A Deep Dive into Pay by Bank and Open Banking

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Editor's Note: This podcast was recorded prior to the Consumer Financial Protection Bureau's (CFPB) final rule on Personal Financial Data Rights, issued under Section 1033 of the Consumer Financial Protection Act.

On the surface it sounds really familiar: Pay your bills online, directly from your bank account. But what makes pay by bank different and how does open banking facilitate this process?

"The idea of open banking is giving consumers the ability to grant businesses access to leverage information about their bank accounts, and it's all done programmatically through modern developer tools," said Dave Glaser, CEO of Dwolla, a Nacha Preferred Partner for ACH Experience/Open Banking. "In order to make payments, though, we need to link that bank account information up to money movement systems, or payment management systems, and that's where pay by bank comes in."

Interviewed on Nacha's Payments SmartCast podcast, Glaser explained that what differentiates open banking and pay by bank from the methods Americans have been using for years is that "we hadn't brought these internet-enabled open opportunities to access banking data and linking them seamlessly with the payment flows until very, very recently." And among the results, Glaser said, is that businesses can now more easily present "a great user experience" including choice of payment method, risk and speed, while helping reduce costs.

Ben Glock, Senior Director of Product Strategy at Visa, a Nacha Preferred Partner for ACH Experience, Account Validation and Open Banking, said Visa recently surveyed 1,500 consumers to better understand how they're choosing to pay.

"What we found is that when selecting a payment choice, security and trust in the brands they're interacting with and in the payment method they're selecting matters, as does fraud protection and convenience. And that's where open banking comes into play with improving these payment experiences for consumers who would choose to pay via ACH," Glock told the podcast.

Since few people have their account and routing numbers memorized, there can be challenges during a manual payment experience. Glock said open banking "allows a consumer to digitally link to their bank account and to authenticate with their bank, authorize the sharing of information necessary to initiate an ACH payment, verify certain attributes like their identity and their balance, and do so in a secure, reliable and more streamlined way."

Amy Morris, Nacha Senior Director, ACH Network Rules, noted that pay by bank activity has been happening "for some time" and has been "successfully operating under the Nacha Operating Rules framework." But, Morris added, as activity increases, Nacha "wants to work with the industry to basically create, if you will, a pay by bank dictionary" that would include agreement on what all the new terms mean specifically "to the payments industry and the ACH Network." Nacha is also looking at the implications of open banking on certain areas of the Nacha Rules.

Much more was discussed, including how pay by bank will change the way you buy a house and a car, and the role AI will play. You can listen to the complete podcast episode below.

Learn more about Dwolla, Visa and other Nacha Preferred Partners on the Nacha website.