Where “Pay-by-Bank” Is Gaining Traction

Open banking is transforming the financial industry, reshaping how banking services are delivered and consumed. Digitalization is allowing for smoother, faster and more secure exchange of data across the financial landscape, paving the way for improved financial services and new business models.

Beyond banking, businesses and consumers will also see substantial changes. Financial actions, such as applying for a loan, vetting the finances of a potential vendor or customer and gauging real-time cash position, are likely to become faster and easier than ever.

For payments, open banking can eliminate the time, effort and risk for parties involved in transactions, facilitating commerce and economic growth. In Europe, recent and proposed regulations are helping to advance open banking and an improved payments system. Businesses should stay abreast of these developments and be ready to take advantage of new ways to transact with their customers and business partners.

Traditional payment methods pose difficulties for both businesses and their end customers. For retail customers, most existing payment methods require manual input. A slower checkout process leads to lower payment conversion (the rate of purchase completion) and lower customer retention.

For businesses, conventional payment methods also pose security and compliance issues, leading to costly chargebacks and refunds. Moreover, a complicated payment flow with multiple intermediaries tends to result in higher fees and slower settlement times.

Pay-by-Bank, or payment initiation, is an alternative that is gaining in popularity. Enabled by open banking, this solution involves direct transfer of funds between bank accounts. “With Pay-by-Bank, businesses benefit from improved success rates, low human error and minimal fraud by design,” says Sara Castelhano, Head of Payments and Commerce Solutions Product for J.P. Morgan Payments in EMEA. “Pay-by-Bank also eliminates chargeback losses, and businesses can pass on the lower transaction costs to their customers.”

Pay-by-Bank also results in faster settlement times, says Castelhano, especially when the transaction occurs on real-time payment rails such as the Faster Payments System in the UK or SEPA Instant in the EU. “We expect Pay-by-Bank to become a go-to payment method for customers as open banking adoption grows,” she says.

Pay-by-Bank has grown quickly in the UK, where 11.4 million such payments were made in July 2023. The number of payments has doubled over 2022 on a year-to-date basis, according to the UK’s Open Banking Limited. The most popular applications were topping up accounts, settling credit card bill payments and e-commerce checkout. In Europe, the number of open-banking users is expected to reach 63.8 million by 2024, up from 12.2 million in 2020, according to Statista. In the Middle East, a number of countries are keen to adopt open banking; Saudi Arabia, for example, aims to make 70% of transactions cashless by 2030.

“Pay-by-Bank has grown fastest among customer-facing transactions, but business-to-business payments have started picking up in recent times, with use cases like wholesaler or supplier receivables and business account validation,” says Castelhano. More broadly, by fetching payment account details of end users, open banking is increasingly being used for onboarding and verification.

Beyond payment initiation, J.P. Morgan Payments is looking at other ways to create value for clients using consumer payment account data. One example is fraud detection: By analyzing past payment behavior, financial institutions can gauge their customers’ willingness and ability to pay. “Studying the income and expense patterns for clients could help lending and rental businesses to make informed credit decisions,” Castelhano says.

Open banking in Europe has been built on the regulatory foundation of the European Commission’s second Payment Services Directive. Implemented in 2018, PSD2 mandated secure data sharing by requiring banks to develop open-banking application programming interfaces (APIs) and to make them available free of charge to merchants and other businesses.

“APIs sit at the heart of open banking,” explains Castelhano, but expansion of open banking in Europe has been hindered by inconsistent API standards and connectivity. Fortunately, the pending Payment Services Directive, PSD3, requires a strengthening of API rules with a focus on functionality and performance. The new regulations promise to “simplify open-banking propositions and ensure that consumers have greater control and continuity over their data, access and permissions,” she says.

PSD3 is one of many regulatory efforts underway worldwide that will support open banking. In the EU, these include mandates related to instant payment, proposals to develop a “digital euro” and creation of a draft framework for financial data access. In the UK, the pending Data Protection and Digital Information Bill advances regulation around data sharing; Saudi Arabia has issued an open-banking framework and launched its Open Banking Lab.

“To be successful in the new world of open banking, businesses will need to put their customers’ interests first,” says Castelhano. That requires understanding what customers want in their payment experience and creating services that are relevant to them, such as secure and convenient payments.

Businesses will also want to increase customer awareness of Pay-by-Bank as a convenient and secure payment option. They could incentivize customers to choose Pay-by-Bank through discounts or loyalty points, or make Pay-by-Bank—or “fast and easy bank transfer”—a preferred method at checkout.

Payments are just one application for open banking, which is playing a growing role in credit, lending, financial management and more. To maximize the value of open-banking services, companies should consider developing their own APIs, says Castelhano.

“Now is the time to invest in open banking and Pay-by-Bank solutions, as demand for low-cost and secure payment methods is increasing among customers, and market adoption will increase as regulators enforce bank adoption and standardization across the world,” she says.