Pay-by-Bank: Ultimate Guide for Online Merchants

Merchants can notably reduce fees and enhance user experience (UX) by adopting this innovative payment method. Here, we explore all aspects of the payment by bank account, including its functionality and how merchants can integrate it.

What Is a Pay-by-Bank Payment?

Pay-by-bank is also known as account-to-account (A2A) or an open banking transaction. It’s a payment method that lets customers make online purchases directly from their bank accounts, removing card networks from the equation. Customers use their online banking credentials to authorise a payment and transfer funds directly to the merchant's account.

Since 2018, the EU's PSD2 regulation has mandated banks to share customer data with authorised fintech firms via application programming interfaces (APIs). APIs act as a software bridge, enabling secure communication between different systems. This makes A2A payments faster, cheaper and more secure.

A2A payments also improve UX. With pay-by-bank, users avoid manually entering their payment details, as the system redirects them from the payment page to their trusted bank’s interface.

What is a Pay-by-Bank App?

Pay-by-bank UK apps differ from the overall pay-by-bank A2A payments. Major UK banks like Barclays and HSBC offer their own Pay-by-Bank apps, which function similarly to A2A, but they operate on a proprietary network rather than through the open banking infrastructure. Because these apps are managed by the banks themselves, they adhere to bank-specific rules, resulting in varying conditions for merchants.

How Does Pay-by-Bank Work

Below is a step-by-step payment-by-bank flow.

1. User selects the 'Pay by Bank app' option at checkout
2. User selects their bank from the options provided
3. User logs in to their banking app, using the required verification method such as Face ID, Touch ID, Mobile Banking PIN, or others
4. User selects the account from which they would like to send money
5. User reviews the on-screen details, including payee, amount, their chosen account and delivery address if displayed
6. User clicks send and confirms the transaction

Benefits of Pay-by-Bank for Merchants

There are many reasons why to use pay-by-bank, for both customers and merchants. Let’s take a look at some of them in more detail.

No Chargebacks

Unlike card payments, instant bank transfers do not include a chargeback mechanism, protecting merchants from chargeback fraud. Additionally, with no card networks involved, merchants avoid the substantial fees associated with chargeback processing.

Faster Settlements

Slow settlements are a frequent issue for merchants using traditional payment methods like cards and BACS, which can take up to three days to clear and disrupt cash flow. In contrast, pay-by-bank payments are credited to merchants' accounts almost instantly, allowing businesses to accurately track their cash flow in real-time.

Lower Fees

Pay-throgh-bank is more cost-effective than traditional card transactions, as it involves no interchange fees. Pay-by-bank means money transfers directly between bank accounts, so they involve lower fees than card-based methods, bypassing costly card networks.

Better Security

Pay-by-bank provides enhanced security because customers don't have to share their credit or debit card details to make a payment. Instead, data is shared through regulated APIs, reducing the risk of fraud and better protecting customer data. This method is significantly more secure than screen scraping.

Better UX

Paying using a bank account is especially convenient for customers who don’t have a credit or debit card or prefer not to use them online. One significant advantage of open banking for UX is app-to-app redirection. The flow bypasses the mobile device’s default browser, directly connecting users to their trusted banking app to grant consent. If the banking app is not installed, users are automatically redirected to a mobile-optimised banking website.

How to Integrate Pay-by-Bank

The most common way to integrate pay-by-bank payments is via a payment initiation service provider (PISP) like Noda, which may already support your existing payment methods. There are several types of integration:

• Direct Open Banking API integration offers a customisable payment journey but demands more time and technical knowledge for implementation.
• Integration tools such as hosted payment pages (HPPs) or software development kits (SDKs) provide a smoother, easier integration experience for developers, though they offer slightly less customisation.

The type of integration required depends on your desired payment flow and the developer resources available to you. Although integrating may seem daunting initially, a dependable provider can guide you through the process and recommend the best integration approach to meet your objectives.Make sure to discuss the following questions with your provider:

• Integration Template & Timeline: A trustworthy provider will assist you in navigating the integration process and establishing an implementation timeline.
• Objectives: Things like enhancing conversion rates are crucial. Your integration team should offer insights on designing a payment flow that improves these rates.
• UX/UI Recommendations: Drawing on experience with other clients, your partner can provide specialised UX and UI advice tailored to your specific needs and objectives.

The integration process involves collaboration between your existing systems and your chosen provider. Delays on your part, such as scarce developer resources or competing priorities, can prolong the timeline.

Integrating with Plugins

Some providers may also offer e-commerce plugins to seamlessly integrate open banking payments in just a few clicks. This is a relatively easy and quick way to leverage pay-by-bank payments if you’re selling on a popular e-commerce platform.

For example, at Noda we offer plugin integration for WooCommerce, Magento, OpenCart, PrestaShop and soon BigCommerce. Merchants can implement them by installing the archive file from the admin panel, and then adding API keys available through Noda Hub.

Future of Pay-by-Bank

The swift uptake of pay-by-bank in online payments is likely to gain even more momentum. Statista forecasts that A2A payments will constitute 10% of all e-commerce transactions by 2026. Currently, they rank as the fourth most popular payment method worldwide, following digital wallets, credit cards, and debit cards, respectively.

According to Statista's March 2023 assessment, Europe currently leads in the pay-by-bank adoption. However, this trend is expected to expand geographically. McKinsey estimates that by 2026, pay-by-bank payments in North America could facilitate approximately $200 billion in consumer-to-business transactions, with the potential for even greater volumes in other payment categories.

Integrate Pay-by-Bank with Noda

​​Noda is a global open banking provider that assists online merchants with end-user KYC, payment processing, LTV forecasting and UX optimisation. We partner with 16,500 banks across 27 countries, spanning over 30,000 bank branches. Noda supports a wide range of currencies for globally-minded clients. We offer scalable plans to fuel your business growth and e-commerce plugins for easy integration.

With Noda's advanced Open Banking API, online businesses can easily integrate direct bank payments, offering their customers a seamless and secure payment experience with lower fees. Whether you're looking to enhance customer verification processes, optimise payment systems, forecast long-term value, or refine the user experience, Noda is your partner in growth.