In the rural southwest corner of Missouri, where cattle outnumber people and small businesses are still the heartbeat of the local economy, First State Bank of Purdy CEO Jeff Scott is betting on a new pay-by-bank solution to boost his retail banking business. Scott feels it could be so popular with area merchants that he is willing to risk losing some debit card interchange fee revenue at the $240 million subsidiary of Purdy Bancshares, based in Monett, Missouri.
“The small businesses, their margins are getting so compressed on lots of things,” he says, adding that card processors charging 2%, 3% or 4% is a real pain point. “I really think [what] I call true small businesses that are fighting for every dollar are going to latch onto this. And that’s a huge audience.”
Pay by bank allows customers to pay merchants directly from their bank accounts at checkout through the use of a mobile app. The pay-by-bank solution First State Bank of Purdy has already set up for two local merchants is provided by LocalPay. Instead of being marketed to merchants, LocalPay is unique because it is designed for banks and directly integrates with the core banking application programming interfaces (APIs) of Fiserv, FIS and, in the case of First State Bank of Purdy, Jack Henry’s jXchange. “That makes it really easy from the banking side,” Scott says. “You know that we’re using all Jack Henry standard code, Jack Henry APIs.”
LocalPay Founder and CEO Kent Yan says pay by bank’s appeal for merchants lies in its low fees, which run 1-to-3 percentage points less than card transaction fees. Yan believes community banks and credit unions are best suited to grow the nascent technology due to their strong foundations. “Look at Jeff’s family bank,” Yan says. “The 81 years of relationship building in the community really put them at the center of the local economy, and linked them up with the merchant and consumer to form a real kind of ecosystem.”
What About Card Fee Revenue?
With First State Bank of Purdy earning 0.8% on its merchant debit card transactions, Scott says he had to look long and hard at the math before adopting pay by bank. On a two-sided transaction where both the consumer and merchant are bank customers, there’s a slight gain in revenue. When the consumer banks somewhere else and First State Bank of Purdy has to pay a small ACH fee to process the transaction, the margins are not as favorable.
“To be quite honest, it’s going to have to be a volume thing,” Scott says. “If you just sit down one for one with the current base, it would probably lose a little bit of money from the interchange fee. But I think from the volume standpoint, it’ll actually make more money in the end.”
Yan is optimistic pay by bank will result in more of those two-sided transactions that increase fee revenues while boosting the bank’s small business deposits. “If Jeff’s bank offers this benefit to the merchants in the two counties they serve, they can significantly increase their revenue because they can attract merchants and open [more] accounts,” he says.
But not every financial institution should view pay by bank the same way. First State Bank of Purdy issues debit cards, but does not issue its own credit cards, using a partner bank for that service instead. A July 2025 Federal Reserve report advises that banks with their own credit card operations should view pay by bank cautiously because it could adversely impact their revenues.
Some experts say card revenues should not be the only concern for financial institutions. Anil Goyal, CEO of CorServ, a card-as-a-service provider for community banks, says card networks also provide protections and peace of mind that should not be underestimated.
“My frank opinion is that a 3% fee for a network that provides you fraud protection, provides you very mature dispute handling processes, guaranteed funds, global acceptance anywhere you go, it’s hard to beat that,” Goyal says. “You’re trying to save that fee, but then you create costs that may not be as transparent to you in the first place. You may have more fraud, you may have more disputes, you may have more reversals, and is that really what you’re trying to do?”
Yan says LocalPay has processes in place for handling consumer claims about errors or unauthorized transactions, as well as merchant refunds. He also says that because pay-by-bank services work through mobile apps, they are even safer in some respects. “If you use an app-based payment method with biometrics, your fraud level is much lower than with a plastic card.”
The Fed report on pay by bank states the technology could also present potential compliance and regulatory risks for banks. The delay of the Consumer Financial Protection Bureau’s open banking rule means there are still no U.S. regulations that would apply to pay-by-bank transactions that involve more than one institution.
Can Pay By Bank Change Consumer Habits?
Even pay-by-bank skeptics admit it is easy to use. In the case of LocalPay, each merchant has a unique QR code the consumer can simply scan with their mobile phone to make a payment.
“By making it easy with the QR code, you take your phone and you’re there and the money’s gone. That makes it really nice and easy,” Scott says. “I’m from Missouri, the Show Me State. Showing them does make it a lot easier to sell to our customers.”
But a consumer must first download the LocalPay app or use their bank’s mobile app if it offers the service. Tony DeSanctis, senior director at Cornerstone Advisors, who specializes in payments, says that is not something most people want to deal with at the register.
“The [intolerance] for friction by most consumers in the checkout process is significant,” he says. “So, my guess is even if you could get a merchant network in place, even if you could get to some kind of a scale with it, I would be skeptical on consumer adoption of this as an alternative payment.”
Research shows most consumers don’t use mobile apps to make point-of-sale purchases. According to the Federal Reserve’s 2025 Diary of Consumer Payment Choice (DCPC), cards, cash and checks still accounted for more than 80% of all payment transactions in 2024.
But Yan believes habits are starting to change. “On the consumer end, you’ve seen Venmo and Cash App become very popular, especially for Gen Z and Gen Y,” Yan says. “So, that kind of spending or payment habit is facilitating this kind of thing.”
Data from the 2025 DCPC does show that consumers younger than 35 used their mobile phone four times per month for in-person, non-bill payments. But mobile phone payments still only accounted for 11% of all such payments.
To boost further consumer adoption, LocalPay is encouraging merchants to use transaction fee savings to offer discounts to customers willing to pay by bank. Those discounts will be advertised on the LocalPay app and on the mobile apps of the banks offering the service.
It’s unclear whether all those pieces can grow merchant and consumer adoption rates. Scott remains positive they will.
“Anybody I’ve told about this, my banking friends, say ‘this is really cool,’” Scott says. “This is very simplistic, and it can solve problems.”
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