The big pay-by-bank projects launching right now

October 25, 2024 3:16 PM

Making payments directly between bank accounts is not a new idea — it's not even novel. But a convergence of factors are making what's called pay-by-bank one of the hottest trends in the payments industry.

Also called account-to-account payments, several large projects were either announced or got underway in the past few weeks.

"There are a number of contributing key factors to the growth of pay-by-bank, including open banking and real-time payments adoption, and a lower-cost alternative to card payments," said Elisa Tavilla, director of debit payments at Javelin Strategy & Research.

A2A transactions make up a small but expanding share of payments. In the United States, A2A e-commerce payments totaled $1.2 trillion in 2017, $2.7 trillion in 2022 and are on pace to reach $4.5 trillion by 2027, according to McKinsey, noting the percentage of A2A was expanding from less than 3% to 5% in that time, while the percentage of card payments is falling from 94% to 90%.

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Walmart, Dwolla and the card brands have all scheduled new A2A features that are set to go live in early 2025. This accelerates what had already been a trend toward supporting A2A transactions as payment firms look to attract merchants and consumers eager to avoid card fees during a period of high prices.

The initiatives come as the Consumer Financial Protection Bureau adds payment apps to its open banking rule, also called Section 1033, a key move that can make it easier for fintechs to offer A2A payments.

While payment experts say the new rule lacks optimum clarity for payment fintechs, the updated 1033 does provide a government endorsement to firms that use open banking to compete with traditional payment methods.

"This will likely further increase growth in open banking and pay-by-bank in the U.S.," Tavilla said.

Here are several major A2A initiatives that just got launched or dramatically expanded since the end of August.

Ansa

Payment startup Ansa earlier this month partnered with financial data aggregator Plaid to sell pay-by-bank to merchants, with a particular focus on coffee shops and other quick-serve restaurants.

Ansa, which powers stored value digital wallets on a white-label basis, contends these businesses are traditionally shut out of ACH transfers, which don't require cards, because of the complex, clunky user experience for these low-value transactions. This leaves purchases that are often less than $10 incurring card-swipe fees.

The San Francisco-based Ansa in 2023 launched its stored wallet technology, which builds a "Starbucks-style" closed-loop payment system for what Ansa calls "habitual use, low transaction value" merchants. Ansa's wallets enable consumers to build a balance to fund payments rather than paying one transaction at a time.

By combining Plaid's pay-by-bank service with Ansa's stored value wallets, the quick-service vendor can offer an easier payment experience, along with financial incentives to use the A2A option, cutting cards out of the equation entirely.

"Merchants are feeling the pressure of slim margins and rising card fees, especially for small-ticket or high-frequency transactions like those in quick-serve restaurants," said Sophia Goldberg, co-founder of Ansa. "They're actively seeking more cost-effective alternatives. They are equally focused on customer loyalty and engagement, which means preserving fresh and superlative customer experiences is paramount."

New technology is making A2A more accessible to smaller merchants, Goldberg said, creating a viable alternative to avoid card-processing fees.

Plaid

Plaid this month expanded its own pay-by-bank menu, adding an option for bill pay. This enables consumers to pay recurring expenses directly from their bank accounts. Consumers choose a bank account to execute a payment, with single-click transactions for recipients that are part of Plaid's network, which has more than 12,000 institutions.

Plaid is hoping to tap a large market for A2A bill payment. Thirty-seven percent of consumers prefer using bank credentials to pay bills, according to the Atlanta Federal Reserve Bank, making it the most popular option. Twenty-six percent prefer debit cards, 18% credit cards, 8% check, 5% cash and the rest other methods.

"Bank payments have really gained traction in the last few years across account funding, account-to-account payments, bill pay and increasingly in e-commerce," said Brian Dammeir, general manager and head of payments at Plaid. "Many factors are coming together providing a perfect storm for bank payments in the U.S. Consumers are demanding faster, more convenient payment experiences, networks like Plaid cover nearly 100% of bank connections in the U.S., and the technology can now enable embedded payment experiences that are fast, easy and safe."

Dwolla

Plaid's scale is also part of an A2A expansion at Dwolla. The payment fintech plans to use Plaid's instant account verification and risk assessment services to improve Dwolla's A2A product for small businesses.

Scheduled to launch in 2025, the new Dwolla A2A product will enable businesses to onboard near-real-time payments by combining Plaid's security and Dwolla's open banking technology, which enables data sharing between banks and third parties.

"By integrating Plaid's advanced account verification and risk assessment features into our Open Banking Services, we're providing a single, unified solution that addresses the complex needs of modern enterprises in the evolving payments landscape," said Dave Glaser, CEO of Dwolla, in a release.

Open banking, which enables permissioned data sharing between banks and third parties, is the lifeblood of a new generation of A2A products because it enables direct communication between bank accounts by using application programming interfaces.

Historically, A2A payments required manual entry of bank routing and account information and can take days to set up and process, Javelin's Tavilla said. "Pay-by-bank with open banking technology provides a faster, simpler, seamless, secure digital payment experience," Tavilla added. "Consumers can easily consent to share their financial data between trusted parties, such as billers, retailers and digital wallet providers, to make payments directly from their bank account with greater security."

Mastercard

Mastercard has merged its money movement products into a single service designed to speed remittances and disbursements between bank accounts.

Called Mastercard Move, the product reaches more than 180 countries and about 95% of the world's banked population. Alipay, Canada's VoPay, Africa's Access Bank Group, UBS and Lloyds have also deployed Mastercard Move.

The card network said at this month's Sibos conference that Move emerged from a successful pilot with UBS and Lloyds. While A2A payments are positioned as an alternative to credit cards, Visa and Mastercard are using the product as a way to bolster relationships with clients.

The card brands can offer simplified processing through the thousands of banks that issue payment cards that use the same network rails to transfer funds.

Visa

Visa in September said it would add biometric security, formal dispute resolution and simplified sign-up for A2A payments.

The card network is positioning the upgrades, scheduled to launch in early 2025, as a way to set up payments for utilities, rent and other recurring payments, with the U.K. as an initial market.

Users can access the U.K.'s faster payment rails, which provides more data for reconciliation and sends a notification when a consumer changes or cancels a permission that they have given for a regularly scheduled transaction. Visa said the updates would bring A2A payment security in line with protections for card payments.

Walmart

Walmart's pay-by-bank product will integrate with the Clearing House's RTP network and the FedNow real-time payment system, a project that's scheduled to be complete in early 2025.

The retail giant released its pay-by-bank feature earlier in 2024 and is adding processing speed to entice consumers to enroll.

Boosting enrollment is key to Walmart as it builds a broader financial services business through One, a fintech that Walmart majority owns. By pairing real-time payments with A2A transfers, Walmart can enable users to time payments more accurately based on available funds as a way to mitigate overdrafts. Real-time payments are also becoming popular in the U.S. Thirty-three percent of banks offer FedNow and an additional 43% plan to offer it, according to a survey by Arizent, American Banker's publisher. Thirty-eight percent of banks offer RTP, and 24% plan to offer RTP.

Fiserv

Bank technology seller Fiserv worked with Walmart on the retailer's real-time payment project, which is part of a broader strategy that demonstrates A2A's potential as a product that can form a base to cross-sell other products.

Fiserv this month said Walmart would refer Clover, Fiserv's point-of-sale system, to clients of Walmart Business, the retailer's suite of products for businesses. During Fiserv's most recent earnings call, CEO Frank Bisignano noted greater demand among merchants for both real-time payments and pay-by-bank options.

Real-time payments adoption is also growing and enhances pay-by-bank's value proposition, Javelin's Tavilla said, noting FedNow has more than 1,000 participating financial institutions.

"Real-time payments would improve account verification and mitigate insufficient funds issues associated with ACH pay-by-bank solutions," Tavilla said. "Additionally, real-time payments and pay-by-bank provide merchants with lower transaction costs relative to card payments, faster settlement, and fewer payment declines, and customers can avoid multiple pending transactions."