As the digital economy evolves, the payments industry is experiencing a significant shift towards more direct and streamlined transaction methods. This transformation is driven by advancements in financial technology, changes in consumer behavior and the growing need for businesses to optimize their payment processes with more efficient, cost-effective and secure digital payment methods.
Pay by bank (also known as account-to-account (A2A) payments), instant payments and open banking are leading the charge. While these three concepts are related, they have distinct characteristics and applications. Understanding these technologies is crucial for businesses looking to enhance their financial operations and provide better experiences for their customers and partners.
By exploring pay by bank, instant payments and open banking, we can gain valuable insights into the future of digital transactions and the potential benefits these methods offer businesses executing mass or large volumes of payments.
Pay by bank (also known as account-to-account (A2A) payments) is a payment method that allows consumers and businesses to make purchases or transfers directly from their bank account without needing paper checks, wire transfers or credit cards. This system leverages the ACH Network, RTP® network and FedNow® Service to securely connect one bank account with another.
Key features of pay by bank include:
Pay by bank can be particularly useful for businesses executing large transactions or recurring payments. For example, a manufacturing company could use pay by bank when working with suppliers and distributors, benefiting from reduced fees and faster settlement times.
Pay by bank payments provide businesses across industries with several advantages and opportunities.
Businesses can process transactions ranging from small, recurring payments to large, one-time transfers without incurring proportionally higher fees. This makes pay by bank payments particularly attractive for companies with diverse payment needs.
Pay by bank payments, such as ACH transfers, offer enhanced security features like tokenization, which replace sensitive information with unique identifiers. This reduces the risk of data breaches and fraud, making them a more secure option compared to traditional card payments. By eliminating the need to store or transmit sensitive card data, A2A transfers provide an extra layer of protection for both businesses and consumers.
The integration of pay by bank payments with enterprise resource planning (ERP)/cash management systems has further streamlined financial operations for many businesses. This integration allows for real-time visibility into cash flows, automated reconciliation and more accurate financial forecasting.
Pay by bank offers several advantages over traditional payment methods. For businesses, it can significantly reduce processing fees, especially for high-value transactions. Customers who use pay by bank do not need to share their card details with merchants and benefit from extra layers of security provided by encryption and tokenization.
Furthermore, pay by bank can enhance the overall payment experience by streamlining the checkout process. With features like instant account verification and real-time balance checks, businesses can confirm bank accounts and see the funds available in the accounts before completing a transaction, reducing returns and improving overall cash flow management.
Instant payments are a type of pay by bank transactions that are processed and settled in real-time or near-instantaneously, revolutionizing the speed at which businesses can operate. In the United States, two primary systems facilitate instant payments: the FedNow Service and the Real-Time Payments (RTP) network.
The RTP network, launched by The Clearing House in November 2017, has grown significantly. In fact, the RTP network’s faster payment capabilities are available to financial institutions that hold close to 90% of U.S. demand deposit accounts. Launched by the Federal Reserve in July 2023, the FedNow Service provides an alternative instant payment system for U.S. financial institutions. It has also seen incredible growth since its launch, recently surpassing 1,000 financial institutions participating in FedNow.
The adoption of instant payments in the United States is rapidly increasing. According to a U.S. Bank study, over 40% of companies exceeding $100 million in revenue already use the RTP network to conduct instant transactions. The study also revealed nearly 70% of businesses anticipate adopting instant payments through RTP or FedNow within the next two years.
Instant payments offer several competitive advantages for enterprises:
As instant payment systems continue to evolve, they are expected to support increasingly complex payment scenarios, potentially revolutionizing how businesses manage their financial operations and relationships with partners and suppliers.
While applicable in B2C transactions, these features make instant payments particularly valuable for B2B applications where large volumes of money and multiple stakeholders rely on instant transactions to maintain operational efficiency. For example, commercial real estate property managers can leverage instant payments to immediately release funds across multiple properties, improving cash flow for vendors and suppliers and reducing project timelines.
The development of features like Request for Payment (RFP) could further enhance the utility of instant payments for businesses, especially for automatic recurring payments and instant micro-transactions. However, use cases are limited by several challenges, including limited use case support from financial institutions and the need for industry-wide standardization.
Open banking promotes the sharing of financial information between various financial institutions and authorized third-party providers, with user consent. It is enabled by application programming interfaces (APIs) that allow the secure access and exchange of consumer data. Open banking is based on the principle that individuals or businesses should have greater control and ownership over their financial data.
Traditionally, banks have monopolized financial data (e.g., bank account balances, transaction histories, etc.) by limiting who they share this information with. Open banking changes that by equipping individuals and businesses with the ability to share their data and payment details with other financial services providers, such as budgeting apps, investment platforms and more.
APIs make open banking possible by allowing software programs to interact with each other and, in this case, enable third-party financial service providers to access customer data securely and efficiently. Growing interest and widespread adoption of the technology led to more than 100 billion open banking API calls in 2023, and is expected to reach 580 billion in 2027.
Alongside the development of payment APIs, open banking is changing how we think about financial management and paving the way for a more customer-centric financial ecosystem.
Open banking and pay by bank work together through payment APIs to create a more seamless and efficient payment experience.
Open banking acts as the foundation, providing the framework for sharing financial data between banks and third-party providers. This sharing is possible through payment APIs, enabling financial institutions to communicate and exchange information securely.
Pay by bank leverages these APIs to facilitate direct transfers between bank accounts. When a customer initiates a payment from one bank account to another, the payment API connects the two banks and initiates the transfer. This process eliminates the need for intermediaries like credit card networks, resulting in faster and more cost-effective payments.
Open banking provides access to financial data, while payment APIs enable the actual transfer of funds. Together, they create a more connected and streamlined payment ecosystem.
While all three innovations offer unique benefits, pay by bank is gaining significant traction in the B2B space.
Pay by bank incurs lower transaction fees, is more secure, provides customers with more control and settles faster compared to credit card transactions, paper checks and wire transfers. This can offer substantial cost savings for companies processing large volumes of payments and enhances an enterprise's relationship with customers, vendors, suppliers and other stakeholders.
As a modern payment service provider, Dwolla works with trusted partners to bring advanced payments solutions to customers. This is evident in Dwolla’s recent collaboration with Visa to integrate open banking technology with pay by bank systems. Dwolla’s pre-integration with Visa Open Banking Solutions creates a single solution for accessing Instant Account Verification (IAV), real-time balance checks and available A2A payment methods more securely. This can reduce complexity and accelerate time-to-market while helping create a smoother implementation process for businesses.
Additionally, pay by bank systems can streamline reconciliation processes. By providing detailed transaction data directly from bank accounts, businesses can automate their accounting procedures more effectively, reducing manual errors and saving time.
As open banking continues to evolve, pay by bank is poised to become an increasingly vital tool for businesses, enhancing payment operations across industries. Its combination of security, cost-effectiveness and user-friendly design makes it an attractive option for businesses looking to optimize their payment processes.
Pay by bank, instant payments, and open banking all have their place in the modern digital transactions world. As companies continue to digitize their financial operations, understanding and leveraging these technologies will be crucial for maintaining competitive advantage and operational efficiency.
Ready to enhance your payments platform? Schedule a call with a payments expert today.