While emerging payment methods such as “buy now, pay later” and crypto remain popular, account-to-account payment methods, known more commonly as “pay-by-bank”, are gaining momentum among consumers.
The open banking-based payment method has customers pay directly out of their bank account to a merchant’s account, often with biometric authentication via their bank’s online platform or app, and requires no credit or debit card details.
While mostly promoted by global transaction banks on the back of open banking initiatives, pay-by-bank is also being championed by fintech companies and card schemes such as Mastercard and Visa.
“We are really seeing a strong growth in pay-by-bank in the market in terms of penetration,” says Phoebe Zhou, head of emerging payments, Europe at HSBC. “In the UK, we have over eight million customers using open banking services, which is one in seven. And it’s not just consumers — small businesses are very keen to use it too.”
Pay-by-bank is now one of the “top three” payment methods in the UK, Netherlands, Finland, Spain and Germany, with one-third of those aged 18-29 using it either daily or weekly, according to research from Brite Payments and YouGov published at the end of March.
The Brite Payments and YouGov report also found that pay-by-bank was three times more likely to be used on a daily or weekly basis than the popular BNPL.
Speed, security and ease of use ranked highly as reasons for using pay-by-bank in the Brite Payments and YouGov research; 42 per cent of regular pay-by-bank users opted for the payment method because of speed, 59 per cent of respondents cited security, and 54 per cent cited ease of use.
According to Zhou, the pay-by-bank method’s success is due to the Competition and Markets Authority’s open banking mandate for the nine largest banks and building societies in the UK — comprising 90 per cent of volume of personal and business bank accounts — to implement common standards and grant third-party access to bank customers’ data via application programming interfaces.
“Consumers value pay-by-bank as it is really one of the more innovative methods as we move towards a cashless society,” says Zhou. “It is so easy to use; you don’t need to key in your card details… The whole end-to-end journey just needs a couple of clicks.”
Reflecting the findings in the Brite Payments report, many banks are also seeing customers respond to the security benefits of pay-by-bank.
“By leveraging connectivity through open banking APIs, pay-by-bank significantly reduces the opportunity for fraud as no bank account or credit/debit card details are exchanged during the transaction,” says Chris Jameson, head of product management for global payments solutions Emea at Bank of America. “It also utilises biometric authentication on mobile devices.”
Despite the growth in this payment option, some argue that pay-by-bank is just a new version of an old way to pay.
“Pay-by-bank is not really new; it is a concept we’re all familiar with,” says Andrew Boyajian, vice-president for payments at Tink, an open banking platform acquired by Visa in 2022. “Yes, there are new technological innovations running in the background, but really, you’re paying for something using your bank account. We’ve already been doing it for a long time and that’s why people trust it.”
Customers are paying bills ‘by bank’
Some consumers have already chosen pay-by-bank for bill payments for some time, according to Boyajian, and after becoming familiar with the steps and benefits, are now choosing it for other payment types.
“We looked at the market in Sweden and found that 60 per cent of the adult population uses pay-by-bank, via payment provider Kivra, for their bills,” he says. “As we look at other areas, such as topping up of travel spending accounts, pay-by-bank is really coming in, because it’s just so easy and typically it tends to be instant, so payments are immediately allocated. We are seeing quite a bit of traction and adoption in that regard.”
Driven by consumer preference, merchants have an incentive to expand their offering to include the new payment method.
“As a merchant you want to cater towards your audience and you want to make the act of paying as easy as possible,” says Boyajian. “In our own research we’ve found around 84 per cent of merchants are still planning to maintain or increase their investment in their payment platform over the next 12 months.”
This March, Tink announced a partnership with Micropayment, a Berlin-based payment processor, which will see pay-by-bank added to its merchants’ online checkouts across the fundraising, non-profit, gaming and entertainment industries in Germany, Austria and Switzerland.
With customers starting to choose pay-by-bank, the dominant card networks are taking strategic steps to future-proof their market share.
“We are seeing many cases of high adoption of pay-by-bank in concentrated areas; however, despite high growth at a global level we’re still in the early phases of building out the infrastructure to spur innovation that drives consumer demand,” says Valerie Nowak, chief product and innovation officer for Mastercard Europe. And for that, says Nowak, “you need more than tech, you need an ecosystem. Mastercard has both”.
Mastercard recently signed a strategic partnership with Nexi, a European payments platform provider with around 2.2mn merchants using its services, to expand its infrastructure to this user segment.
Europe catching up
The UK, which has mandated open banking requirements, is a “consistent” and “cohesive” market, says HSBC’s Zhou. However, the adoption rate in Europe is not uniform and relatively low compared with the UK. “Because in Europe open banking is not mandated or the default, there are multiple different banks using their own schemes in different markets, and this creates friction in the customer journey,” she adds.
The UK has relied on Faster Payments, its comprehensive instant payment infrastructure, since 2008. Real-time payments have been slow going in Europe. Launched in 2017, the Single Euro Payments Area Instant Credit Transfer scheme allows payment of up to €100,000 to another account in less than 10 seconds, powered by open banking.
Zhou points to France as a key example. “Instead of using a biometric log-in, some banks in France still require the user to key in their mobile banking details — so that creates friction and can make the transaction difficult to complete,” she says.
In France, Spain, Italy and Germany, around 2 per cent of digital consumers used open banking in 2022 according to data from PwC. The equivalent figure in the UK at that time was 9.2 per cent.
The European Payments Initiative, a consortium of 16 of Europe’s largest banks, is taking steps to build unified, instant account-to-account payments under one “unified brand” across Europe. The EPI’s acquisition of iDeal, an online payment solution, in October last year, along with its Wero digital wallet, indicate that a consistent customer experience is in development.
EPI will initially support person-to-person and person-to-professional payments, followed by online and mobile shopping payments and then point-of-sale payments.
‘Non-sweeping’ variable recurring payments
Open banking has so far concerned itself with single, immediate payments, says Tink’s Boyajian. However, with the development of variable recurring payments within the open banking mandate, the UK market is taking a step beyond single immediate payments.
“One of the really cool things about the UK market is they’ve thought beyond single payments and laid the framework for thinking about how you and I typically spend money — which is subscription services like Netflix, Spotify or repeat orders for groceries,” he says.
Currently, VRPs are limited to moving money between their individual accounts in the UK. The UK Financial Conduct Authority describes this as “sweeping”.
However, the Joint Regulatory Oversight Committee, comprising the FCA, Payment Systems Regulator, CMA and HM Treasury, developed a blueprint for the phased roll-out of “non-sweeping” VRPs, beginning in the third quarter of 2024.
Non-sweeping VRP was identified as a key stepping stone, according to the JROC, to enable wider use of open banking-initiated payments, and ultimately to increasing competition in retail payments.
“Rather than put a direct debit or standing order in place — or any other payment type — we will be able to use pay-by-bank, with the same fast, secure user experience,” says Boyajian.
It is when the payment method is used in the same way as card payments that we will see mass adoption, says Mastercard’s Nowak.
The Brite Payments and YouGov report found that more than half of respondents believe waiting more than an hour for a payout — a payment from a business to a consumer — is unreasonable.
“Nobody wakes up in the morning thinking about how they want to pay for something,” says Nowak. “Ultimately, it needs to be convenient, fast, safe and secure, in the same way contactless took off for cards.”
