Expert in the field of international financial law Konstantin Kryvopust notes that “Pay by Bank” payment method is becoming an increasingly popular way to pay for online purchases, changing the payment landscape in the world and forcing financial institutions to review their strategies. How does “Pay by Bank” work? What advantages does it have over other usual payment methods? But will it become popular in Ukraine? Read more in the article.
What is “Pay by Bank”?
Using this payment method, buyers pay for goods or services directly from their bank account, without entering a debit or credit card number.
When customers choose this payment method, they are redirected to their banking application, where they complete the payment. In doing so, customers are verified and authenticated in real-time to minimize fraud.
84% of US consumers pay bills directly from their bank accounts.
The most popular use case for “Pay by Bank” is regular payments, such as utility bills and subscriptions. In the case of one-time payments, the travel industry and e-commerce are particularly suitable for Pay by Bank transactions due to their high average transaction value.
Why is payment through “Pay by Bank” becoming more and more popular?
Above all, it is a safe and convenient payment method, as customers do not need to enter their credit or debit card details to make a payment. This reduces the risk of fraud and helps protect customer data.
In addition, Pay by Bank may be more convenient for customers who do not have a credit or debit card or do not wish to use it for online transactions.
Also, paying directly from a bank account ensures faster payment processing times. Transactions are processed in real-time, meaning businesses can get paid faster. This will help improve cash flow for businesses and reduce the time and resources required to reconcile payments.
Other advantages for business include increased conversion and approval of transactions, lower cost of payments (the ability to save on interchange fees, in general saving up to 85% of the cost of payment), reduced subscription churn due to the absence of the problem of card expiration, the ability to reach a wider audience (especially young a generation that is increasingly wary of credit cards).
How is payment made using “Pay by Bank”?
Payment from a bank account can be implemented using various technologies and platforms, including open banking, bank APIs or special payment gateways that support direct bank transfers. This payment method is commonly used in e-commerce, bill payments, and other online transactions.
In order for a customer to make a payment, the bank must verify the customer’s identity and receive confirmation of payment before sending the funds. Here’s how it works:
- Payment initiation: when purchasing a product or service, the customer chooses “Pay by Bank” as a payment method. This option is usually available on e-commerce websites, bill payment portals or other platforms that accept online payments.
- Bank selection: the client selects his bank from the list of supported banks. Available from the drop down menu or search function.
- Client authentication: the customer will be redirected to their bank’s secure portal or prompted to log in through a third-party interface. The customer may also be required to provide additional authorization for the transaction, such as a code sent to a mobile device, a security token, or to undergo biometric authentication (such as a fingerprint or facial recognition). This step verifies the customer’s identity and authorizes the transaction.
- Confirmation of payment: the customer confirms the payment details, including the amount, recipient (company) and other relevant information.
- Transfer of funds: after confirmation, the bank processes the payment by transferring funds from the client’s account to the company’s account.
- Notification and Termination: the client and the company receive a notification of a successful payment. This confirmation can be in the form of an email, SMS or screen message.
- Calculation: the bank settles by transaction, updating the relevant accounts.
How is Pay by Bank changing banking and financial services?
“Pay by Bank” is changing banking and financial services, influencing customer expectations, industry standards and business processes.
Customer-centric approach: “Pay by Bank” helped shift the focus to customer-oriented banking. This is an incentive for banks to offer personalized services, allowing customers to choose how and where they share their data for greater transparency and control.
Payments in real time: “Pay by Bank” enables instant bank transfers, changing traditional bank schedules. This has implications for cash flow management and has led to increased adoption of instant payments across industries.
Secure authentication: “Pay by Bank” uses secure authentication methods, which reduces the risk of fraud and unauthorized access. This change has raised expectations about security in the financial sector.
Fintech development: the introduction of “Pay by Bank” allowed fintechs to challenge banks and develop new services. Competition from fintech businesses that traditional banks are facing is pushing them to innovate and improve their services.
Updating legacy systems: the adoption of “Pay by Bank” requires banks to update legacy systems to support modern APIs and real-time transactions. This transformation involves significant investment in technology and infrastructure.
System stability: As Pay by Bank becomes more common, banks must develop sustainable, reliable systems that can provide uninterrupted service and minimize downtime. This focus on reliability can improve the overall banking infrastructure.
Cross-border transactions: “Pay by Bank” allows customers to make international payments more easily. This change opens up new markets for business and allows expanding the range of international financial services.
Financial availability: Pay by Bank increases financial inclusion by providing payment options to those who may not have access to traditional credit or debit cards. This will make it possible to reach the population that is not sufficiently served by banks.
How do leading card networks react to “Pay by Bank”?
Leaders of card networks Visa and Mastercard, understanding the growing popularity of “Pay by Bank”, obviously decided not to oppose the trend, but to join it. Back in 2022, Visa acquired the open banking startup Tink, which allows money transfers between banks, merchants and fintechs. Initially, Tink was launched in Europe, and recently it was revealed that Visa is preparing to launch the service in the US with a few pilot customers.
As for Mastercard, last fall, the largest American bank JP Morgan launched the “Pay by Bank” solution based on Mastercard’s open banking technology, enabling merchants to accept payments directly from their customers’ bank accounts. JP Morgan’s “Pay by Bank” is available for invoicing for a variety of recurring payments, including rent, utilities, healthcare, and more.
Prospects of “Pay by Bank” in Ukraine
The popularity of “Pay by Bank” will continue to grow in the world. This is facilitated by factors such as the high transaction cost in card payment methods for all participants, regulatory readiness, in particular the implementation of open banking at the legislative level, as well as the constant growth of the level of fintech in banks. Banks are investing more and more in the latest solutions and mobile applications, which allow implementing “Pay by Bank” without significant efforts.
Ukraine is no exception. In Ukraine, the banking system is very young and therefore technologically quite developed, so innovations develop very quickly, including among users. Even older people do not just use cards, but are also active users of banks’ mobile applications.
In addition, a number of technologies that will facilitate the transition of Ukrainians to “Pay by Bank” have already been implemented in Ukraine or are expected to be implemented next year, in particular:
- NBU QR technology;
- instant payment system (from 2025)
- open banking (also from 2025)
- at the same time, every retail bank has quite functional and convenient mobile applications through which you can quickly make a payment.
In Ukraine, there are other alternative payment systems based on IBAN payments, and competition in this segment will only grow. The competition in this area will certainly be interesting, as many companies are trying to take their place in the market of new payment technologies.
