How Pay-By-Bank Will Modernize U.S. Payments

Pay-by-bank allows consumers to pay directly with their bank accounts — will this trending method for money movement help build a new digital economy in the United States? 

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What’s in this post? 

• What is pay-by-bank?
• How does pay-by-bank work?
• Benefits of pay-by-bank
• Will pay-by-bank see mass adoption in the U.S.? 
• What’s next?

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What is pay-by-bank? 

Pay-by-bank is a direct form of payment where a consumer transfers funds from their bank account to a merchant’s. The two accounts are typically linked by a bank aggregator, which acts as an intermediary between the parties. 

The pay-by-bank method leverages secure bank-to-bank transfers, facilitated by open banking protocols and APIs — eliminating a need for credit or debit cards. 

In the U.S., pay-by-bank has gained popularity for specific use cases, like automated bill or subscription payments, but they’ve also become commonplace in emerging, highly regulated industries like online gaming and cannabis. 

How does pay-by-bank work? 

There are three key components to pay-by-bank transactions: 

1. Authentication (for first-time transactions)

Before a pay-by-bank transaction is initiated between a customer and a new merchant, the customer’s account must be authenticated and “linked” to the merchant’s. This onboarding process is easily completed using an aggregator with direct bank APIs, like Aerosync, which verifies an account by enabling the user to log in to their bank directly. 

Alternatively, micro-deposits (small transactions whose amounts customers must then verify) can be used before checkout. This is for accounts not connected to APIs or for users who choose not to use an instant method.

2. Authorization

To mitigate fraud, businesses offering pay-by-bank should perform fraud and risk detection checks. Additionally, leading pay-by-bank providers help reduce risk by blocking high-risk transactions. 

Note: Many pay-by-bank options will guarantee payments, meaning they shoulder the risk if a payment is authorized but ends up being returned. However, this often lowers average acceptance rates as low as 60-70%. Aeropay’s balanced, unique approach to returns has garnered an industry-leading 95% approval rate. 

3. Money movement and settlement

Once the transaction is approved, funds are moved from the customer’s bank to the merchant’s account. Depending on the customer bank and the merchant’s payment processing partner, there are three different rails the funds can move along: 

1. ACH - The Automated Clearing House offers both ACH credit and ACH debit electronic transactions in a batch environment. Funds are typically processed within 1 to 3 days, depending on the processing window (First Same Day ACH, Second Same Day ACH, Third Same Day ACH, Next Day ACH). 

2. RTP - RTP® from The Clearing House is a real-time payments platform that offers instant payments on its rails. Almost all U.S. financial institutions have access to RTP, and more are joining as volume grows. Right now, RTP is primarily used to send payments as real-time requests for payment aren’t widely available. 

3. FedNow - The Federal Reserve’s instant payment service was launched in 2023 to allow businesses and individuals to send and receive instant payments in real time, around the clock, every day of the year.

Aeropay specializes in pay-by-bank payments and works with over 12,000 financial institutions nationwide. We send funds along the fastest, most affordable route and instantly default to the next-best option depending on real-time availability. 

Benefits of pay-by-bank

Pay-by-bank is quickly gaining momentum because it’s a simple solution to complex payment issues that have existed in the U.S. for decades. 

Here are the key benefits of pay-by-bank for businesses: 

Lower merchant cost

When consumers pay-by-bank, merchants are charged much lower transaction fees compared to traditional cards. This is the biggest pay-by-bank advantage.

In 2023, U.S. merchants paid $101 billion in Visa and MasterCard credit card processing fees, including $72 billion in interchange fees. Most merchants are paying a hefty 2-5% fee for each credit card transaction — and that number’s been increasing.

Pay-by-bank fees are much lower. For example, see FedNow's fee structure here. For example, FedNow fees can be as low as a few cents per transaction and ACH fees are generally between 0.5% to 1.5% per transaction. 

Durable payment information 

Traditional cards expire every three years on average. Plus, many consumers lose or replace them even sooner.

On the other hand, U.S. adults use the same primary checking account for more than 17 years on average. 

For subscriptions, bill payments, or more reliable e-commerce account transactions, there’s immense value in pay-by-bank’s ability to reduce payment churn. Consumers don’t have to add new card details every time they’re updated. Instead, a single bank link connects an account for every future transaction. 

Better merchant control

Open banking ensures transparent data control between financial institutions, merchants, and third-parties. Merchants can access real-time data directly from consumers’ banks, which enhances the authentication process and reduces the risk of fraud. 

Merchants are also able to easily verify account information, such as account balance, which ensures funds availability. 

At the same time, merchants can set up more effective processes to limit fraudulent transactions, alongside typical processor risk mitigation practices like bank-level authentication and multi-factor authentication (MFA).

Will pay-by-bank see mass adoption in the U.S.? 

Pay-by-bank is already a global phenomenon. In fact, the U.S. is actually trailing behind countries like Brazil, India, and China when it comes to Real-Time Payments. 

Still, U.S. payment solutions are catching up. FIS forecasts account-to-account payments will see a compound annual growth rate of 14% through 2026. 

Pay-by-bank is now gathering social proof for online and retail adoption of bank payments in highly-regulated U.S. industries — leveraging flexibility from card networks to simplify faster payments. And traditional sectors are taking notice. 

The pay-by-bank floodgates are opening. The infrastructure is in place, open banking and fintechs are building on the momentum, and merchants are entirely fed up with card payments. 

Let’s dive deeper to understand why: 

The Brazil example

In late 2020, Brazil’s central bank introduced Pix, a real-time payment system. There are now over 158 million users leveraging Pix for pay-by-bank. In 2023, Pix processed more than 36 billion transactions, representing over a third of all banking transactions in Brazil.

The popular pay-by-bank method has become a verb in Brazil, with consumers using phrases like “Pix me” to ask for payment. 

“Brazilians are very open to new things, it is a part of the country’s culture,” Ralf Germer, CEO and founder of PagBrasil, told PYMNTS’ CEO Karen Webster.

The impact of Brazil’s widespread pay-by-bank adoption has been undeniably positive:

• Pix can be used 24/7 for person-to-person (P2P) and person-to-business (P2B) payments. P2B transactions have grown from 5% at launch to 38% by March 2023.
• Pix transactions are significantly cheaper for retailers compared to traditional card payments. The average cost for Pix transactions is around 0.22%, whereas debit card fees are over 1%, and credit card fees can reach 2.2%. This cost efficiency has encouraged many businesses to offer discounts and free shipping for payments made through Pix, further driving consumer adoption.
• PYMNTS 2024 Global Digital Shopping Index revealed Brazil was one of the most digitally connected countries among 11 surveyed, surpassing economies like the U.S., U.K. and Germany.

U.S. infrastructure readiness

In the U.S., the infrastructure already exists to scale pay-by-bank toward mass adoption. 

The Automated Clearing House network began 2024 by processing 8.2 billion payments in the first quarter. The value of those payments ($719 billion) was up 27.2% from a year earlier.

At the same time, real-time payments are gaining a foothold in the U.S. payments space. The launch of RTP by The Clearing House in 2017 was followed by The Federal Reserve’s launch of FedNow in 2023. The fast growth of those real-time networks has quickly enabled 78% of U.S. bank accounts for real-time credit settlement.

Following up on their rising adoption, FedNow and RTP are expanding request for payment capabilities. They’re expected to power instant settlement for pay-by-bank transactions in the near future.

Open banking’s role

The rise of open banking has both accelerated pay-by-bank solutions, and enhanced their effectiveness. 

Open banking allows consumers to securely share their data with third-party financial service providers, enabling faster bank connections and more robust security/authentication protocols.

“The data elements that data providers are required to share under the proposed [personal financial data rights] rule is information to initiate payment to or from a Reg E (deposit) account,” Alex Johnson wrote in a January essay for Fintech Takes. “Pay-by-bank may end up being the most significant competitive threat enabled by open banking when all is said and done.”

The Great Settlement, interchange fees, and antiquated card networks

Both merchants and consumers are finding themselves increasingly frustrated with the United States’ dependence on credit cards for everyday purchases. 

Americans are in record credit card debt of $1.079 trillion.

Additionally, merchants have undergone decades of litigation against card processors like Mastercard and Visa in an effort to combat excessive interchange fees. 

While these major card companies attempted to settle, A U.S. judge rejected the proposed $30 billion antitrust settlement. She cited that the fees would remain too high and the card companies would retain excessive control.

These bubbling issues are indicative of a larger problem. Debit and credit cards are the primary payment method in the U.S., with 53% of consumers using a physical or virtual debit card and 37% using a physical or virtual credit card. But they’re incredibly expensive for merchants due to interchange fees and additional costs like chargebacks. 

Americans depend on antiquated, expensive card payment methods because they’re comfortable using them (and because credit cards offer rewards). But we see countries like Brazil thriving without them. This conflict sets the stage for a movement away from cards and towards a new payment experience like pay-by-bank. 

Social proof: Pay-by-bank in highly regulated industries

Highly-regulated industries carry a greater perceived risk and are typically controlled by government rules. Many banks and financial institutions are cautious when working with businesses in these industries, leaving businesses underserved from a banking and payments perspective. 

For example, the cannabis industry faces a unique problem. Most U.S. states legalized the plant in some form, but legal cannabis businesses aren’t allowed to accept traditional payment methods.

​​Major card networks like Mastercard and Visa have taken a firm stance on this issue, stating that as long as cannabis is federally illegal, dispensaries won’t be allowed to accept credit or debit cards.

Pay-by-bank emerged as the only legitimate and compliant cashless payment option for cannabis retailers. 

Other emerging industries, like online gaming, leverage pay-by-bank solutions to enable instant withdrawals and streamline compliance-first money movement.

To date, millions of individuals in the U.S. are already using pay-by-bank to buy cannabis and make deposits/withdrawals from online gaming accounts. If those consumers choose to pay-by-bank in another industry, like e-commerce, the process will already be familiar — and more importantly, their bank account will already be linked for payment.  

What’s next for pay-by-bank?

In a recent pay-by-bank deep dive, Alex Johnson’s essay for Fintech Takes laid out 5 lessons Aeropay took away from years of work in highly-regulated industries:

1. Overinvest in data aggregation. 

2. Figure out how to solve for ACH returns.

3. Have a plan to fight friendly fraud.

4. Be prepared to steer consumer behavior.

5. Find new opportunities to engage customers.

Alex’s hypothesis on the future adoption of pay-by-bank: 

It seems likely to me that pay-by-bank will eventually become a major part of the U.S. payments ecosystem. I’m clearly not alone in this opinion, as the big investments made by banks and the payment card networks in pay-by-bank and open banking have demonstrated.

However, the time it takes for the U.S. to get to this end state will depend on how quickly the [payments] industry internalizes the lessons learned by emerging pay-by-bank leaders like Aeropay in building the required infrastructure for highly regulated industries.

Dan Muller, Founder and CEO at Aeropay, added these insights to the argument for a digital economy powered by pay-by-bank: 

Aeropay was founded to move money more effectively and affordably. We started in cannabis with a compliance-first approach that doesn’t sacrifice end-user conversion. That’s been highly effective to build trust for both our merchants and end-users. 

The same playbook applies to every new industry we enter — whether it’s online gaming, automated bill payments, property management, or traditional ecommerce/retail. Merchants prefer Aeropay over cards because it’s much more affordable and risk-averse. Their customers prefer Aeropay because it’s undeniably simple, fast, and straightforward. 

The truth is in the data. We’ve already moved $1 billion in funds, prevented $750 million in fraud, and connected over 1 million user banks — all while maintaining approval rates above 90%. 

We aren’t going to replace cash or cards, we’re going to empower merchants to lower the high costs associated with traditional payments by adding pay-by-bank as a primary payment option. Consumers will choose the payment method that best fits their needs.

Ready to step into the future of payments? Talk to Aeropay about pay-by-bank today.

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