opinion

Account-to-Account Payments: The New Banking Disruptor?

Account-to-Account Payments: The New Banking Disruptor?

So much of our industry relies upon Visa and Mastercard to support consumer payments — and with that reliance comes increased scrutiny by both brands. From a compliance perspective, the bar keeps getting raised until it feels like we end up spending half our time making sure we are compliant rather than growing our business.

I don’t blame Visa or Mastercard for putting controls in place, as they too are under scrutiny in supporting our industry, but understanding that does nothing to ease our pain. Fortunately, a potential solution has been developing over the past few years: pay-by-bank transactions. This alternative payment method is growing in popularity, so this month, we will look at pay-by-bank options, their benefits and where you can find them.

Pay-by-bank costs less than card transactions, since processing fees are lower, and it can be faster due to real-time or near-real-time settlements.

Fee Frustration

Does it feel like you keep getting hit with additional fees? Annual Visa and Mastercard registration fees alone can total $1,500 per year. This cost can push a new player or startup into the red right off the bat. There is also a premium charge from the card brands and our acquirers to process transactions specifically in the adult market, making it more costly for all of us.

While this is frustrating — after all, you are being penalized for offering a service that is clearly in demand, simply because it offends certain people — there is hope. Pay-by-bank transactions offer “freedom of banking.” Depending on where you live, pay-by-bank may already be available to you.

Pay-by-bank transactions — also known as bank transfers, account-to-account (A2A) or direct bank payments — are cardless payment methods that allow customers to pay directly from their bank account to the merchant’s bank account through “open banking.” This is offered by banks and payment service providers (PSPs) in partnership with payment networks or intermediaries. This solution is prevalent in Europe, the U.K. and South America, and is slowly developing in the U.S.

The Pay-by-Bank Process

So, how does pay-by-bank work? During the checkout process on a merchant’s website or app, the customer selects pay-by-bank and is directed to a list of banks. The customer then selects their preferred bank. For authentication, customers are redirected to their familiar online banking portal or mobile banking app, where they log in with their username and password, or through biometric authentication such as fingerprint or iris recognition.

After logging in, the customer authorizes the payment. This may involve confirming the transaction amount and providing any additional security information their bank requires, such as a one-time password sent via SMS or email for payment authentication. Once the customer authorizes the payment, the funds are transferred directly from the customer’s bank account to the merchant’s bank account. After processing, the customer and the merchant receive transaction confirmation. The merchant can then begin to fulfill the order or provide immediate access to the purchased goods or services. Lastly, the PSP or intermediary ensures the funds have been settled between the customer’s and merchant’s banks, typically through the banking system’s clearing and settlement process.

A Bounty of Banking Benefits

Pay-by-bank offers many advantages. For instance, PSPs can offer their merchants a broader range of payment options to attract new customers. Furthermore, fraud risk is reduced since customers authorize payments directly through their bank’s secure online banking portal. This helps PSPs and their merchants minimize losses due to chargebacks and unauthorized transactions.

Beyond transaction integrity, as mentioned earlier, pay-by-bank costs less than card transactions, since processing fees are lower, and it can be faster due to real-time or near-real-time settlements. This can improve cash flow, as funds from bank transfers are deposited immediately upon processing. 

Where to Take Advantage of Pay-by-Bank

Pay-by-bank is already very common in Europe, where it has been adopted for years. Ideal in the Netherlands, Sofort/Klarna/Giropay in Germany, and Swish and Trustly in Sweden are all localized bank-to-bank transfer products. Europe has also created the Single European Payments Area (SEPA), which allows consumers to make “borderless” payments between banks in the Eurozone.

Pay-by-bank is also growing in Brazil, where in the past it has been challenging to convert consumer traffic with credit cards due to the lack of consumer penetration. A local bank-to-bank solution called Pix, designed by the Brazilian Central Bank, was rolled out to consumers in 2020 and is rapidly becoming the most popular mode of payment in the country. Today, 74% of all transactions by Brazilian consumers are made through Pix because it has proved to be more cost-effective for both consumers and merchants.

In the U.K., bank-to-bank solution Faster Payments allows consumers to circumvent the card networks. A few of our merchants have integrated Faster Payments and one of them, a large cam merchant, reported a 20% increase in U.K. transactions after implementing it.

There is not yet a pay-by-bank option in the U.S., but two competing systems are in development: Fed Now from the Federal Reserve and Real Time Payments from The Clearing House. For now, those services still only facilitate payments on behalf of banks and financial institutions. Once a consumer solution is ready, it will be a welcome addition for U.S. merchants to take advantage of.

In the meantime, we are keeping a close eye on pay-by-bank solutions and how they lower processing costs, reduce fraud and increase conversion rates. At a time when the cost of everything seems to be going up, pay-by-bank could be a welcome way to bring at least some costs down.

Cathy Beardsley is president and CEO of Segpay, a merchant services provider offering a wide range of custom financial solutions including payment facilitator, direct merchant accounts and secure gateway services. Under her direction, Segpay has become one of four companies approved by Visa to operate as a high-risk internet payment services provider. Segpay offers secure turnkey solutions to accept online payments, with a guarantee that funds are kept safe and protected with its proprietary Fraud Mitigation System and customer service and support. For any questions or help, contact sales@segpay.com or compliance@segpay.com.

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