More merchants fed up with credit card expense are showing interest in payments that pull funds directly from consumers' bank accounts, giving fresh momentum to the so-called Pay by Bank movement.
It's a relatively narrow market, given the deep entrenchment of U.S. credit and debit cards for non-cash transactions. And with the exception of some fixed-services, vendors like utilities that directly accept consumer bank-account payments, most merchants still need an intermediary to guarantee that a customer's ACH funds will be available after goods are exchanged.
But rising inflation, merchants' ongoing
"Overall, card-processing costs in the U.S. are among the highest in the world, and when you factor in the significant rise in credit card chargebacks merchants are seeing and ongoing fraud issues, Pay by Bank is becoming more attractive," said Eric Shoykhet, which co-founded Link Money in San Francisco in 2021.
However, not all consumer transactions are suitable for Pay by Bank settlement, Shoykhet said. The approach is ideal for repeat-purchase and subscription-payment scenarios and transactions over about $20, he said.
"In situations where there's an existing connection between the merchant and the customer, such as a card on file, a Pay by Bank approach can cut card-acceptance costs by about 70% versus accepting cards, by relying primarily on ACH," Shoykhet said.
Link Money uses ACH rails in addition to proprietary technology to guarantee same-day settlement of funds for merchants that typically sell services like parking, storage and tickets, along with other commodities where repeat purchases are likely.
With about 40 employees, Link Money has raised $30 million within the last year to drive expansion in the category of merchant payments where the firm contends it has little direct competition.
"We're selling against card acceptance in a wide range of use cases where merchants already have an existing audience of customers and the payments are fairly predictable," Shoykhet said.
Fiserv also is seeing more use of its Pay by Bank services, and the company expects the momentum of faster payment processing to accelerate adoption, said Charles Williams, vice president and general manager of alternative payments at the Wisconsin-based payments processing firm.
Walmart's move
Through its Carat from Fiserv e-commerce platform, Fiserv guarantees merchants immediate settlement of Pay by Bank transactions. Merchant clients already using Fiserv's Pay by Bank service include gasoline retailer Sunoco and a large not-yet-named U.S. grocery store that recently launched a Pay by Bank option for consumers. Earlier this year, Walmart signed a deal to extend Fiserv's Pay by Bank services to consumers for real-time settlement of certain transactions.
"We're working on linking this whole process where we can settle Pay by Bank transactions via ACH or real-time payments, and as these networks evolve, create merchant value propositions where we can eliminate [card] interchange for a lot of merchants," Williams said.
Pay by Bank is unlikely to address the needs of most merchants–especially first-time or one-time transactions. But the method's share of transactions may expand incrementally in the next few years, observers say.
The concept faces two main challenges to broad adoption in the U.S. market, according to Nilesh Vaidya, global industry head for retail banking and wealth management at Capgemini. One is the lack of a transformative market event to trigger adoption, and another is the fact that Pay by Bank is a cost-saving mechanism versus a revenue-driver, he said.
"The Pay by Bank model is good for the merchant and the consumer, but the provider and the banks must decide how to charge for this payment volume. Both need to generate some revenue to build the required payments infrastructure and change consumer habits," Vaidya said.
A best-case scenario for Pay by Bank's growth could be large e-commerce operators using their market power to persuade consumers to enroll their bank accounts for routine purchases instead of using network-branded credit and debit cards, he said.
Wireless carriers are already moving in this direction.
Target's approach
Target Corp. has also proven that with the right incentive, consumers will consent to fund purchases directly from a bank account. The Minneapolis-based retail giant introduced a check card in 2007 that taps customers' checking accounts via ACH to pay for purchases.
It evolved into the Target Debit RedCard, which dangles an incentive of 5% savings on the total purchase amount as an incentive. More than 11% of the company's revenue flows through its private-label debit card, although some observers note one of the program's flaws is its
"Target has been successfully using a Pay by Bank model for years–it's just ACH connected to a decoupled debit card," said Thad Peterson, a strategic advisor with Datos Insights.
But such strategies don't necessarily translate to other industries and merchandise categories where consumers have many other payment options and merchants are competing for each sale, he said.
"Pay by Bank only makes sense right now for a pretty narrow set of merchants, plus there's a whole set of new, faster payments coming online and we're not sure where it will shake out," Peterson said.
