The Future of Merchant Services: Why Banks Should Embrace Pay-by-Bank Solutions

The Traditional Focus of Banks: Consumer-Centric Solutions

Most banks have traditionally centered their services around consumer banking—starting with fundamental checking and savings accounts and gradually expanding into lending products such as mortgages and personal loans. Over time, many banks have ventured into merchant and commercial banking, offering business checking, savings, and lending solutions. However, one area where many banks have struggled or completely retreated is merchant acquiring services—the ability to facilitate credit and debit card payments for businesses.

The Decline of Traditional Merchant Acquiring

Historically, merchant acquiring was a profitable but resource-intensive business. Banks had to dedicate significant resources to:

• Marketing and onboarding merchants into card acceptance.
• Deploying and maintaining hardware for in-store payments.
• Integrating technology solutions with merchant systems.
• Providing customer support for ongoing transaction processing issues.

Over time, banks started offloading these responsibilities to Independent Sales Organizations (ISOs) and third-party service providers. Large merchant acquirers like Elavon emerged, offering turnkey solutions where banks simply acted as referral points rather than actively managing merchant relationships. Additionally, smaller banks often relied on third-party acquiring processors to handle technology and processing, further reducing their direct engagement in merchant services.

With so many intermediaries in the value chain, the financial appeal of merchant services began to erode. Many banks have exited this space altogether, losing out on key benefits such as:

• Merchant deposits (from transactions and settlements).
• Transaction fee revenues (interchange and processing fees).
• Deepened merchant relationships that lead to cross-sell opportunities (e.g., business loans, payroll services, treasury management).

Banks faced a difficult tradeoff: invest in an operationally demanding, shrinking-margin business or settle for limited financial upside with a hands-off referral model.

A Game Changer: Pay-by-Bank as the New Merchant Services Model

Recent advancements in payments technology have paved the way for a simpler, more profitable alternative: Pay-by-Bank. This emerging payment solution enables direct account-to-account (A2A) payments, allowing consumers to pay merchants directly from their bank accounts—bypassing card networks and reducing intermediary costs.

Why Pay-by-Bank is a Better Merchant Services Model for Banks

1. Higher Profitability & Lower Costs
   

• Traditional card-based payments involve multiple parties taking a share of the fees—issuers, acquirers, networks, ISOs, and processors.
• Pay-by-Bank removes many of these intermediaries, allowing banks to retain a larger portion of transaction revenue while offering lower fees to merchants.

2. Minimal Bank Resources Required
   

• Unlike traditional merchant acquiring, which requires hardware deployment, customer support, and sales teams, Pay-by-Bank is digital-first and operates through a self-service model.
• Merchants can sign up, configure, and begin accepting payments through a simple app download and registration process.

3. Stronger Merchant Relationships & Deposits Growth
   

• By offering Pay-by-Bank, banks can re-establish direct relationships with merchants without needing to manage costly legacy merchant services infrastructure.
• Since funds settle directly into merchant bank accounts (instead of passing through intermediaries), banks benefit from higher deposit balances.

4. Enhanced Security & Reduced Fraud Risks
   

• Pay-by-Bank transactions authenticate directly with consumer bank accounts, reducing the risk of fraud and chargebacks compared to traditional credit and debit card payments.
• With card fraud increasing, merchants are seeking safer, more cost-effective payment methods—and Pay-by-Bank delivers.

5. Future-Proofing Against Payments Innovation
   

• Regulatory initiatives like Regulation 1033 in the U.S. and Open Banking frameworks globally are pushing the industry towards more direct, bank-led payment solutions.
• Pay-by-Bank aligns with this trend, positioning banks to own the customer experience rather than ceding it to fintech disruptors.

Expanding Market Reach with a Strong Merchant Payment Offering

A compelling merchant payment solution does not just provide benefits to existing bank merchant customers—it also serves as a powerful merchant acquisition tool. Businesses looking for lower-cost, high-benefit payment solutions will be drawn to banks offering Pay-by-Bank services, leading to an increase in new merchant account openings. This influx of new merchant customers not only grows the bank's deposit base but also creates opportunities for cross-selling additional financial products such as business loans, treasury management, and payroll services. By positioning themselves as leaders in cost-effective payment solutions, banks can attract a broader segment of the commercial market, further strengthening their role in business banking.

The Time is Now: Banks Must Act

Banks that embrace Pay-by-Bank can re-enter the merchant services space in a way that is more financially lucrative and operationally scalable than traditional card acquiring. By leveraging digital-first, self-service models, banks can win back merchant relationships, grow deposits, and strengthen their role in the evolving payments ecosystem.

Rather than letting fintechs and third-party providers dominate, banks have an opportunity to lead the shift to modern, direct payments—offering a seamless, cost-effective alternative that benefits both merchants and financial institutions.

The choice is clear: modernize merchant services with Pay-by-Bank or risk losing yet another revenue stream to emerging competitors.

Companies such as LocalPay, which are already working with multiple banks in local communities, demonstrate that this model offers a straightforward yet highly effective solution for Banks looking to enhance their merchant services – generating greater revenue, increasing deposits, and unlocking additional financial benefits.