For decades, retailers have protested the fees Visa V and Mastercard MA charge them to accept credit and debit cards. “Pay by bank” is the latest effort to circumvent those fees by letting people pay directly from their bank accounts.
Financial services consulting firm Sionic has partnered with MX, a company that connects fintechs to users’ bank accounts, and Google Cloud Services to launch pay by bank in the United States. The product lets merchants cut out card acceptance fees, which range from 1% to 3%. Its success in the US depends on whether merchants can incentivize consumers to switch from heavily utilized credit or debit cards.
Pay by bank lets consumers bypass Visa and Mastercard’s payment rails and pay directly from their bank account. It’s already popular abroad, particularly in Asia and Europe, but has so far failed to catch on in the US market where 84% of adults have at least one credit card. While credit and debit cards approach ubiquity in the United States, the card networks are facing scrutiny as interchange fees–charges to merchants to cover the cost of processing transactions–have continued to climb. In 2021, merchants were charged $77.5 billion in credit card fees, which are split between issuing banks and the card networks. In March, Visa and Mastercard were preparing to raise interchange fees even further, the Wall Street Journal reported.
The pay-by-bank product uses the real-time-payments (RTP) network operated by The Clearing House, an organization owned by 23 of the largest banks including Citibank, Wells Fargo WFC and HSBC HSBC, with lower fees than the card networks . The Clearing House’s real-time-payments network is also used by Venmo and Zelle to facilitate money transfers. Launched in 2017 in America, RTP aims to speed up bank transfers so they settle instantly – that’s a stark contrast to the days it can take to settle most bank transfers over the ACH network.
“We’re reallocating the control of that merchant-customer relationship away from those expensive rewards credit cards into the hands of the merchants,” CEO and founder of Sionic Ron Herman said.
Customers use Sionic’s pay-by-bank option, called ULink, by scanning a QR code at checkout. The option could also appear to consumers as a button within their mobile banking apps. For security, the technology “tokenizes” user account information. “The merchant never sees the account number for the individual that’s paying because they didn’t present a debit card, they presented a token to the merchant,” says Elizabeth McQuerry, a partner at payments consulting and research firm Glenbrook Partners.
With ULink, MX’s technology confirms a customer has the balance available to cover the transaction, and the fund transfer occurs within seconds over the RTP network. There is no risk that merchants will not receive payment or that the customer will overdraft their account. However, once the transaction has occurred, there are fewer options for recourse if there is a dispute. For example, if a consumer orders something online and it never arrives, they will either have to settle the dispute with the merchant or ask their bank to issue a refund. Card networks have more experience handling fraud and protect customers through things like Visa’s zero liability policy, which requires banks to cover card holders in the event of a fraudulent transaction.
“We know Visa is and will remain one of the most cost effective and secure ways to pay and be paid – offering superior functionality and benefits to merchants and consumers at a competitive cost,” a Visa spokesperson said.
Merchants who want customers to use pay by bank will want to handle disputes swiftly, similarly to how Amazon AMZN has built customer loyalty through generous refund policies. Merchants eager to accept payment by bank could incentivize consumers to switch over by offering rewards or discounts for using the service. Some merchants are ahead of the curve, offering their own card programs similar to pay by bank. The Target TGT Red Debit card, for example, works by transferring customer funds directly from their bank account to Target’s. In return for using the product, Red Card customers receive up to 5% cash back on their purchases. In addition to avoiding interchange fees, the Red Card gives Target greater control over the customer experience and more access to offer new promotions or products.
Plaid, an MX competitor and one of the most valuable private fintech companies in America, does not currently offer a pay-by-bank service or utilize the RTP network. In 2020, when Visa announced plans to acquire Plaid for $5.3 billion, the Department of Justice blocked it saying that Visa was trying to “eliminate this competitive threat to its online debit business before Plaid had a chance to succeed.” Visa denied the allegations, claiming that Plaid’s business is “complementary to Visa’s, not competitive.” Mastercard made its move into pay by bank in 2016 by acquiring Vocalink, which offers the service throughout the United Kingdom.
Sionic’s product isn’t the first time pay by bank has attempted to gain traction in the United States. In 2014, Merchant Customer Exchange, a payments company owned by a group of big box retailers including Walmart WMT, attempted to launch a pay-by-bank product called CurrentC. The initiative was shut down two years later after failing to gain traction with consumers. Even if merchants are eager to spur adoption, changing consumer payment habits is a slow process, especially when many are accustomed to a quick and simple card experience.
It is unclear if Google Cloud Services’ involvement in Sionic’s pay-by-bank product foreshadows bigger plans for the tech giant, since Google has been working on payment technology for over a decade. Its products have moved through several iterations. In May, Google Pay (a competitor to Apple Pay) was rebranded to Google Wallet. The most recent version is a digital wallet designed to store card information, in addition to tickets or vaccination cards. Last year, the company ditched plans to offer Google Pay users the option to sign up for checking accounts and debit cards through a program called Google Plex.
Given Google Wallet’s history, it wouldn’t be too far a leap for the company to add pay by bank.
“The Sionic and MX announcement is likely to be warmly embraced by Google Wallet, which abandoned its own efforts known as Google Cache and Google Plex to provide a direct pay-by-bank option,” CEO and founder of payments firm Crone Consulting, Richard Crone, said.