Clearing Up Pay-by-Bank Confusion Requires Education and Incentives

Last week, Nacha said its Payments Innovation Alliance formed a new project team seeking to answer the question, “What is pay by bank?”

Via the project, financial institutions, providers and FinTechs, will delve into identifying “operational, risk and educational issues” associated with what Nacha called the “common industry term of art.”

On the face of it, sending money directly from one’s bank account to pay for goods, services or recurring charges, such as rent or utilities, sounds simple. The electronic payment option should be able to gain ground in everyday financial life, especially with progress in the United States being made with faster payments and the recent finalization of data-sharing rules.

However, as Nacha’s announcement showed, there’s confusion that needs to be cleared up for pay by bank to be used more broadly. The PYMNTS Intelligence report “What Consumers Need for Pay by Bank to Catch On,” a Trustly collaboration, found that as many as 46% of consumers are interested in open banking; the remainder are resistant.

The resistance comes in part because consumers are unfamiliar with pay by bank, how it’s used, and how it offers better transaction security and speed, among other benefits. Chalk it up to nomenclature.

Confusion and Potential

When asked where the confusion might lie, Trustly CEO Alexandre Gonthier told PYMNTS that “when we say open banking payments, pay by bank or account-to-account (A2A) payments, there is a difference.”

A2A stands as what he termed the “broadest umbrella term” for bank payments because the A2A designation spans direct debit (or pull) payments, real-time credit transfer (or push) payments and peer-to-peer transactions. Depending on the payment type, the funds flow across different networks or schemes, from ACH to SEPA to the FedNow® Service. Open banking payments combine open banking technology and A2A payment functionality.

“It can be confusing because the term pay by bank could technically mean any of the aforementioned payment schemes,” he said. “But most people today say, ‘pay by bank’ and mean ‘open banking payments.’”

There is potential for further inroads. Only about 11% of consumers have used pay by bank, and 44% of non-users said they were not familiar with the payment option.

Ross McFerrin, vice president of growth at Trustly, told PYMNTS that interest in pay by bank jumps to 81% of consumers after hearing about incentives. (Data showed that cash back and discounts are particularly effective.)

“Merchants have an opportunity to control their own destiny on the payment page by incentivizing pay by bank for consumers,” McFerrin said. “At the same time, pay-by-bank providers will have an opportunity to lean into open banking technology to innovate payment options through products that meet the needs of consumers.”

As for the benefits of pay by bank, in a PYMNTS interview late last month, Brian Dammeir, head of payments for Plaid, told Karen Webster and Paul Chang, global payments market development for AWS, that “the user experience is what’s really changing.”

Traditional online bill pay requires users to recall or locate their account information and enter that data manually, which leaves the process error-prone. Consumers can digitally authenticate their account information, making payments through a streamlined, biometric-driven interface.

Education and Outreach

Trustly’s McFerrin told PYMNTS that the progress made in mandating data sharing (including routing and account numbers) through the Consumer Financial Protection Bureau’s final rule “is a good start, but it won’t spur the average consumer to demand pay by bank. There’s a lot of education that needs to happen, and much of that will come around product adoption and word of mouth, similarly to how products like PayPal, Venmo and Cash App became household names.”

“The key is telling this story through real-world examples and concrete benefits, not abstract technical explanations,” he added. “Consider how credit card companies made their case to consumers decades ago. They focused on convenience and benefits instead of the underlying technology.”

As McFerrin told PYMNTS: “Success will ultimately come down to one crucial question: What will convince consumers to put their bank accounts back at the center of their financial lives? The answer lies in creating standards that enable a seamless experience, backed by education that makes the benefits crystal clear.”