. For example, in Europe, its research shows, pay-by-bank represented 18% of e-commerce transactions in 2022. Some experts predict that new European regulations requiring more use of the payment technology will goose this number considerably. In some countries, among them Poland, Finland and the Netherlands, A2A already dominates payments. In Poland, 67% of ecommerce relies on A2A.
With the advent of FedNow sparking change in the U.S., times are changing.
“By late 2024, hundreds more banks and payment service providers will launch account-to-account faster payment capability, urged on by merchant sensitivity around card fees and banks delivering payment solutions to complement open banking.”
— Forrester, Predictions 2024: Payments
It behooves traditional banking institutions to consider the possibilities on both the consumer and business banking fronts sooner rather than later because pay-by-bank isn’t completely in their control.
How Pay-by-bank Will Fit into U.S. Payments Mix
Pay-by-bank enables people to make payments directly from their bank accounts, bypassing even debit cards. As currently practiced in the U.S. A2A transactions generally use the automated clearinghouse. This access is promoted by online retailers who work with consumers to obtain their payment credentials, with safeguards built in, so payments can subsequently be run through the ACH system, much like sending through a check. The funds come out of their deposit accounts. Unlike a debit card, no interchange fee is charged.
To get consumers to try this alternative to their familiar cards, merchants often offer incentives, such as immediate cost savings or loyalty rewards. Among examples in ecommerce are the Summer Fridays skin care site, which gives 10% store credit for pay-by-bank purchases. At point of sale, there are programs like Gas Buddy, which claims it can used at nearly all gas stations, which includes discounts of up to 25 cents a gallon.
Stripe, Rapyd, Flywire, Adyen and other payment companies have been coming up with A2A offerings for merchants to offer to consumers and these fintechs have been increasing the likelihood that pay-by-bank will grow.
Payments consultant Richard Crone explains that these firms, with broad payment offerings, have been building pay-by-bank options for merchants around the world. In the U.S., he points out that merchants have been doing some of this for years in narrow cases, such as with recurring utility payments that use customers’ payment credentials to draw directly on their deposit accounts. These are referred to as “payment credential on file” transactions.
In October J.P. Morgan Payments and Mastercard announced the first pilot, with Verizon, of an A2A service the bank and Mastercard began working on in November 2022. Verizon will make the service available for paying monthly bills. (Separately, the JPMorgan Chase Onyx blockchain unit launched a programmable payments service for business-to-business needs that is a crypto take on pay-by-bank.)
Some may see pay-by-bank as a merchant workaround, but it reflects industry-level evolution.
Read more about FedNow:
- Instant Payments: How to Navigate the FedNow Revolution
- FedNow Turns Instant Payments into a Must-Have for Banks and Credit Unions
Payments in McKinsey’s ‘Account Age’ and Beyond
In its 2023 Global Payments Report, McKinsey calls the age we are in the “Account Era,” leaving behind the “Plastic Era.” The roots of this new age lie in the beginnings of ecommerce. “Internet and mobile technologies made it possible for users to direct funds from their accounts,” according to McKinsey, “repurposing infrastructure such as automated clearing houses.” Coming next, McKinsey suggests, may be what it calls the “Decoupled Era,” in which “payments may be increasingly disconnected from accounts and other fixed repositories of value,” the exact opposite of getting a stack of checks and a debit card when you opened a bank account. The consulting firm predicts that banks will seek more partnerships and M&A in the payments space in response to this decoupling.
From the consumer perspective, Jacob Morgan, principal analyst at Forrester, thinks A2A will appeal to people who like to have complete control over their funds and like to pay as they go, rather than incur charges or actual debt.
“It’s having virtual ways of managing your money to the minute,” explains Morgan. For some this will be a matter of paying bills close to the wire because they live on tight budgets. But Morgan believes others will come around in time.
Digital Wallets and Pay-by-bank:
Forrester's Jacob Morgan thinks the increasing adoption of digital wallets will encourage use of pay-by-bank because they wean consumers further away from plastic.
This is even though many current digital wallet transactions ultimately go through credit and debit card accounts. Digital wallets became the leading ecommerce payment method (32%) in 2022, while they came in third at physical point of sale in the U.S., in a tie with cash, according to the FIS study. A 2023 Morning Consult payments study found that in August about two thirds of U.S. adults used a digital wallet for some type of payment.
Penetration will take time, however. Morgan says the card habit runs deep among consumers and retailers continue to lean into it as an automatic payment option. Incentives from merchants will help, but Morgan thinks their use will be transitory because of the cost.
Businesses Are Driving Demand for Pay-By-Bank Too
Both Morgan and Crone see even more appeal for businesses. “You can start to build services that manage cash pooling or intraday balances using real time money movement capabilities,” he explains. This has the potential to make small business financial tools more sophisticated.
Indeed, Richard Crone says he thinks business use of pay-by-bank will drive much of the shift in 2024. He thinks many applications will be “win-wins” for the bank and the business, when they work together. “This is where the most energy is being directed now, especially for international transactions and cross-border payments,” says Crone.
As this method becomes more mainstream in the U.S., more creativity will be applied. Morgan says that in the U.K. and Europe the use of digital wallets and QR codes, among other steps, has sped and smoothed A2A adoption. They simplify the consumer side of the transactions, he explains, avoiding account number entry errors, for example. U.K. income taxes can be paid via A2A and QR code, Morgan says, and more invoices in Europe have a pay-by-bank payment process built in.
‘Dumb Pipe’ Strategies May Not Be So Dumb (Or Avoidable)
The banking system often finds itself having built the plumbing system that others come along and profit from. Morgan says that the pay-by-bank trend has elements of that challenge.
In the early days of Apple Pay, he observes, banks worried about becoming dumb pipes. The response of many was, and sometimes continues to be, to not allow their payment cards to be used that way. It’s a way of controlling what banks can control, but in the long-run it isn’t a great strategy, Morgan says.
“First in wallet is important,” he says, “but your institution needs to be in the wallets in order to be used. If you are not present in the platforms, the ecosystems, the marketplaces and the digital wallets, your customers won’t be able to use you. It’s as simple as that.”
Not Playing Isn't A Real Option:
Consumers may become dissatisfied with a card issuer who keeps them from using a digital wallet to pay. Many younger consumers only pay with digital wallets these days.
So, to successfully pass through McKinsey’s Account Era and into the next period, dominated by the decoupling of payments, banking players need to think differently. Finding ways to capitalize on owning the pipes will help, according to Morgan.
Capital One figured out how to do this with card transactions by capturing rich transaction data that digital wallets like Apple Pay or Google Pay didn’t. Customers could access the data in the bank’s own app.
“So if you wanted to have the kid gloves experience,” says Morgan, “you went into the bank’s app, rather than Apple’s or Google’s,” Morgan says.
Itty Bitty Payments that Could Be Drops of Water in a Wave
Forrester also sees increasing use of “micropayments” spurring more account-to-account payments. Just as the concept of subscriptions to nearly everything from toys to shaving cream took off a couple of years ago, there’s been a boom in apps and other technology to undo subscriptions because of their ongoing costs. Some of these, and other products and services — such as reports and articles and even movie rentals — could be sold with micropayments enabled by A2A service, says Morgan.
“For the consumer, you are paying just for the content that you consume,” says Morgan. “As a business you might lose the regularity of the subscription, but you don’t lose all of the business because your customer now has a cheaper, on-demand payment method they can use just for the content they want.”
From the seller’s perspective, such micropayment possibilities using A2A eliminate much of the cost that would be involved if they chose credit card payments for such small charges.
Yet Richard Crone points out that in some cases there’s much more than micropayments at stake. He thinks Elon Musk, who wants to turn his X social platform into a banking and payments company, is going to use pay-by-bank to start things. We explore Crone’s analysis of this development in “Inside Elon Musk’s Stealth Move to Build X into a Pay-By-Bank Powerhouse.”