So much of our industry is tied to Visa and Mastercard to support consumer payments. We’re all also tied to the increased scrutiny of both brands. The bar, from a compliance perspective, keeps getting raised. It feels like we’re spending half our time making sure we are compliant versus growing our business. While I don’t blame Visa or Mastercard for putting controls in place, as they also suffer from supporting our industry. An answer to our pain has been developing over the past few years through paying with bank payments or transactions. These alternate payment methods are growing in popularity. This month we wanted to look at the options available, their benefits, and where you can find these pay by bank options.
Fee Frustration
Does it feel like you keep getting hit with additional fees? Annual Visa and Mastercard registration fees alone can total $1,500 per year. This cost can make a new player or start-up start off in the red. There is also a premium charge from the card brands and our acquirers to process transactions specifically in the adult market, making it more costly for all of us. While it is frustrating and can make you feel like you are being penalized for offering a service that might offend some, there is hope with new options. Democracies all over the world support freedom of speech. Soon there will be freedom of banking through payment options and depending on where you live, some are already here with pay by bank transactions.
Pay by bank transactions, also known as bank transfers, account to account (A2A) or direct bank payments are cardless payment methods that allow customers to pay directly from their bank account to the merchant’s bank account through open banking. This is offered by banks and payment service providers (PSPs) in partnership with payment networks or intermediaries. This solution is prevalent in Europe, UK, South America, and is slowly developing in the U.S.
The Pay by Bank Process
So how does pay by bank work? During the checkout process on a merchant’s website or app, the customer selects a pay by bank method and is directed to a list of banks. The customer can select their preferred bank from that list. For authentication, customers are redirected to their familiar online banking portal or mobile banking app. They can then log in using their online banking credentials, such as their username and password, or through biometric authentication (fingerprint, iris, etc.). After logging in, the customer authorizes the payment. This may involve confirming the transaction amount and providing additional security information their bank requires, such as a one-time password sent SMS or email for a payment authentication. Once the customer authorizes the payment, the funds are transferred directly from the customer’s bank account to the merchant’s bank account. After processing the payment, the customer and the merchant receive transaction confirmation. The merchant can start to process the order or provide immediate access to the purchased goods or services. Lastly the PSP or intermediary ensures the funds are settled between the customer’s and merchant’s banks, typically through the banking system’s clearing and settlement process.
A Bounty of Banking Benefits
There are many positives to the expanded payment options. By providing pay by bank option methods, PSPs can offer their merchants a broader range of payment options to attract new customers. Fraud risk is reduced since customers authorize payments directly through their bank’s secure online banking portal. This helps PSPs and their merchants minimize losses due to chargebacks and unauthorized transactions. It also saves merchants financial and reputational risk and the costs of managing disputes. Processing fees are also lower. Pay by bank transactions are less than card transactions and can offer faster settlements due to real-time or near real-time settlements. This can improve cash flow as funds from bank transfers can be deposited into the merchant’s account in real time. Also, there is enhanced security. With pay by bank, transactions use the improved security features of online banking platforms like multi-factor authentication and encryption to protect sensitive customer data and transactions.
Where to Take Advantage of Pay by Bank
Pay by bank is a very common form of payment in Europe and has been an option for years. For example, Ideal in the Netherlands, Sofort/Klarna/Giropay in Germany, Swish and Trustly in Sweden- all are localized bank to bank transfer products. Europe has also created SEPA (Single European Payments Area) which allows consumers to make bank-to-bank payments between banks in the Eurozone. This eliminates borders for bank-to-bank transfers. At Segpay, we recently added SEPA as a bank-to-bank solution for our merchants to take advantage of.
Pay by bank is also growing in Brazil. Consumer traffic from Latin America has always been challenging to convert with credit cards due to the lack of consumer penetration. Pix is the local bank to bank solution designed by the Brazilian Central Bank. It was rolled out to consumers in Brazil in 2020 and is rapidly becoming the most popular form of payments in the country. Today, 74 percent of all transactions by Brazilian consumers are made through Pix because it’s proved to be more cost effective for both consumers and merchants.
In the UK, Faster Payments is the bank-to-bank solution allowing consumers to circumvent using the card networks. A few of our merchants have integrated UK’s Faster payments and one of them, a large cam merchant, reported a 20 percent increase in their UK transactions after implementing it.
For those of us in the U.S. an option isn’t available just yet. There are two competing systems developing, Fed Now from the Federal Reserve and Real Time Payments from The Clearing House. Both services are still only banking services for moving bank to bank payments. Once a solution is ready, it would be a welcome addition to U.S. retailers and ecommerce providers to take advantage of.
At Segpay, we’re keeping a close eye on pay by bank solutions and look forward to adding many of these solutions to help lower our costs of processing for merchants, reducing fraud, and increasing consumer conversion rates. During these times when everything seems to be going up in costs, we welcome new ways to bring some costs down. Sharing the savings would be a win for all of us.
