Originally published in the Financial Tech Times by Dave Glaser, CEO at Dwolla.
In the age of instant gratification, even the trusty debit or credit card can feel a bit clunky. Consumers are increasingly ditching plastic for a new breed of payment methods that offer a smoother, more secure experience.
Enter pay-by-bank, also known as account-to-account (A2A) payments. This method allows people to bypass cards altogether, paying directly from their checking account with just a few clicks or taps. The rise of pay-by-bank is not just a passing fad; it’s a full-fledged trend with the potential to reshape the financial landscape. In fact, experts predict that A2A payments will see a compound annual growth rate of 14% through 2026.
In order to provide these pay-by-bank payments, businesses need to be able to verify customers’ bank account information when they link those accounts for payments. This calls for a new solution in payments: instant account verification (IAV). With IAV, modern businesses and financial institutions benefit from a flexible, streamlined, and secure solution that shares and verifies customer data in order to quickly collect, send, and resolve payments.
With lower transaction fees, reliable recurring payment options, increased transparency, and more flexibility, pay-by-bank is already popular across Europe and Asia, meaning it’s only a matter of time before it spreads stateside.
As it gains momentum in the United States, customers used to leveraging pay-by-bank options for large purchases like bills, subscriptions, and high-ticket items will realize they’re able to apply the same seamless, efficient payment experience to smaller, daily point-of-sale retail purchases. And as customers replace plastic and paper with digital options, pay-by-bank will emerge as a transformative leader in this space.
While consumers tend to lead the charge in shaping spending habits, B2B payments are more quickly embracing a shift to the more streamlined and personalized experience that pay-by-bank can provide. In fact, the adoption of pay-by-bank and other electronic payment methods reflects an industry-wide appetite for digital transformation across all aspects of business operations.
Increasing access to payments via pay-by-bank and other electronic transactions is a smart business move that’s shaping payment processing expectations across industries. From retail to real estate and insurance, our digital-first world is replacing paper checks and invoices with digital wallets, contactless payments, and buy now, pay later (BNPL) options. As a result, these preferred payment methods are driving demand to conduct and resolve electronic transactions in real time.
Moving away from cash and checks requires businesses to set up digital account verification to securely process financial transactions. This process not only helps to reduce fraud but also supports a more seamless digital payment experience. With instant account verification (IAV), businesses can quickly validate a user’s financial account details. Speed is key here, as bypassing long waiting periods to authenticate information provides an enhanced user experience, decreases user abandonment, and guarantees payment at a faster rate.
As IAV becomes the standard, businesses can also provide modern, advanced instant payment methods to remain competitive, retain customers, and reach new goals. Through IAV and real-time transaction processing, businesses provide customers with a more secure and efficient payment journey that builds brand trust. Plus, adding open banking to account-to-account (A2A) payment technology can create an advanced, unified solution that streamlines the digital payment process.
When businesses invest in digital transformation and pay-by-bank options, they are empowered to provide quick, reliable, secure, and flexible payment solutions capable of meeting current and future business demands.
Businesses that adopt these modern techniques stand out, particularly against competitors that are holding onto outdated systems and legacy technology, and become industry leaders. For example, during this year’s Visa Payments Forum, Visa announced major changes to its products and services, which are expected to cause a ripple effect across the credit card and digital payment industry.
The event’s biggest takeaway was Visa’s dedication to “confirming identity without interrupting the checkout experience.” This commitment includes increasing easy tap-to-pay options, implementing a payment passkey service to prevent fraud, and revolutionizing the A2A payments experience by expanding pay-by-bank transactions. Instant account verification plays a crucial role in driving these changes to digital banking. Consequently, millions of customers will benefit from a more seamless, secure, and frictionless payment experience.
While other companies and countries have benefited from similar advances in recent years, the fact that Visa — a major brand leading the payment space — is taking on these features means we can expect wider adoption and improvements to existing infrastructures. Businesses and financial institutions will have to adapt or risk falling behind as wave after wave of digital payment innovations drive the industry forward.
The current payment landscape is defined by customer expectations toward increased convenience and choice. This means customers want a greater variety of payment options to decide when and where to pay, with the ultimate goal of completing a quick and easy checkout process. Pay-by-bank provides this payment flexibility, saving customers time and enhancing their experience with a brand. As businesses follow Visa’s model or make their own adjustments to their payment tech stacks, incorporating a flexible payment solution that meets customer expectations, habits, and preferences will ensure they can keep up with industry changes.
Speed isn’t the only factor pushing businesses and financial institutions toward the digital payment revolution. As payment behaviors shift, so do the risks of fraud and data breaches.
Open banking and APIs are revolutionizing the way financial data is shared, prioritizing security and customer protection. By enabling secure data exchange between financial institutions and trusted third parties, open banking systems, including features like IAV, are fostering a more transparent and efficient financial ecosystem. Tokenization, a critical component of this process, replaces sensitive financial information with non-decipherable tokens, significantly reducing the risk of data breaches.
Moreover, innovative payment providers are offering businesses a secure alternative to storing sensitive financial data in-house. By entrusting this responsibility to specialized providers with robust security measures, businesses can focus on their core competencies while safeguarding customer information.
Beyond enhanced security, open banking empowers customers with greater control over their financial data. Real-time transaction monitoring and payment status updates provide increased transparency. Additionally, by leveraging advanced technologies to meet Know Your Customer (KYC) requirements, financial institutions can gain valuable insights into customer payment behaviors while maintaining the highest security standards.
Finally, artificial intelligence (AI) and machine learning (ML) have emerged as tools to aid in implementing faster, more secure payment processes. These technologies can identify customer transaction patterns, automate tasks, and monitor for fraud.
With so much digital transformation happening to the payment industry recently, organizations that want to future-proof their businesses and win customers should look into digital payment methods, like pay-by-bank. Features like IAV add flexibility, security, and speed to the equation. By investing in digital transformation and leveraging the power of IAV, businesses can not only streamline their payment processes but also gain a competitive edge, ensuring long-term success and customer satisfaction.