Hailey Johnson
Pay-by-bank is a payment method that allows customers to pay directly from their bank accounts without relying on credit limits or interest rates on outstanding balances. It offers several advantages, including faster settlements, lower fees, and reduced chargeback risks. Subscription-based businesses are increasingly adopting pay-by-bank options for recurring payments, and cross-border bank payment solutions are also gaining popularity. However, it's important to consider potential risks, such as fraudulent transactions, and understand how to resolve disputes and protect sensitive customer information.
| Characteristics | Values |
|---|---|
| Real-time payments | Some bank-based payment methods can perform instant transactions |
| Faster settlements | Some banking methods offer the option to settle faster than credit cards |
| Account-based payments | Customers can pay directly from their bank accounts without relying on credit limits |
| No need for credit checks | Bank-based payments don't require credit checks |
| Reduced chargebacks | Bank transfers have lower chargeback risks because customers have to initiate payments directly from their bank accounts |
| Subscription services | Subscription-based businesses are increasingly giving customers the option to pay by bank for recurring payments |
| Cross-border payments | Cross-border bank payment solutions are growing in popularity, giving global businesses a lower-cost, faster option for transactions |
| Customer-centric approach | Giving customers the option to pay by bank has helped shift the focus to customer-centric banking |
| Bank account authentication | Customers are redirected to their bank's secure online portal or prompted to log in through a third-party interface |
| Settlement and confirmation | The payment is marked successful asynchronously, and funds are available in the business's account |
| Lower fees | Card networks charge higher fees than banks, so payment processors typically pass fewer costs along to businesses for bank payments |
| Direct authentication | When paying by bank, customers authenticate directly with their bank, reducing the risk of phishing and unauthorized access |
| Transaction success rates | Bank-to-bank payments have higher transaction success rates than cards |
| Security | Open banking APIs do not require customers to share their bank login information with third-party service providers |
| Fraud detection | Companies offering the option should perform fraud and risk detection checks |
| Convenience | Automatic payments can be a convenient way for people to make sure they pay their bills on time |
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What You'll Learn
Real-time payments
However, it is important to note that some banks charge a fee to receive real-time payments, and transfers may be limited by destination institutions, daily transaction caps, and participating entities.
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Faster settlements
Bank-to-bank or account-to-account (A2A) payments have been around for decades, but they are currently experiencing a revival. 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 rise in remote banking and bank branch closures also resulted in more digital payments. This growth in cashless payment is expected to continue at a CAGR of 15% during the period 2022-27.
Pay-by-bank transactions require three steps. The first of these, authentication, only needs to be completed once between a customer and a new merchant. This step verifies the existence of the customer's account and its ability to send funds. It can be carried out through instant verification APIs such as Plaid Auth, which verifies accounts in seconds. Alternatively, micro-deposits can be used for accounts not connected to APIs or for users who choose not to use an instant method.
Once the authentication step has been completed, the customer selects Pay-by-Bank as a payment option and is prompted to choose their primary bank from a list of participating institutions. The choice redirects customers to their bank's website or mobile banking app to log in to their account with their username and password or with biometric identifiers. During this step, customers may be asked to consent to a third-party provider accessing their bank account details through an API. It is important to note that open banking APIs do not require customers to share their bank login information with third-party service providers.
Pay-by-bank offers several advantages over paying by credit card. These include lower fees, faster settlement, direct authentication, no need for credit checks, and reduced chargebacks. Lower fees are due to card networks charging higher fees than banks, so payment processors typically pass fewer costs along to businesses for bank payments. Bank-based payments don't require credit checks, making them accessible to those without credit or with poor credit history. Credit card payments are also prone to chargebacks because of disputes or fraudulent transactions. Bank transfers have a lower chargeback risk because customers must initiate payments directly from their bank accounts.
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Account-based payments
Account-to-account A2A payments are a quick, convenient, secure, and cost-effective way to send and receive money directly between bank accounts. They are facilitated by open banking technology and allow customers to pay directly from their bank accounts without relying on credit limits or worrying about interest rates on outstanding balances. Account-to-account payments also eliminate the need for credit checks, making them accessible to those without credit or with a poor credit history.
A2A payments have been around for a while but have historically been seen as bank account-specific transactions, such as when a consumer uses a bank transfer or direct debit to pay a bill. However, A2A payments can support all direct account payments, including bank and digital wallets. There are two types of A2A payments: push payments and pull payments. Push payments are typically used for one-off transfers as they require customers to manually send money. Pull payments, on the other hand, are when businesses withdraw funds from customers' accounts.
Account-to-account payments offer seamless, lightning-fast transactions with the added convenience of mobile usage. They provide a single, seamless payment flow for both merchants and customers. Customers only need a bank account to make a payment, and they can easily pay through a web-to-app connection or directly in their browser, reducing friction at checkout. Account-to-account payments also offer faster settlements compared to credit cards, which often take two business days due to batch processing and reconciliation.
With the increasing digital payment volumes and the rise of remote banking, interest in account-based payments is growing. Account-to-account payments provide a secure payment method that guarantees better conversion for merchants and easier payments for customers. They also have lower chargeback risks because customers initiate payments directly from their bank accounts. Additionally, card networks charge higher fees than banks, so businesses can benefit from lower costs associated with account-to-account payments.
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Subscription services
When it comes to paying for subscription services, there are various options available. Many subscription services offer automatic payments or autopay, which can be set up by linking your bank account, savings account, or credit/debit card to the service provider. This allows the service provider to automatically deduct the agreed-upon amount at regular intervals, such as monthly, bi-weekly, or annually. Automatic payments can help individuals stay on top of recurring expenses and save time and effort by eliminating the need to manually pay each bill.
However, it is important to carefully consider the payment method used for subscription services. Credit cards, for instance, offer added security against fraudulent activity and can help maintain an active card status. Additionally, virtual credit cards provide greater control and enhanced security for online transactions. They are particularly useful for free trials, as they prevent unexpected charges if you forget to cancel the subscription.
Some companies, like Microsoft, accept credit and debit cards as well as wire transfers for their subscription services. It is worth noting that the availability of payment methods may depend on the type of billing account you have with the company.
Overall, subscription services in banking and payments offer convenience and transparency, but it is important to choose the right payment method and stay vigilant about reviewing bills and managing your budget to avoid unexpected charges or excessive debt.
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Authentication
Payment authentication is a crucial part of any business's fraud prevention process. It is the process of confirming a customer's identity through at least one of the following authentication factors: knowledge, inherence, ownership, and user location. Knowledge is the most common category used for transaction authentication, as it involves information that only the cardholder possesses, such as a personal password, PIN, or secret word. Ownership authentication also uses information that only the user possesses. Inherence and user location are also important factors in authentication. Inherence can be confirmed through biometric identification, such as fingerprint scanning, facial recognition, voice recognition, or iris scanning. User location can be confirmed through Geolocation, which uses WiFi signals to determine the geographic location of the payer.
There are several methods of payment authentication. One-time passcodes or pins can be sent via text, email, or phone call. Authentication apps can also be used to generate a unique security code that changes every few minutes. Biometric identification can also be used to verify identity through fingerprint, retinal scan, or facial recognition.
Payment authentication is especially important for online and mobile commerce, as global spending on e-commerce reached $4.2 trillion in 2020, while losses from illegal purchases using stolen credit card numbers are also growing. Banks and card issuers, merchants, and payment processors use forms of authentication to protect themselves from fraudulent transactions and chargebacks.
Direct authentication is a type of payment initiation where customers authenticate directly with their bank, reducing the risk of phishing and unauthorized access. This process typically involves multi-factor authentication (MFA). Bank transfers and redirects are often carried out in a bank's secure online portal or mobile app, reducing the opportunities for fraudulent actors to steal customers' payment information.
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Frequently asked questions
Paying through bank is quick, convenient, secure, and cost-effective. It also offers faster settlements and lower fees compared to credit cards.
To set up a pay-through-bank account, you will need to select the "Pay-by-Bank" option during checkout and choose your primary bank from a list of participating institutions. You will then be redirected to your bank's website or mobile banking app to log in to your account.
You can set up automatic payments from your bank account by providing the company with your checking account or debit card information and giving them permission to withdraw funds from your account regularly. You can set a fixed amount for each payment or allow payments to vary within a specified range.
While paying through bank is generally secure, it is important to be cautious and only provide your bank account information to legitimate and credible companies. Additionally, there may be consumer protection risks and uncertainties around recourse mechanisms and liability arrangements in the event of disputes.
