Pay by bank is a payment method that allows customers to make payments directly from their bank accounts to merchants or businesses without the need for traditional credit or debit cards. This payment option is often facilitated through mobile banking apps or online banking platforms provided by banks and financial institutions.
Also sometimes called account-to-account (A2A), bank-to-bank, or direct bank transfer, this form of payment was initially more popularly used as a money transfer method from one individual to another. Over time, it has become increasingly adopted in consumer-to-business (C2B) and business-to-business (B2B) transactions due to the ease of use and affordability of most pay-by-bank methods.
Types of Pay by Bank Methods
Pay-by-bank methods encompass a wide range of payment options, from traditional ACH payments to cutting-edge real-time payment systems and popular mobile payment apps. These payment methods often differ in terms of transaction speed, convenience, and fees.
Although not a digital pay-by-bank method, we would be remiss not to include paper checks as it is the first form of A2A payment. Though there is a decreasing trend in its use, there are still many businesses that use this payment method. They involve a manual process where the payer writes a check, and the payee deposits it into their bank account. It usually takes two business days for a check to clear.
According to the Federal Reserve, almost 3.4 billion checks were processed in 2022, down by 35% from five years ago in 2017. Despite their decreasing popularity due to digital alternatives, checks remain a viable option for some transactions, especially in certain industries and for larger payments. Paper checks are available to any US bank that offers checking accounts.
Automated Clearing House (ACH) payments are electronic fund transfers between bank accounts in the United States. They can be used for various transactions, including bill payments, direct deposits, and one-time payments. ACH transactions typically take a few business days to process.
Regular ACH payments usually take two to three business days but an improvement to the ACH network in 2015 has allowed faster processing and settlement, making same-day ACH payments possible.
With same-day ACH, ACH transactions submitted to the clearing house before cutoff times are settled on the same day. Both same-day ACH and regular ACH incur fees, but they are slightly higher for same-day ACH. While regular ACH transactions typically cost around $0.20 to $1.50 per transaction, same-day ACH payments usually cost around $1 to $5. ACH payments are available to any bank in the US.
Real-time Payments (RTP) is a payment network started by The Clearing House in 2017. As the name suggests, it offers immediate settlement and availability of funds in the recipient’s account. This makes them ideal for instant transactions.
Each RTP transaction incurs a transaction fee of around $0.25 to $1. Check if your bank is on the list of RTP network participating financial institutions.
Federal Reserves launched its FedNow Service in July 2023, a payments infrastructure that allows instant bank-to-bank transfers. The FedNow transaction fee is usually $0.045. Being a relatively new service, the list of FedNow participating financial institutions is still growing.
Mobile Payment Apps
There are now several mobile payment services that allow users to link their bank accounts so they can send payments using the mobile app. Here are some of the most popular payment apps that facilitate pay-by-bank transactions.
- Venmo: Venmo is a mobile payment app that allows users to send money to friends and family or make payments to participating merchants. Users can connect their bank accounts to Venmo for seamless transactions. Read our Venmo guide for small businesses.
- Zelle: Zelle is a peer-to-peer payment network that partners with many banks and credit unions in the US. It enables users to send money directly from their bank accounts to others using only an email address or mobile number. Learn how to use Zelle for business.
- PayPal: While known for its online payment platform, PayPal also offers the option to link bank accounts. Users can transfer money from their bank accounts to their PayPal accounts, and vice versa. Read our PayPal Business review.
How Pay by Bank Works
Although the process of using Pay by Bank differs depending on the specific payment method used, here is a general overview of how it works:
- Customer intends to make a purchase and send a payment directly to the merchant’s bank account.
- Customers are directed to their mobile banking app or a pay-by-bank app where they will be asked to log in.
- Customer confirms the transaction and authorizes the payment by providing any required authentication such as a PIN or a fingerprint.
- Customer’s bank verifies the identity of the customer using the submitted form of authentication and approves the transaction.
- The payment is processed and the funds are transferred directly from the customer’s bank account to the merchant’s bank account.
Pros & Cons of Pay By Bank
|Low transaction fees||Limited adoption|
|No chargebacks for instant transactions (eliminates friendly fraud)||Sending limits|
|Fast (allows instant transfers)||Limited integrations|
|Highly secure||May require manual accounting|
Pay by bank often comes with lower processing fees for merchants compared to traditional card payments. This can result in cost savings, especially for small businesses with tight budgets. Businesses may use pay by bank to accept payments without having to sign up with a merchant account provider.
It also virtually eliminates the risk of chargebacks, which occur when a customer disputes a transaction and are a common concern when accepting credit card payments online. Once a pay-by-bank transaction is authorized, it’s generally considered final, reducing the incidence of friendly fraud or disputes initiated by customers. Learn more about chargebacks.
Pay-by-bank transactions are also typically processed instantly, reducing wait times for funds to clear and making them ideal for time-sensitive payments.
While security may be a concern for some merchants and customers, most pay-by-bank methods involve using the customer’s banking app, which typically employs robust encryption and authentication protocols. Also, customers don’t need to share their credit card numbers or other information with merchants. Most transactions are initiated by the customer and the merchant only needs to check if the payment has been credited to their bank account.
However, there are also disadvantages to using pay-by-bank methods. While pay by bank is gaining traction, it may not be as widely accepted as traditional payment methods like credit and debit cards. This limits the awareness of customers and makes them more wary of using it as a payment option.
Also, while most banks do not set a limit to the amount a bank account can receive, many banks consider it a withdrawal transaction, which banks often limit to a certain number per month. This makes paying by bank-to-bank transfer unattractive to customers.
Most pay-by-bank methods may not be integrated into online platforms or point-of-sale systems. If you have an online shop, your ecommerce platform may not have any integrations available to accommodate your chosen pay-by-bank method. The disconnect between more traditional payment solutions and pay by bank may also mean you will need to manually reconcile transactions on your accounting software.
Pay by Bank Outlook
As the financial technology landscape continues to evolve, the future of Pay by Bank holds exciting possibilities and potential developments that promise to reshape the way businesses and customers conduct digital transactions.
- Wider Acceptance and Integration
There is a growing acceptance and integration of this payment method across various industries. As businesses and merchants recognize the benefits of reduced transaction fees and enhanced security, they are likely to adopt pay by bank as a mainstream payment option. This expansion could make pay by bank a more common choice for consumers in their daily transactions. In 2022, the National Automated Clearinghouse Association (Nacha) moved 30 billion payments amounting to $76.7 trillion in 2022, a growth of 3% and 5.6%, respectively, over 2021.
- Enhanced User Experiences
Financial institutions and fintech companies are continually innovating to enhance the user experience of pay by bank. This includes making the payment process more intuitive, streamlining account linking, and offering additional features like transaction tracking and categorization. These improvements aim to make pay by bank not only secure and cost-effective but also user-friendly.
- International Expansion
Currently, pay-by-bank methods are predominantly used in specific regions or countries. In the future, we can expect to see greater international expansion of these payment options. Cross-border pay by bank transactions could simplify global commerce and reduce the reliance on costly international wire transfers.
- Enhanced Security Measures
Security will remain a top priority in the future of pay by bank. Expect to see continued advancements in security measures, including biometric authentication, artificial intelligence for fraud detection, and blockchain-based transaction verification, ensuring that pay by bank remains a safe and trustworthy payment method.
Pay by Bank Frequently Asked Questions (FAQs)
Here are some of the most common questions we get about pay by bank. Expand the sections to learn more.
The key differences between accepting payments via debit card and pay by bank are the method of transaction and associated costs. Debit card payments are widely accepted, but they come with processing fees that merchants must bear. On the other hand, pay by bank transactions can be cost-effective for merchants as they often entail lower or no processing fees. However, pay by bank’s limited adoption and the need for integration with ecommerce platforms can be potential drawbacks for merchants.
Yes, pay-by-bank transactions are generally secure. They typically employ encryption and authentication measures to protect user data and transaction details. Users can have confidence in the security of their financial information when using this payment method.
To determine if your bank supports pay-by-bank, you can start by visiting the official website of your bank or contacting its customer support.
Pay by bank, also known as account-to-account (A2A) or direct bank transfer, is a digital payment method that streamlines transactions, reduces costs, and enhances security, making it a suitable payment option for small businesses. Although pay by bank is still gaining traction, businesses should consider integrating pay-by-bank as a payment option.