Pay by Bank

One thing merchants and consumers have in common is that they both have a complicated relationship with credit cards. On the one hand, everyone loves the speed and convenience. Bring up fees, interest, and chargebacks, and you’ll see a very different reaction.

This has led to considerable demand for alternative payment systems that are fast and easy like credit cards but don’t come with the drawbacks. The latest contender is Pay by Bank, which negotiates a direct and secure connection between banks for secure, immediate fund transfers. How does Pay by Bank work, and what do merchants need to know about accepting this form of payment?

In a world where “cash, check, or charge” are the only payment options, it makes sense that credit cards would become the dominant form of payment for e-commerce.

But credit cards were never designed to be used in a digital, interconnected economy, and it doesn’t take long to see the problems emerge. Fraud is the most obvious one.

All you really need to make a credit card transaction are the payment credentials, a relatively small amount of data that can easily be stolen, sold, and misused. Preventing credit card fraud requires add-on support technologies like 3-D Secure and artificial intelligence filters.

Bank-to-bank transfers may look like a good alternative to card payments, but they can actually be riskier for consumers than credit cards because they usually aren’t covered under the laws that grant cardholders chargeback rights in the event of credit card fraud.

App-based payment platforms that provide a secure shell for ACH transfers have found a place in the world of electronic payments, but they require the consumer to set up and maintain an account.

Pay by Bank is a new implementation of direct bank-to-bank fund transfers that is designed to be simple and painless for consumers to use. 

What Is Pay by Bank?

Pay by Bank is a joint venture from Bank of America and Banked Ltd. Currently available only in the UK (but set to expand soon), Pay by Bank allows merchants to offer a new payment option to their customers that moves money directly from their customer’s account to the merchant’s account.

Pay by Bank is based on the Open Banking concept, which describes systems in which consumers can give third-party providers access to their banking information for the purpose of facilitating the development of beneficial financial tools and services. It’s designed to give consumers some freedom of choice and prevent big banks from forcing them to use proprietary resources, and is mandated by law in regions such as the EU and the UK.

How Does Pay by Bank Work?

Eligible merchants can add the Pay by Bank option to their checkout by contacting Banked Ltd. When a customer completes their shopping and starts to check out, they will see the Pay by Bank option. If they select it, they will then be prompted to choose their bank from a list.

Once they have selected their personal bank, the customer can authenticate the payment by validating their identity through their online banking website or app. They’ll do this the same way they normally log in to their account—with a password, face ID, fingerprint scan, or however they have it secured.

As soon as the authentication is complete, the funds will be transferred directly from the customer’s personal bank account to the merchant account, and the checkout can proceed to completion.

Pay by Bank payments can also be initiated with a QR code or via secure links sent over SMS or internet chat apps.

What Are the Benefits of Pay by Bank?

One of the best features of Pay by Bank is its security. It’s safer than an ACH transfer because the customer never has to transmit their bank account number or any other identifying details to the merchant.

Private information often gets stolen and circulated to fraudsters when cybercriminals hack into merchant servers or eavesdrop on network traffic, but Pay by Bank avoids these risks.

There are many other upsides for merchants. Pay by Bank is a direct fund transfer, so merchants don’t have to wait through the credit card settlement and clearing process. It’s easy to implement through an API and it doesn’t require the customer to have registered for the service in advance. It doesn’t include as many costly transaction fees as credit card payments. And, best of all—no chargebacks.

How Will Pay by Bank Disputes Be Resolved?

In the UK, the law that establishes chargeback rights is Section 75 of the Consumer Credit Act. Like the US Fair Credit Billing Act, this law protects consumers from credit card fraud by greatly limiting their liability in the event that their card is used without their authorization. These laws do not apply to direct fund transfers between banks, so they are not subject to the chargeback process.

Transactions like these, such as ACH transfers, do have dispute protocols, but they tend to be more rigorous and harder for fraudsters to game than the chargeback process. Nor are they tied into regulatory frameworks that penalize merchants, such as the “excessive chargeback” programs run by the card networks.

Banked Ltd directs consumers to contact them directly if they want to dispute a payment. While the exact process for Pay by Bank disputes is not yet well-publicized or documented, most alternative payment system dispute processes are less harmful to merchants than standard credit card chargebacks.

Conclusion

Merchants and consumers may have different reasons for seeking out alternatives to credit cards, but both sides have reasons to be motivated to expand their payment options. Pay by Bank’s UK launch should serve as a proving ground for this new technology, and its future availability may depend on how well it takes off there.

It remains to be seen whether or not Pay by Bank can be viable in markets that do not have Open Banking requirements, but we already know from the rise of Buy Now Pay Later that payment trends in Europe can have an influence on the stateside payments industry. Even without Open Banking, we are likely to see an increase in bank-to-bank payment platforms if Pay by Bank becomes popular.

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