What is pay by bank?

A comprehensive guide to understanding pay by bank payments.

Pay by bank payments have been around for decades but are currently undergoing a reboot. New-style account-to-account payments are a quick, convenient, secure and cost-effective way to make and receive payment directly between bank accounts.

With real-time processing and enhanced security, pay by bank is becoming a popular choice for both online and in-store purchases. We look into how pay by bank payments work, their benefits and what the future may hold for this payment method.

In this article, we cover:

What is pay by bank?

Why is there increasing interest in pay by bank?

How does pay by bank work?

What are the steps to pay by bank?

What is pay by bank app?

What is pay by bank online?

What are the pros and cons of pay by bank?

Is pay by bank safe?

Is pay by bank the future of payments?

1. What is pay by bank?

Pay by bank is a way to pay and be paid directly from a bank account. It’s quick, convenient, safe and secure for both customers and businesses.

For customers, pay by bank is slicker and quicker than topping up wallets, typing in card details or converting physical cash or vouchers to make online purchases. When integrated at checkout, customers simply select bank transfer, log into their online or mobile banking as usual, check the payment details and confirm to pay sellers worldwide.

For businesses, accepting payments direct from customers’ bank accounts is now as easy for cross-border as for domestic sales. It’s cheaper with better acceptance rates than cards, for example transaction success rates as high as 99% versus 91.6% for cards.

2. Why is there increasing interest in pay by bank?

Bank-to-bank or account-to-account (A2A) payments have been around for a while. 50-plus years in some countries with legacy batch systems. Examples include Bacs in the UK, Electronic Funds Transfer (EFT) in Canada and the Bulk Electronic Clearing System (BECS) in Australia and New Zealand.

However, interest in pay by bank is increasing as digital payment volumes increase, mostly at the expense of less efficient paper-based methods, such as cash and cheques. The Covid-induced double whammy of the rise in both remote banking and bank branch closures also resulted in more digital payments. This growth in cashless payment will continue at a CAGR of 15% during the period 2022-27, says consulting firm CapGemini.

Technology is also speeding up money movement. So, funds arrive on account in real-time – that’s in seconds, not hours or days. It’s also helping to turn bank-held data inside out with so-called ‘Open Banking’ that enable new, secure sharing of bank data with customer consent.

Payments – or payment initiation – is one particular killer use case for Open Banking. It’s a win-win for both customers and businesses:

• Customers get quick, convenient and secure transfers that look and feel the same as the bank transfer they know and trust.
• Businesses get access to hundreds of banks and thousands of customers worldwide via a single connection.

3. How does pay by bank work?

Pay by bank generally works via an electronic network of participating banks and financial institutions.

Sometimes these networks are owned and operated by the participants directly via a joint venture or holding company. Or they may be run as separate for-profit companies, whose expertise is running a technology network or back-office functions, rather than specifically banking or finance.

Network participants may choose to promote their bank transfer method under a single brand. For example, iDEAL in the Netherlands, BILK in Poland or Swish in Sweden.

Besides ownership and governance, speed is the other main determinant of how pay by bank works. Pay by bank payments either run on traditional batch or real-time rails.

With batch payment networks, payments arrive on the beneficiary’s (recipient’s) account in 1-3 days. This can be up to 5 days for international bank-to-bank payments. With real-time payment networks, payments arrive near instantly.

4. What are the steps to pay by bank?

When integrated at checkout, customers simply do the following to pay by bank:

1. Select bank transfer
2. Find their bank
3. Log into their online bank as usual
4. Check payment details
5. Confirm payment

Customers don’t have to type in card details, expiry dates etc. Or manually make a bank transfer the old-fashioned way. The potential for fat-finger errors on tiny mobile keyboards and data theft are also reduced.

Thanks to Open Banking technology, customers can also pay businesses outside their home country directly via their bank account. Similarly, businesses can accept pay by bank transfers from hundreds of banks and thousands of customers worldwide via a single connection.

5. What is pay by bank app?

Pay by bank app is when customers use an app on their mobile phone or device to transfer funds between bank accounts.

Banks or financial institutions add a mobile-based interface on the front end. When they’re checking out online, customers can pay directly from the banking app on their phone, tablet etc.

To accept all types of pay by bank payments, businesses can contact their payment service provider to turn on this functionality.

6. What is pay by bank online?

Pay by bank online allows customers to pay directly from their bank account when checking out online. It works via a web-based interface, rather than a mobile app as for pay by bank app.

To accept all types of pay by bank payments, businesses can contact their payment service provider to turn on this functionality.

7. What are the pros and cons of pay by bank?

The pros of pay by bank are that it helps businesses cut costs, principally card scheme, interchange and chargeback fees.

It helps boost revenue with better acceptance rates and conversion, and more customer choice. Pay by bank transaction success rates can be as high as 99% versus 91.6% for cards. And with 20% of consumers abandoning their purchase if their preferred payment method is not offered, better bank payments help turn browsers into buyers.

Finally, pay by bank helps improve cashflow with faster funds transfer than cards, speed up international expansion and optimize fraud prevention.

The cons of pay by bank relate to coverage. Some countries and regions have high unbanked populations, where take-up could be lower than in Europe and the UK, where most customers typically have bank accounts.

So, while 10 million consumers and small businesses regularly benefit from Open Banking in the UK, awareness may be low elsewhere as not all countries are moving at the same speed.

Similarly, the EU and UK have Open Banking regulations, yet other countries and regions are playing catch up with standardized rules for data-sharing.

8. Is pay by bank safe?

Pay by bank is as safe as traditional payments online, if not safer, due to several in-built features.

Customers don’t have to type out card or account details, or consent to them being stored. That’s because unlike ‘pull-based’ card payment, pay by bank transfers work on a ‘push’ mechanism.

This also means that businesses can take payments without taking account data, which reduces the scope for certain types of fraud.

Customers authorize payments with bank-grade security by logging into their online or mobile banking.

However, it is possible for fraudsters to trick people into sending money via pay by bank by posing as a genuine recipient. Known as authorized push payment (APP), this fraud type rising in line with the rise in popularity of direct bank transfers.

To help prevent this, banks and financial institutions are introducing confirmation of payee, where the receiving bank confirms the details of the recipient before the payment is made.

Some countries, such as the UK, are also introducing mandatory reimbursements of fraudulent push payments under certain circumstances.

9. Is pay by bank the future of payments?

Connecting customers to a funding source – whether that’s a bank, mobile money or loyalty points account – is the future not only of payments but also of business.

Open Banking-style pay by bank promises more joined-up money, through the sharing of data with customer consent. And this is account data not merely payment initiation data.

If businesses can connect customers to their money, there’s scope for them to innovate and collaborate more.

That’s particularly around offering financial services in non-financial contexts when customers need it most, also known as embedded finance.

For example, loans offered at the point of purchase. Or home insurance that appears alongside a new rental agreement.

Integrating this directly into what the customer is already doing is the ultimate friction-free experience. To take up the offer, all they need to do is agree.

Open Banking is the technical and regulatory rails powering this type of innovation. And in this way, could be said to be the future not only of payments but also of business.