How Pay-by-Bank Benefits Financial Institutions

Pay-by-Bank is gaining traction as an innovative payment method, offering financial institutions a unique opportunity to drive growth while enhancing customer and merchant experiences. While this payment solution is still in its early stages in the United States compared to Europe, recent advancements in real-time payment infrastructure, such as FedNow and RTP, position Pay-by-Bank for rapid expansion. By reducing reliance on traditional card networks, Pay-by-Bank facilitates faster, more cost-effective transactions, benefiting all stakeholders.

In Europe, Pay-by-Bank has seen widespread adoption due to open banking regulations, which mandate that banks provide secure access to account information and payments. However, European banks have struggled to monetize this trend due to regulatory constraints that limit their ability to charge transaction fees. Instead, fintech firms and third-party providers have driven innovation and reaped the benefits of direct bank payments. In contrast, the U.S. banking landscape presents a significant opportunity for financial institutions to be the primary enablers of Pay-by-Bank. By proactively integrating this solution into their payment offerings, U.S. banks can not only facilitate lower-cost payments for merchants and consumers but also capture a share of the transaction revenue—something that has eluded many European banks.

Meeting Market Demand for Lower-Cost Payments

Both merchants and consumers are actively seeking lower-cost alternatives to traditional payment methods, which often come with high transaction fees. Pay-by-Bank provides a lower-cost payment solution by enabling direct account-to-account (A2A) transfers, reducing dependency on costly card networks. Traditional credit and debit card transactions can carry interchange fees ranging from 1.5% to 3.5% for merchants, along with additional processing fees. Pay-by-Bank significantly reduces these costs, allowing businesses to retain more revenue while offering consumers a seamless, secure, and efficient way to pay. This direct payment method not only minimizes fees but also decreases fraud risks and delays associated with card-based payments, making it an attractive solution for both merchants and financial institutions.

Driving Real-Time Payment Adoption in the U.S.

Currently, Pay-by-Bank in the U.S. is mostly limited to non-time-sensitive transactions, such as bill payments and account transfers. However, with the introduction of FedNow and RTP, real-time A2A payments are set to take off. These new payment rails empower banks to offer instant, cost-effective transactions, creating a more efficient financial ecosystem that benefits both businesses and consumers.

Emerging Trends in Pay-by-Bank

Globally, Pay-by-Bank is experiencing increased adoption due to regulatory support, technological advancements, and growing consumer trust. In Europe, open banking regulations have facilitated seamless bank-to-bank payments, reducing reliance on traditional card networks. The U.S. is now following suit, with more fintech companies and financial institutions integrating Pay-by-Bank capabilities into their platforms.

One key trend is the integration of Pay-by-Bank with bill pay platforms, allowing consumers to make secure, direct payments without the need for credit or debit cards. Additionally, recurring payment functionalities for subscription-based services are emerging, expanding the use cases beyond one-time transactions. Financial institutions that invest in this technology early can gain a competitive edge by capturing new market segments and increasing customer engagement.

Despite these advancements, real-time Pay-by-Bank is still not widespread in the U.S. With the latest technology, banks now have an opportunity to offer this solution to their merchants for payments at the point of sale – in real-time. Small merchants and businesses, as well as service providers who typically either cannot get card acceptance or have to pay high fees to Payment Service Providers, such as Square, now have a lower-cost alternative.

Revenue Growth and Deposit Retention for Banks

For banks, Pay-by-Bank is not just about offering a new payment method—it’s a strategic revenue opportunity. Financial institutions can earn a transaction fee from every Pay-by-Bank payment. When a consumer makes a payment, their bank can capture an "issuer-like" fee, while the merchant’s bank can collect a "merchant services" fee. This means banks can generate revenue every time funds move in or out of the bank, strengthening their financial position.

Additionally, enabling Pay-by-Bank helps banks retain deposits within their ecosystem. Consumers who rely on third-party wallets like PayPal or Venmo often move funds out of their banks and local communities. By offering a direct, cost-effective payment alternative, banks can keep more deposits within their institution, supporting liquidity and lending activities.

Furthermore, Pay-by-Bank serves as a valuable merchant services product. By equipping local businesses with this low-cost acceptance solution, banks create strong incentives for merchants to maintain their deposits with them. As more merchants in a community recognize the cost benefits and efficiency of Pay-by-Bank, they are likely to open new accounts with banks that offer this service, driving new customer acquisition and strengthening local economic growth.

Additional Benefits for Banks

Beyond revenue generation and deposit retention, Pay-by-Bank provides banks with deeper insights into consumer spending behaviors. By analyzing transaction data, financial institutions can tailor personalized financial products, improve risk assessments, and enhance fraud prevention strategies.

Furthermore, adopting Pay-by-Bank strengthens customer relationships by providing a frictionless and secure payment experience. Consumers benefit from faster, more transparent transactions, while businesses enjoy lower processing fees and improved cash flow management. By positioning themselves as leaders in payment innovation, banks can solidify trust and loyalty among their customer base.

Conclusion

As real-time payment adoption accelerates in the U.S., Pay-by-Bank presents a significant opportunity for financial institutions to drive revenue, retain deposits, and enhance their merchant services offerings. By championing this payment innovation, banks can position themselves as leaders in the evolving payments landscape while providing cost-effective, efficient solutions for both consumers and businesses.