Pay by bank (PBB) refers to a direct payment from a consumer’s bank account to a business for their goods or services without the use of a credit or debit card. These payments typically leverage the Automated Clearing House network but are expanding to instant payment rails such as the Federal Reserve’s FedNow and The Clearing House’s Real-Time Payments (RTP). Today, most PBB purchases are made via e-commerce, but new partnerships are emerging that could drive acceptance and usage to the point of sale.
Merchants have longed for solutions to accept electronic payments that aren’t card-based at the point of sale, primarily due to the perceived lower cost of acceptance. With ACH or instant payments, merchants have less risk of taking losses because transactions are practically irrevocable: PBB typically leaves the consumer or their financial institution on the hook. As a result, the payments industry predicts further PBB adoption in lower-risk merchant spending categories, such as medical offices, auto, insurance and other loan payments.
Fintech payment service companies such as PayPal Holdings, Block’s Square and Stripe are already offering PBB solutions to merchants as another source of revenue. Since many consumers have their bank account information stored with one or more payment service providers, there is minimal development required to provide a solution.
Walmart is expanding its current PBB offerings through a partnership with Fiserv to offer instant payments via RTP and FedNow later this year. JetBlue Airways Corp. announced a partnership with PayPal’s Venmo to accept payments through the wallet app, which offers a PBB method via ACH. The airline currently allows payments for flights via Venmo on its website and app and could consider accepting Venmo for in-flight purchases.
PBB appeals to consumers for a variety of reasons. Consumers believe payments through fintechs are more secure since they don’t share their bank details with each merchant. Combine that with promotions or discounts, and it’s easy to see the allure.
The biggest barrier to PBB adoption could be the physical point of sale. With most point of sale terminals designed to accommodate cards or digital wallets, it will take time for retailers to set up PBB capabilities. While trade groups promote QR codes as a solution, it’s unclear if consumers must download new apps on their mobile devices or share routing and account number credentials, concerns that could pose formidable obstacles.
In addition, merchants that want to leapfrog ACH and move to instant funds will have to think about how to accept RTP and Fed Now push payments. Instant funds work off push payments: the consumer may need to receive a request for payment from the merchant to push the correct dollar amount in exchange for goods and services.
A shift away from cards has been at the forefront of concern for financial institutions. The biggest implication of PBB is the erosion of a critical revenue stream: card interchange. Along with a hit on revenue, customer stickiness is at risk. Should loyal credit card users shift to PBB, financial institutions could lose a primary form of engagement with consumers, potentially putting them at a higher risk of attrition.
In addition, financial institutions will need to fully understand the risks associated with consumer fraud and non-fraud claims handling and budgeting. With no way to charge merchants back for claims, financial institutions will need to consider their regulatory obligations and develop mechanisms to manage fraud risk. If a financial institution doesn’t cover the consumers’ claim, do they risk losing the customer relationship?
PBB’s potential to disrupt the card payment value chain is clear. We expect to see greater adoption as more merchants integrate PBB across e-commerce and develop fintech partnerships. Financial institutions must consider how growth in PBB will impact their card revenue streams while assessing how to manage new types of fraud and non-fraud claims. As PBB gains greater traction with U.S. shoppers, consumers may consider moving their primary bank accounts to institutions that can accommodate the payment method with minimal friction.
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