Pay by Bank: An Alternative and Easy Way to Make Payments

In the fast-paced world of digital finance, new innovations are constantly changing how we manage our money. One development is pay by bank, a payment method that allows consumers to make payments directly from their bank accounts-without using a debit or credit card.

To pay using your bank account, you would:

1. Select the "pay by bank" option at checkout.
2. Choose your bank from a list or enter its name.
3. Be redirected to your bank's website.
4. Log in with your online banking credentials.
5. Authorize the payment.
6. Confirm the transaction.
7. Optionally, save your bank details for future use.

(Note: Steps may vary by bank and payment provider.)

Direct authentication with the consumer's bank ensures bank-level security: a password, fingerprint scan, face ID, one-time password, or however the consumer has secured it. The consumer logs into their account the same way they do to check their account balance. The retailer or biller does not have access to any login credentials; the log-in occurs at the bank's website or in the bank's mobile app. Since the payment comes directly from the consumer's bank account, there is no need to enter debit or credit card details or personal information, or to store sensitive data online with a third party.

While direct bank payments are not new in the US, recent advancements in technology, the introduction of real-time payment systems, and the development of open banking infrastructure represent a significant evolution. Open banking lets consumers securely share their account information with third-party companies like fintech firms and other service providers without screen scraping.

Open banking in the US sets standards for sharing consumer financial data through application programming interfaces (APIs). These APIs enable secure transmission of payment instructions and authorizations between banks and other financial institutions. Security is maintained through a combination of industry standards like OAuth 2.0 for authorization, proposed regulatory rules under Section 1033 of the Dodd-Frank Act, and best practices in cybersecurity. These measures protect transactions and consumer data from fraud and unauthorized access, ensuring the integrity and confidentiality of financial transactions.

Such technology innovations make "pay by bank" an emerging and increasingly relevant payment type in the US market, poised to revolutionize the way we handle financial transactions. Its usage is expected to accelerate in 2024 in the US.

For consumers, pay by bank offers security, transparency, and convenience. For merchants, pay by bank means lower transaction fees because it bypasses the traditional card networks and payment processors, reducing the number of intermediaries. Sometimes, these savings are passed on to consumers as discounts or rewards, incentivizing them to adopt this new payment method. If the transaction is settled real-time, merchants gain immediate access to funds, improving cash flow. It improves operational efficiency, eliminates chargebacks, and helps reduce the time and resources required for reconciliation and processing.

To maintain pay-by-bank authentication security, companies must rigorously follow security protocols. OAuth 2.0 can be exploited if redirect URLs are not properly validated. Proper handling and expiration of access tokens are crucial to prevent misuse. Regular security audits, updates, and educating users on phishing are essential for robust security.

By adhering to these measures, we can ensure the ongoing safety and trustworthiness of financial transactions in the open banking era.

Have you used alternative payment methods? What did you like or caused concerns? We welcome your thoughts on pay by bank. Join the conversation. Reach out to me at [email protected].