Blog

The UK payments industry is undergoing a seismic shift, driven by the rapid evolution of technology and regulatory frameworks. Among the most transformative innovations is 'Pay by Bank,' a product of open banking that enables consumers to pay merchants directly from their bank accounts. By bypassing traditional card networks, 'Pay by Bank' is poised to disrupt the payments ecosystem, redefining consumer experience and challenging established norms.

What is 'Pay by Bank'?

'Pay by Bank' leverages the core principles of open banking which compels the UK’s largest banks to provide TPPs with access to customer account information and payment initiation services, with customer consent.

The 'Pay by Bank' model allows consumers to authorise payments directly from their bank accounts to merchants, typically through an API-driven interface. Transactions are authenticated using secure methods such as biometric verification or two-factor authentication, eliminating the need for credit or debit cards.

A Disruptor to the Payments Landscape

1. Cost Efficiency

One of the most significant ways 'Pay by Bank' disrupts the traditional payments industry is by reducing transaction costs. Traditional card payments involve a complex chain of acquirers, issuers, and card schemes, each taking a slice of the transaction value. By cutting out these intermediaries, 'Pay by Bank' offers a cost-effective alternative for merchants, with lower processing fees and faster settlement times. This is particularly attractive for SMEs which often struggle with high card processing costs.

2. Enhanced Security

Security has long been a cornerstone of payment innovation. 'Pay by Bank' transactions are inherently more secure due to open banking's robust regulatory framework. The use of APIs, combined with strong customer authentication mandated under PSD2, minimises fraud risks. Sensitive card details are no longer shared or stored, reducing the attack surface for cybercriminals.

3. Improved Consumer Experience

For consumers, 'Pay by Bank' offers a frictionless payment journey. By eliminating the need to manually enter card details or remember passwords, the process becomes quicker and more intuitive. Many services integrate directly into banking apps, providing consumers with real-time visibility of their account balances, aiding better financial decision-making.

Regulatory Landscape: The Catalyst for Change

The regulatory framework also poses challenges. For 'Pay by Bank' to scale, regulators must address the following:

• Liability and Refunds: Unlike card payments, where consumers benefit from chargeback protections, 'Pay by Bank' transactions can lack equivalent safety nets. Clear guidelines on liability in cases of fraud or merchant insolvency are essential to foster trust.
• Standardisation: Inconsistencies in implementation among banks can lead to fragmented user experiences. Regulatory efforts must continue to drive uniformity across the ecosystem.
• Accessibility: For 'Pay by Bank' to achieve mass adoption, regulators must ensure that the service is inclusive, catering to digitally excluded populations who may lack access to smartphones or internet banking.

Consumer Adoption: The Final Frontier

While the potential of 'Pay by Bank' is undeniable, its widespread adoption hinges on consumer trust and awareness. Many consumers remain loyal to traditional card payments, largely due to familiarity and perceived security. For 'Pay by Bank' to become mainstream, stakeholders must prioritise education and marketing efforts to demystify the technology and highlight its benefits.

Additionally, collaboration between banks, fintechs, and merchants will be critical. Partnerships with major retailers can serve as a launchpad, showcasing the convenience and cost savings of 'Pay by Bank' to a broader audience.

Looking Ahead

As 'Pay by Bank' continues to gain traction, its implications for the UK payments industry are profound. For merchants, the promise of lower costs and quicker settlements is transformative. For consumers, the seamless and secure experience aligns with the broader trend of digitisation and personalisation.

However, regulators must strike a delicate balance between fostering innovation and safeguarding consumers. Meanwhile, industry players must work collectively to overcome barriers to adoption, ensuring that 'Pay by Bank' delivers on its disruptive potential.

In a world increasingly defined by convenience and connectivity, 'Pay by Bank' represents the future of payments. Its success will not only reshape the UK payments landscape but also set a global precedent for how open banking can revolutionise financial services.