Pay by Bank: The Future of Payments

In the fast-evolving world of digital payments, "pay by bank" is quickly gaining traction as a preferred option for consumers and businesses alike. Instead of relying on traditional card networks, pay by bank allows direct transactions between a consumer’s bank account and the merchant. By cutting out intermediaries, this method can reduce fees, simplify the user experience, and bolster security, which our friend and colleague, the Payments Professor covered in a recent video.

Why Pay by Bank Is Rising in Popularity
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Pay-by-bank transactions prove to be attractive for several use cases – such as loan payments, rent payments and healthcare payments to retail transactions and even transactions like rideshare payments and betting. Millennials and Gen Z are particularly interested in this transaction method, especially when incentives are
offered. In fact, 81% of consumers express at least some interest in pay by bank when informed about potential rewards, according to data from PYMNTS.com.

So, what are the benefits of pay by bank?

1. Reduced Transaction Fees
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For merchants, one of the most appealing aspects of pay by bank is the reduced
transaction cost. Credit and debit card payments typically incur a fee ranging
between 1% and 3%, which can significantly cut into profits. Pay by bank
transactions, on the other hand, often come with lower fees, making them
attractive to businesses looking to reduce costs without compromising payment
options.
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2. Enhanced Security
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Security remains a top concern in digital payments. Pay by bank leverages bank-
level authentication, providing an extra layer of security and eliminating the need
to store sensitive card information. This not only minimizes the risk of fraud but
also instills greater confidence in consumers about the safety of their financial
data.

3. Simplified Checkout Experience

‍Consumers are increasingly demanding fast, seamless checkout experiences. Pay by bank simplifies the checkout process by allowing users to pay directly from their bank accounts without needing to enter card details. With fewer steps, pay bybank reduces friction and speeds up transactions, making it a win for consumers and merchants alike.

4. Financial Inclusion
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For many people who don’t have credit cards but hold bank accounts, pay by bank opens doors to online transactions. By supporting those without access to traditional credit, businesses can widen their consumer base and contribute to financial inclusion efforts.
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Key Trends Shaping Pay by Bank
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1. Increased Support from Fintechs and Banks
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Fintech companies and traditional banks are investing heavily in pay by bank infrastructure, adding it as an option within banking apps and payment gateways. By facilitating these transactions directly through banking interfaces, both fintechs and banks can expand their service offerings, retain customer loyalty, and provide more flexibility in payment options.
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2. Cross-Border Potential
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Although pay by bank is more popular in Europe, it’s starting to gain traction in other regions, including North America. With its potential for cross-border payments, pay by bank can make it easier and more cost-effective for global commerce. As the technology and partnerships supporting pay by bank grow, this method is set to become a valuable option for international transactions.
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3. Regulatory Support and Open Banking
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Open banking frameworks, such as the recent CFPB 1033 rule, have paved the way for secure, direct connections between banks and third-party providers. These regulatory changes make it easier for consumers to link their bank accounts to payment apps securely, which is a crucial enabler for pay by bank.

What’s Next for Pay by Bank?
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As pay by bank continues to evolve, we can expect broader adoption, especially as merchants recognize the benefits of reduced fees and smoother transactions. Financial institutions will likely deepen their involvement, potentially offering more tailored incentives for users who opt for pay by bank options over traditional card
payments. With growing regulatory support and increased comfort among consumers, pay by bank is well-positioned to become a staple in digital payment ecosystems worldwide.
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In conclusion, pay by bank is more than just a passing trend; it represents a shift toward a more efficient, secure, and inclusive payment landscape. As businesses and consumers continue to prioritize simplicity and cost savings, pay by bank may well become the preferred payment method of the future.