An increasing number of businesses are giving their customers the option to pay by bank because it has lower transaction fees compared with card-based payments. Bank payment options include debits, transfers, redirects, and real-time payments. Transactions are typically processed quickly, sometimes instantly, depending on the banking infrastructure, and authentication methods such as bank login or multifactor authentication (MFA) ensure secure transactions. Below, we’ll cover different ways customers can pay by bank, its benefits and challenges, and how this payment method is affecting the financial industry.

What’s in this article?

• How do bank payments work?
  
• Advantages of paying by bank over credit cards
  
• Challenges with bank payments
  
• The evolving landscape of bank payments
  
• How bank payments are changing financial services
  

How do bank payments work?

Bank payments can be implemented through various technologies and platforms including open banking, bank application programming interfaces (APIs), or dedicated payment gateways that support direct bank transfers. It’s commonly used in ecommerce, bill payments, and other online transactions. For a customer to pay by bank, their bank typically needs to authenticate their identity and get payment confirmation before sending the funds. Here’s how it works:

• Payment initiation: The customer chooses to pay with their bank account as the payment method when purchasing a product or service. This option is typically available on ecommerce websites, bill payment portals, or other platforms that accept online payments.

• Bank selection: The customer selects their bank from a list of supported banks. This is often presented in a dropdown menu or search function.

• Bank account authentication: The customer is redirected to their bank’s secure online portal or prompted to log in through a third-party interface. The customer might also have to provide additional authorization for the transaction such as a code sent to a mobile device, a security token, or biometric authentication (e.g., fingerprint or facial recognition). This step verifies the customer’s identity and authorizes the transaction.

• Settlement and confirmation: The payment is marked successful asynchronously, and funds are available in the business’s account.

Advantages of paying by bank over credit cards

Bank payments offer some advantages over paying by credit card, which are outlined below.

Lower transaction costs

• Lower fees: Card networks charge higher fees than banks, so payment processors typically pass less costs along to businesses for bank payments.
  

Better security

• Direct authentication: When paying by bank, customers authenticate directly with their bank, reducing the risk of phishing and unauthorized access. This process typically involves MFA.

• Fewer opportunities for fraud: Bank transfers and redirects are often carried out in a bank’s secure online portal or mobile app, there are fewer opportunities for fraudulent actors to steal customers’ payment information.

Faster transactions

• Real-time payments: Some bank-based payment methods can perform instant transactions. Though credit card payments are authorized in real time, businesses don’t usually receive the money instantaneously.

• Faster settlements: Some banking methods offer the option to settle faster than credit cards, which often take two business days because of batch processing and reconciliation.

Increased customer control

• Account-based payments: Customers can pay directly from their bank accounts without relying on credit limits or worrying about interest rates on outstanding balances.

• No need for credit checks: Bank-based payments don’t require credit checks, making them accessible to those without credit or with poor credit history.

Lower risk of chargebacks

• Reduced chargebacks: Credit card payments are prone to chargebacks because of disputes or fraudulent transactions. Bank transfers, in particular, have lower chargeback risks because customers have to initiate payments directly from their bank accounts.

• Simplified dispute resolution: Because the transaction is between the customer and their bank, resolving disputes can be more straightforward, reducing the administrative burden on businesses.

Accessibility

• Cross-border compatibility: Many bank-based payment systems are designed to work across borders, providing an easier international payment experience. Credit cards might have limitations because of varying acceptance rates and additional fees for international transactions.

• Inclusion for unbanked and underbanked: Some bank-based systems offer access to individuals who might not have credit cards but do have bank accounts, promoting financial inclusion.

Challenges with bank payments

As with any payment method, bank payments can present challenges for businesses. Here are some of the potential challenges:

User experience

The process of logging into a bank account, authenticating, and completing a transaction can be more complex and time-consuming than card-based payments. This additional friction might deter customers from paying by bank.

• Solution: Use technologies such as open banking and API integration to simplify the user interface and reduce the steps required to complete a transaction. Single sign-on (SSO) and consistent user flows across platforms can also improve the experience.
  

Transaction reversibility and chargebacks

Bank transfers, in particular, are often irreversible. While this helps reduce dispute risk for businesses, customers are left on the hook for where they send funds.

• Solution: Debit-based banking methods offer dispute mechanisms. Implement clear dispute resolution processes and customer support mechanisms. Offer refunds or adjustments in case of errors or customer dissatisfaction.
  

Security risks

Though bank-based payments are typically secure, they are not immune to security risks such as phishing or identity theft. Customers could be tricked into providing their bank credentials to malicious actors.

• Solution: Educate users about security best practices and the risks of phishing. Use MFA, biometric verification, and secure communication protocols to boost security. Regularly perform security audits of payments platforms to identify and address vulnerabilities.
  

Cross-border compatibility

Bank-based payment methods can encounter compatibility issues when dealing with international transactions. Different banking systems and regulations in various countries can cause delays or additional fees.

• Solution: Collaborate with banks and financial institutions to standardize cross-border payment processes. Use international payment gateways with experience handling cross-border transactions.
  

Dependence on banking infrastructure

Payments rely on banking infrastructure, which might experience outages or downtime and lead to payment delays or failures.

• Solution: Implement redundancy and failover systems to ensure continuity during outages. Work with banks that have reliable infrastructure and backup systems. Providing clear communication to customers during outages can also help manage expectations.
  

Compliance and regulation

Bank-based payments must comply with various regulations such as Anti-Money Laundering (AML) and Know Your Customer (KYC) rules. Compliance can add complexity and overhead to the payment process.

• Solution: Stay informed about regulatory requirements, and keep all processes compliant with relevant laws. Work with legal experts and compliance officers to maintain adherence to regulations.
  

The evolving landscape of bank payments

The landscape is adapting to technological advancements, changing consumer preferences and regulations, and emerging partnerships and use cases.

Technological advancements

• Open banking: Open banking initiatives, which let third-party developers build applications that connect to bank data through secure APIs, have increased accessibility and interoperability among financial institutions.

• Real-time payments: The development of real-time payment systems has enabled instantaneous bank transfers, transforming payment speed and customer experience.

• Artificial intelligence (AI) and machine learning (ML): AI and ML are being used to improve fraud detection, security, and personalization in bank-based payments.

Regulatory changes

• PSD2 and other regulations: The Payment Services Directive 2 (PSD2) in Europe requires banks to open their data to third parties (with customer consent), facilitating open banking and leading to increased competition and innovation in the payment industry.

• Compliance and security: Regulatory frameworks have adapted to focus more on data protection and security, with stricter rules for financial transactions.

Customer trends and expectations

• Convenience and speed: Customers increasingly expect easy and quick payment experiences.

• Security concerns: With increasing cyber threats, customers are prioritizing secure payment methods.

• Mobile and digital payments: Consumer preference is shifting to mobile and digital payments.

Industry partnerships and collaboration

• Fintech-bank collaboration: Fintech businesses and traditional banks are collaborating to create more bank payment solutions.

• Integration with ecommerce platforms: Ecommerce platforms are increasingly adopting pay by bank options.

• Interoperability and standardization: Fintech businesses and banks are working toward standardizing protocols and improving the interoperability of bank payments among different banks and payment systems.

Popular use cases

• Business-to-business (B2B) transactions: Bank payments are popular with high-value B2B transactions because of the low fees.

• Subscription services: Subscription-based businesses are increasingly giving their customers the option to pay by bank for recurring payments. Customers typically only need to input their payment details once and businesses don’t have to worry about payment failure due to card expiration.

• Cross-border payments: Cross-border bank payments solutions are growing in popularity, giving global businesses a lower-cost, faster option for transactions.

How bank payments are changing financial services

Bank payment features are changing financial services by affecting customer expectations, industry standards, and business processes.

• Customer-centric approach: Giving customers the option to pay by bank has helped shift the focus to customer-centric banking. Banks are incentivized to offer personalized services, letting customers choose how and where they share their data for greater transparency and customer control.

• Real-time payments: The rise of real-time payment systems allows for instantaneous bank transfers, transforming traditional banking timelines. This has implications for cash flow management and has led to increased adoption of instant payments in various industries.

• Secure authentication: Bank payments rely on secure authentication methods such as MFA, reducing the risk of fraud and unauthorized access. This change has heightened security expectations across the financial sector.

• Fintech disruption: The adoption of bank payments has enabled fintech businesses to disrupt traditional banking models and develop new services such as budgeting apps, payment gateways, and personal finance management tools. The competition traditional banks face from fintech businesses has driven innovation and forced banks to improve their services.

• Upgrading legacy systems: The adoption of bank payments requires banks to upgrade their legacy systems to support modern APIs and real-time transactions. This transformation involves substantial investment in technology and infrastructure.

• System resilience: As more customers choose to pay by bank, banks must develop resilient, reliable systems that can provide continuous service and minimize downtime. This focus on reliability can improve the overall banking infrastructure.

• Cross-border transactions: The rise of bank payments has facilitated quicker cross-border transactions, letting customers make payments internationally more easily. This change is opening new markets for businesses and enabling more international financial services.

• Financial inclusion: Bank payments increase financial inclusion by providing payment options to those who might not have access to or qualify for traditional credit or debit cards.