Real-time transactions, cross-border payments, and banking app transfers — are you ready for the latest pay-by-bank innovations?
Key takeaways:
|
Pay by bank is a secure payment method that allows direct bank transfers between individuals and/or businesses. It is also referred to as electronic bank transfers or EFT because the exchange of funds is done electronically between the sender’s and recipient’s banks.
In the early days, pay by bank was commonly known as bank-to-bank, account-to-account (A2A), or direct bank transfer, as this payment method was used primarily for money transfers between two individuals. Eventually, pay by bank became a staple for B2Bs because it allows for clear paper trails. Consumers have also begun using electronic checks instead of the paper version to pay their bills.
Today, the pay by bank method includes a modern C2B approach where customers pay merchants directly through online banking and mobile banking apps.
Pay by bank includes everything from traditional ACH transactions to digital banking apps. Each option differs in processing speed and fees.
In the US, the Automated Clearing House (ACH) network is composed of financial organization representatives that assume the role of processing, clearing, and settling all ACH and echeck payments. |
See: Best ACH Payment Processing for Businesses
The personal pay-by-bank (individual bank transfers) process differs from commercial pay by bank (C2B, B2B) in terms of how transactions are initiated. However, the processing and clearing stages are mostly the same.
In most cases, the receiver in individual bank-to-bank transfers does not request (or initiate) the payment. Meanwhile, commercial pay by bank transactions are often characterized by payment requests, such as an invoice.
For personal pay by banks: The customer chooses a pay-by-bank method and prepares a fund transfer request.
For commercial pay by bank: The customer receives an invoice from the merchant, chooses a pay-by-bank method, and prepares the fund transfer request.
The sender chooses from one of the pay-by-bank types.
For IVR and ATM payment type: The sender interacts with the IVR system or ATM machine by going through the prompts to process their payment request.
For debit card payment type: The sender verifies the specified amount on the payment terminal and enters their PIN code on the PIN pad.
For digital wallet payment type: The sender logs into the app and follows the prompt for sending payments.
For all other pay-by-bank types: The sender fills out a form that specifies the transaction details as well as provides a notice of official authorization to complete the transaction.
For all pay-by-bank payment types: The sender’s bank receives the payment and authorization request. The bank first verifies the identity of the account holder and then validates that the sender’s account has sufficient funds.
For ACH and echecks: Once the bank verifies and validates the financial information, the funds and the transaction details are routed electronically to Nacha’s ACH network for clearing and forwarding to the recipient’s account.
The sender’s bank debits the transaction amount for approved (and cleared for ACH and echecks) payment requests. The bank adjusts the sender’s fund balance and also notifies the sender that the request is successful in the form of a receipt.
If the request is rejected, the sender is also notified and will have to choose a different payment method.
For digital wallet, IVR, debit card, and ATM payment types: The approval or rejection notice is also displayed on the terminal screen in addition to a printed or emailed receipt.
The recipient of the funds will get a notification by email from their bank once the transfer is successful.
For debit card payments at the point of sale: Transaction records are kept and updated within the POS software.
Note that fund transfer speed varies depending on the pay-by-bank type. Digital wallet, IVR, debit card, and ATM transactions are nearly instantaneous. With wire transfers, the first send takes an average of three to five business days. Succeeding payments to the same recipient within 24 hours. Payments that go through the ACH network takes anywhere from two to three business days.
See: 10 Best Free Business Checking Accounts
The modern pay-by-bank method is all about the use of technology in sending and receiving payments. Each pay-by-bank method, except for IVR and ATM transactions, can be done online or from a banking app.
Bank websites provide individual and business account holders with the ability to initiate transactions online. Users can log in to access their funds and a variety of features. Business bank account holders have the ability to create and send digital invoices to their customers. Those who have an e-commerce website can link their bank to their merchant account and payment processor so customers will have the option to pay via bank for their online purchase with an ACH or bank transfer.
Also read:
A banking app is a mobile wallet installed on the user’s smartphone, tablet, or iPad. It can be linked to multiple bank accounts and the available features for accepting payments will depend on the type. In both versions, the app can generate QR codes and payment links. Business bank accounts can generate invoices; individual bank accounts can even send payment requests.
Lower-risk payment method. Compared to credit card payments, pay-by-bank transactions are less risky to financial institutions since they deal with available funds instead of a credit line (such as in credit cards), resulting in lower transaction processing fees.
Accessibility. Multiple pay-by-bank types, particularly mobile banking apps, provide customers with 24/7 access to their bank accounts and faster means of payment for their purchases. This means businesses that accept pay by bank receive payments any time of the day.
Lower fees. Fees for accepting pay-by-bank payments are generally lower compared to credit card transaction fees which helps improve the bottom line for businesses.
Less prone to disputes. There are no chargeback claims in pay-by-bank transactions, which means a lower risk of incurring chargeback fees for businesses. Bank-to-bank transactions are also well documented, so senders have real-time access to records of their transactions.
Seamless cross-border transactions. Modern pay-by-bank transactions, particularly mobile banking, provide users with access to international fund transfers. In the future, pay by bank innovations will make same-day — even instant — transfers possible.
Slow processing time. At the moment, pay-by-bank methods, such as ACH and wire transfers, take at least a day to process.
Transaction limits. Most pay-by-bank methods limit the transaction value allowed within a day and within a month, making it difficult to use for large-volume businesses.
Limited integrations. Pay-by-bank methods have very limited integration capabilities. Customers will have to initiate requests directly from a banking platform while merchant payment processors only support ACH and pay-by-bank app integrations.
See: 8 Best Banks for Ecommerce
Recent developments in the financial technology landscape focus largely on making payments faster and more convenient. Much focus is given to upgrading the current pay-by-bank infrastructure with digital railways and improved banking policies.
Anna Lynn Dizon has over four years of experience in risk mitigation, serving as both a research lead and client liaison. Her fintech journey began at PayPal in customer and technical support, followed by a role in office and finance management for a U.S. company that collaborates with global banks to establish and manage HR and international payment processing. Since 2017, Anna has been a contributing writer for Fit Small Business, Technology Advice, and TechRepublic, covering fintech and POS software reviews, payment processing guides, eCommerce, inventory management, business startups, and regulatory compliance.
