The Rise of Real-Time Payments and the Future of Pay-by-Bank

In recent years, the global financial landscape has witnessed a significant rise in real-time payments, a payment method that, among other things, allows for immediate transfer of money from a customer’s account to a merchant’s account.

Link Money CEO Eric Shoykhet said in an interview with PYMNTS that real-time payments are a precursor to the emergence of account-to-account or pay-by-bank payment options in the United States market.

The progression is a natural one, he said, noting that “in order to settle account-to-account or in a pay-by-bank context, the merchant needs to know that the customer has sufficient funds” in their accounts. Historically, he added, the U.S. has lagged behind Europe, Brazil and India in the embrace of real-time payments.

But with the emergence of the FedNow® Service, which officially debuted over the summer with The Clearing House’s RTP network, the availability of real-time payments is growing.

However, as Shoykhet was quick to point out, there’s an important distinction between the U.S. and other markets. In the U.S., real-time payments are “credit push” transactions, which means that the sender must instruct their financial institution (FI) to go ahead with the payment and authenticate each payment.

“That’s different than other markets where there is a real-time debit ‘pull,’” he noted.

In those cases, a merchant or payment provider can request to pull money from the customer’s account (also in real-time fashion), he said.

Dealing With Complexity Behind the Scenes

“The reality, in the United States, is that for us to have pay-by-bank, a lot of that volume is going to need to run on ACH rails,” Shoykhet said.

That necessity gives rise to complexity behind the scenes as payments wend their way between consumers and merchants, he said. (After all, ACH transactions don’t settle in real time.)

We’re several years away from “pull” functionality taking root in the U.S.  In the meantime, providers such as Link Money help abstract away that complexity, and ultimately, can save merchants as much as 70% of transaction costs compared to card-based payment methods, he said.

The company has built decisioning models that can guarantee the sufficiency of funds in accounts and real-time payments to the merchant, even though the payments themselves are carried over rails that aren’t instantaneous in nature.

The consumer-facing aspects of pay-by-bank is straightforward. Shoykhet said that users only have to click the logo of the bank, link to the FI’s mobile app and authenticate via face ID or other biometrics before the transaction goes through.

“It’s a seamless flow, and you don’t have to enter card details or CVC information,” he said. “ … [I]t’s a simple and seamless user experience.”

Security is bolstered by the fact that no card-level details are passed to the merchant.

On the merchant side of the commerce equation, amid the allure of reducing transaction costs, there are and will continue to be ways to incentivize consumers to embrace pay-by-bank options, Shoykhet said.

Telcos, for example, offer discounts if consumers opt in to paying directly through their bank accounts. The model also makes sense in the case of subscription-based or recurring payment models (such as gym memberships or storage units) where customer relationships are typically long-lived and stretch out over a period of years.

“The math makes a lot of sense,” he said.

And in looking ahead at the movement toward critical mass, he added, the eventuality of real-time debit pull will help pay-by-bank adoption grow organically as “it will be easier to settle those transactions — and less complicated.”