5 Critical Payments Challenges for Banks in 2026. Keep Your Eye on PayPal
By Steve Cocheo, Senior Executive Editor at The Financial Brand
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The payments battleground will only grow more intense in 2026 as the economics become increasingly complex, technologies morph, and long-held assumptions fall by the wayside.
Every bank and credit union will have a stake in this revolution — and they can’t afford to sit it out.
Fintechs are getting smarter about payments every day.
Need to Know:
- A storm of payments issues confront banks and credit unions going into 2026, from the growing appeal of digital wallets to agentic payments and rising competition.
- The intersection of payments and lending is changing the game and now nonbanks are seeking charters, the latest being PayPal.
- A major pivot: Debit cards, once a simple utility product, now represent a competitive threat to other payment vehicles.
Pay Attention to Payments, or Face Deposit Disruption
Banks and credit unions rely heavily on deposits, but increasingly the risk they face isn’t a matter of rates paid, but product design — most notably in payments, according to Tony DeSanctis, senior director at Cornerstone Advisors.
“People don’t recognize how important payments are to the deposit relationship,” argues DeSanctis. “It’s at the core of deposits, especially low-costdeposits.
The problem: “It’s becoming more and more compelling to keep your deposits somewhere besides a bank or a credit union, because of features, benefits, convenience, financial insights, and more,” says DeSanctis.
Fintechs are promoting deposit accounts after “identifying specific niches, specific product offerings, and specific value propositions,” says DeSanctis. “They’re not trying to be Chase, BofA nor Wells Fargo. Chime has a niche. SoFi has a niche. Two completely different niches. But guess what? They’re both growing rapidly.”
DeSanctis says it’s no coincidence that so many fintechs are introducing debit cards and leaning into them.
Case in point: the Affirm Card. “If you’re going to do buy now, pay later with a debit card, guess what that card needs to have in it? A deposit balance,” says DeSanctis. “It may not be the consumer’s primary deposit account, but that deposit balance isn’t at your financial institution.”
Read more: Consumers Say It’s Not You, It’s Chime
Buy Now, Pay Later Is Mainstream. Get Over It or Get Left Behind
“2025 is the year that buy now, pay later went mainstream,” says Sean Gelles, senior director, payments intelligence, at J.D. Power. “This is how the average American is going to be buying on credit for the foreseeable future.” (Gelles is a speaker at The Financial Brand Forum 2026.)
Early on, some scoffed at BNPL, saying it was just a minor variation on credit cards. Americans don’t agree.
And it’s not just Gen Z. J.D. Power research has seen usage spreading up through younger Millennials to older Millennials and even to younger Gen Xers.
Gelles says preliminary data from still-unpublished research suggests that about half of the number of transactions during the Black Friday period were made with BNPL. Consumers buying on Amazon may be offered multiple BNPL options now. Adobe is forecasting that BNPL use this holiday season will hit $20.2 billion, up 11% from 2024.
Why BNPL? “It appeals to folks who either don’t have a credit card or who have a credit card but see buy now, pay later as a more attractive option to revolving a credit card balance,” says Gelles.
But isn’t it still “debt”? Yes and no. “Buy now, pay later is a better mousetrap. It’s clearer. It’s got a set duration. The rate is clear,” says DeSanctis, a longtime card executive. “It’s just better, as much as it pains me to say it.”
BNPL for credit, cards for points. DeSanctis says younger consumers haven’t ditched cards. They’re just ditching card credit.
“The younger generation uses credit cards to get rewards and uses buy now, pay later to borrow money. They’ve bifurcated those two behaviors,” says DeSanctis. He says rollover is getting chewed by BNPL.
Why do banks still lag on BNPL? Gelles says he’s scratching his head — “It’s crazy to me.” Only a handful of large banks offer a post-purchase buy now, pay later option in their credit card programs, and fewer offer debit-based BNPL. He adds that some hardly market their BNPL options.
Meanwhile, both Gelles and DeSanctis point to a growing number of smaller institutions, especially credit unions, that are offering post-purchase BNPL offerings out of their debit card programs.
“Debit-based BNPL is going to become table stakes pretty quickly, especially with the younger generation,” he says.
What’s at risk? Disintermediation and lost relationships. Gelles points out that debit cards have become the number-one payment method in the U.S. And many want the option for BNPL. Fail to serve that up, he says, and they will shift transactions to someone who does.
“They’ll go get a deposit account with a debit card with a fintech,” says Gelles.
Read more: How the Marriage of Open Banking and Payments Will Change Everything
Watch Agentic Consumer Payments, But Don’t Get Fooled By Headlines
Agentic commerce, and the essential agentic payments that go with it, have dominated industry headlines almost as much as stablecoins. But Lily Varon, principal analyst at Forrester, says bankers have to apply a reality filter.
“It’s still such early days,” says Varon. “Many of the agentic commerce product announcements aren’t really even product launches, they’re just partnership announcements, announcements about intentions to build. Announcements with actual usable products are few and far between.”
2026 will be a major year for AI agents, but not yet in payments.
On the consumer payments front, Varon says, it will be a year of gestation, as the reality catches up to the hype. She expects pickup in 2027.
“The fundamental infrastructure is just now being built and it’s not great. There are a lot of open questions,” says Varon “So we’re in this weird place where the train has left the station, but it’s on rickety rails.”
The issues. “Agentic commerce shakes payments to the core,” says Varon. “The core principles of identifying a customer as a legitimate customer, that they are human and who they say they are, suddenly go out the window when you’ve got an agent, a bot, that has the authority to act on their behalf.”
Varon explains that challenges arise for authentication and authorization and points out that the card networks and others, such as OpenAI, have essentially told merchants that any fraud liabilities will be on them.
Some figures from Forrester:
- The firm’s consumer research indicates that 64% of U.S. online adults don’t trust AI agents to use their personal data to buy things.
- However, to-be-published data indicates that 8% of responding consumers used OpenAI’s Instant Checkout and 8% used Perplexity’s Buy with Pro.
“That’s pretty rapid adoption for something that’s really new, and that’s a testament of the times,” says Varon. “I think we’ll see hyper adoption — and abandonment, too. Remember Pokémon GO?”
An agentic payments bellwether: Adobe forecasts that commerce site traffic generated by large language models will rise by over 500% by yearend, compared to 2024 levels.
Read more about agentic banking and payments:
- Brett King: Bankers Have Five Years to Rebuild for Agentic AI, Or Perish
- Is AI Learning the Job Faster Than Banks Can Redefine It?
- Are American Consumers Ready to Let AI Agents Shop and Pay on Their Behalf?
Faster Payments: 2026 Will Be the Year for ‘RFP’
FedNow and The Clearing House Real-Time Payments Network continue to grow in transactions and users. Both services have an option called “Request for Payment” that enables merchants to request for an instant payment, drawn on the recipient’s bank account.
Jim Colassano, senior vice president, product development and strategy at The Clearing House, thinks 2026 will be the year RFP takes off.
The significance of RFPs. “It’s going to be a real shift in terms of the way collections and receivables are done,” says Colassano. An RFP is a message sent via the networks that is intended to be driven to the recipient’s financial institution and from there to the front end, ideally a mobile device.
Consumers can agree to the RFP and their funds will be sent through the system. If they don’t agree — let’s say they already paid the bill — the message can be ignored and their account untouched.
Only financial institutions can use the RTP Network.
Read more: Banks Wary of Instant Payments Should Start by Just Receiving Them
Increasingly a Payments Do-It-All, PayPal Is Seeking the Keys to Banking
In mid-December applications, PayPal, the payments giant, applied for a Utah industrial bank charter, and federal deposit insurance. The filings are part of a wider trend that will bring even more competition to incumbent banks and credit unions.
“This is not new for PayPal,” says payments consultant Richard Crone. “Across the globe they have bank charters in other regions.”
PayPal stressed the opportunity the charter would represent for increased business banking, and plans to seek direct membership in card networks in the U.S.
But Crone sees even more potential:
• Cost saving. With a charter PayPal can cut out as much as 15 basis points of costs currently paid to banks for card system access it would have on its own.
• Deposit building. Idle balances held in PayPal accounts could ride there in safety, and also be instantly available should customers want to move the funds elsewhere.
• Friction reducing. PayPal would also gain access to the automated clearinghouse system, helping with transfers of funds out of PayPal and Venmo accounts. “They can eliminate 99.9% of the settlement risk once they are a bank and qualified to participate in RTP and FedNow,” says Crone.
• Innovation enhancing. PayPal is an active stablecoin issuer. Becoming a bank would provide its own on and off ramps for stablecoin transactions, taking away a stumbling block some others face.
• Agentic enabling. PayPal’s agentic payments efforts would receive a boost, with an insured deposit bank in the picture. And PayPal is already a major BNPL provider.
What can traditional institutions do with such a formidable competitor in the wings? Crone suggests dropping the competitive mindset and seeking ways to partner with the fintech-cum-bank. He says agentic commerce may be a natural connection as banks consider ways to get into that stream.
Read more 2026 outlook stories:
