Pay by Bank Is Gathering Steam: How U.S. Banks Can Ride the Wave

The revolution in payments from revolving credit to debit-based and account-to-account products is accelerating and coming to America. Pay by bank offers a rare opportunity for banks, consumers and merchants all to benefit – but only if technologies, processes and strategies are aligned.

The report: The Rise of Pay By Bank

Source: Lipis Advisors

Why we picked this report: Although written for merchants (and underwritten by payment players Plaid and Adyen), the report is a concise guide to the forces driving the trend toward pay-by-bank and offers a roadmap (as well as guardrails) to banks who want to better serve their customers by offering this capability.

Executive Summary

Pay by bank (PBB) solutions are poised for significant growth in the U.S. market, driven by increasing consumer willingness to adopt new payment methods and merchant demand for cost-effective alternatives to card payments. PBB offers advantages such as reduced transaction costs, improved cash flow, and enhanced security.

To capitalize on this trend, retail banking executives should focus on aligning PBB functionality with consumer needs, forging strategic partnerships, and promoting PBB benefits to both merchants and consumers. By embracing PBB and other alternative payment methods, banks can adapt to changing consumer preferences and maximize opportunities in the evolving payment landscape.

Key Takeaways

• PBB solutions are gaining traction in high-impact use cases such as e-commerce and bill pay, aligning with the shift from revolving credit to debit and account-to-account products.

• Successful PBB implementation requires partnerships with banks, payment processors, and technology providers to ensure seamless functionality and wide adoption.

• Consumer education on PBB security and convenience is crucial for driving adoption and overcoming potential hesitations.

• Collaboration with payment service providers enables banks and merchants to navigate the evolving payment landscape effectively.

What we liked about this report: It’s a thorough overview of the PBB trend that succinctly itemizes the benefits to consumers, merchants and banks alike.

What we didn’t: Because merchants are its intended audience, some sections are only of oblique or contextual interest to bankers.

The Rise of Pay by Bank: Opportunities and Challenges

Pay by bank is a direct payment method that allows customers to transfer funds from their bank account to a business’s account without using a payment card. This process typically involves the customer selecting PBB at checkout, securely connecting to their bank account through an open banking payments network, and authorizing the payment. The transaction is then processed, and the merchant receives the funds, often more quickly than with traditional card payments.

The U.S. market is primed for PBB adoption due to several factors:

Consumer willingness: There’s a growing openness to try new payment methods, particularly among younger generations who prefer debit-based and alternative payment options.

Merchant demand: Businesses are actively seeking cost-effective alternatives to card payments, with PBB offering potential savings of 20-70% on transaction fees.

Technological advancements: The growth of open banking APIs and instant payment systems like RTP and FedNow is facilitating easier implementation of PBB solutions.

Regulatory changes: Recent settlements in the U.S. may allow merchants to incentivize customers to use preferred payment methods, potentially driving PBB adoption.

A Key Stat:

85% of surveyed consumers already use bank-linked payments for recurring transactions, indicating familiarity with the concept.

PBB offers several advantages for consumers:

Enhanced security: PBB transactions typically leverage bank-grade security measures and don’t require sharing sensitive card details. This enhanced security can reduce the risk of fraud and provide peace of mind for consumers, especially when making large purchases or transactions with new merchants.

Potential rewards or discounts: As merchants save on transaction fees, they may pass some of these savings on to consumers in the form of discounts or rewards for using PBB. This can provide a financial incentive for consumers to choose PBB over other payment methods, potentially leading to long-term adoption.

Seamless integration with digital banking services: PBB solutions often integrate directly with a consumer’s existing digital banking app or online banking portal. This integration can provide a more unified and convenient financial management experience, allowing consumers to track their spending and manage their accounts more effectively.

Improved transaction transparency: PBB transactions typically provide clear, real-time information about the payment status. This transparency can help consumers better manage their finances and reduce anxiety about when payments will be processed or whether they’ve been successful.

PBB also offers significant benefits for merchants, including lower transaction costs, faster settlement and improved cash flow, automated reconciliation, and reduced chargeback risk.

How to Implement Successful PBB Solutions

To maximize the potential of PBB, retail banks should focus on:

User experience: Develop intuitive, frictionless PBB interfaces that rival the convenience of card payments. This involves creating streamlined authentication processes, minimizing the number of steps required to complete a transaction. Regular user testing and iterative improvements based on feedback are crucial to maintaining a competitive edge in user experience.

Partnerships: Collaborate with payment processors and technology providers to ensure wide reach and seamless functionality. These partnerships can help overcome the fragmentation in the US financial market and provide access to a broader customer base. Consider working with fintech companies that specialize in open banking APIs to leverage their expertise and existing connections.

Fraud prevention: Implement robust security measures, including multi-factor authentication and real-time transaction monitoring. Utilize advanced technologies such as machine learning and behavioral analytics to detect and prevent fraudulent activities. Regularly update security protocols to stay ahead of emerging threats and maintain consumer trust in the PBB system.

Education: Inform both merchants and consumers about the benefits and security features of PBB to drive adoption. Develop comprehensive educational materials, including video tutorials, infographics, and interactive demos, to explain how PBB works and its advantages. Consider implementing a dedicated support team to assist with onboarding and address any concerns from both merchants and consumers.

Read more:

Use case optimization: Tailor PBB solutions for high-impact scenarios such as e-commerce, bill payments, and large transactions. Analyze transaction data to identify patterns and preferences in different sectors and customer segments. Use these insights to refine PBB offerings and create targeted marketing campaigns that highlight the specific benefits for each use case.

Incentive programs: Develop attractive incentive programs for both merchants and consumers to encourage PBB adoption. This could include temporary fee waivers for merchants, cashback offers for consumers, or loyalty points for repeated PBB usage. Ensure that these incentives are sustainable in the long term and align with overall business goals.

An Indicator of PBB's Success:

PBB transactions can result in cost savings of 20-70% compared to card payments for merchants.

Regulatory compliance: Stay informed about evolving regulations related to open banking and digital payments. Ensure that PBB solutions comply with all relevant laws and industry standards, including data protection and privacy regulations. Engage with regulatory bodies to contribute to the development of favorable policies that support PBB innovation and adoption.

Performance monitoring and optimization: Implement robust analytics tools to track key performance indicators (KPIs) for PBB transactions. Regularly analyze metrics such as adoption rates, transaction volumes, settlement times, and user satisfaction scores. Use these insights to continuously refine and improve the PBB offering, addressing any pain points or areas for improvement identified through data analysis.

Overcoming Challenges

While PBB presents significant opportunities, there are challenges to address:

Achieving ubiquity: Ensure broad acceptance across financial institutions and merchants to make PBB a viable option for most transactions.

Fraud concerns: Implement strong fraud prevention measures and educate users to build trust in PBB systems.

Dispute resolution: Develop fair and efficient processes for handling transaction disputes that protect both consumers and merchants.

Integration bomplexity: Assist merchants in updating their systems and processes to fully leverage PBB capabilities.

The Path Forward

As the payment landscape continues to evolve, retail banking executives must position themselves at the forefront of innovation. By embracing PBB and other alternative payment methods, banks can:

  • Meet changing consumer preferences and expectations.
  • Help merchants reduce costs and improve operational efficiency.
  • Capitalize on the growing trend towards account-based and instant payments.
  • Strengthen relationships with both consumers and businesses by offering cutting-edge financial solutions.

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