Digital transformation is a commonly used phrase inside businesses planning for almost any change related to their industry, processes, strategies, and almost anything that impacts the bottom line. Getting more granular, businesses relying on traditional payment methods are looking to enhance their transactions and learn how digital payments solutions can an impactful area of transformation.

Many businesses already offer a wide range of payment options to remain competitive. From buy-now-pay-later (BNPL) to digital wallets, to online payment systems, they have become a common part of the checkout process. Now there is a new player emerging in the payments landscape - pay by bank.

The account-to-account (A2A) payment solution can transform how businesses and consumers handle transactions, allowing them to make payments directly from their bank accounts.

McKinsey doubled down on this shift, identifying four major eras of payment business models. Leaving behind paper and plastic, the current “Account Era” is defined by instant transfers, A2A payments, and virtual cards. And the name is fitting.

Pay by bank allows direct transfers between bank accounts, offering a streamlined alternative to card-based systems.

Currently, pay by bank is facing a slower adoption in the U.S. than Europe and Asia, but industry experts predict a compoundannual growth rate of 14% through 2026 for A2A payments spurred by the Federal Reserve’s recently launched FedNow instant payment service.  As the payments industry continues to implement digital transformation, pay by bank will remain a key driver in the revolution.

Benefits, Challenges and Adoption Hurdles

Pay by bank offers numerous advantages for businesses, including lower transaction fees, faster settlements, and reduced chargebacks. For consumers, the benefits include increased convenience, enhanced security, and potential cost savings. Industries that stand to benefit most from pay by bank include insurance, real estate, lending, and investments. These sectors can leverage the speed and efficiency of A2A payments to streamline operations and improve customer satisfaction.

Despite its benefits, pay by bank faces several challenges in the U.S. market. The established card-based payment infrastructure, regulatory differences compared to Europe and Asia, and ingrained consumer habits all contribute to slower adoption rates.

Dave Glaser, CEO of Dwolla, a digital payments provider, acknowledges these challenges. He says, “Unlike Europe and Asia, the U.S. has been slower to adopt pay by bank due to a preference for cards and concerns over account security. Businesses face similar risks as consumers, but also potential data breaches. The media should highlight how pay by bank, when implemented with robust security measures, can be among the safest payment methods."

According to Glaser, the primary driver of mistrust surrounding pay by bank is the fear of unauthorized transactions and potential account takeover.

However, these fears are often overstated. While ACH fraud exists, robust security measures can make pay by bank one of the safest payment methods available.

Dwolla’s approach to securing pay by bank methods emphasizes robust monitoring that includes a dedicated security team, 24/7 surveillance using cutting-edge tools, rigorous protocols, and advanced encryption. Additionally, a specialized security team, certified by SSAE 18 SOC 2 Type II, safeguards customer data and infrastructure.

Dwolla also employs industry-leading encryption standards to protect sensitive information and continuously assess its systems and partners for vulnerabilities. Glaser explains, "Dwolla is increasing security and facilitating acceptance of pay by bank payments by integrating with Open Banking Services partners, including Visa and MX, utilizing strong authentication measures and tokenization of sensitive information, establishing robust consumer protection policies, and educating consumers and businesses about the benefits and safeguards of pay by bank."

As security concerns are addressed and enthusiasm for pay by bank solutions grows, businesses can look forward to its potential to bridge the financial divide. By providing secure and accessible payment options, pay by bank can empower underserved communities to participate more fully in the digital economy.

Emphasizing this point, Glaser says, "We hear consistently from businesses across industries that they need to streamline payment processes, reduce friction for customers and enhance overall financial management. Pay by bank also plays an important role in financial inclusion and reducing reliance on cards."

These trends, paired with increasing regulatory changes, general democratization of digital payments, and growing interest for business use cases will continue to drive the adoption of open banking and pay by bank services in the coming years.

The Future of Pay by Bank

As the U.S. market prepares for accelerated adoption of pay by bank services, businesses and consumers can anticipate even more benefits fueled by a rise in efficient payment options, technological advancements, and changing consumer preferences, especially among younger generations.

Glaser notes two additional forces are increasing A2A adoption. He says, “First, technology has made it easier than ever to adopt A2A, and second, consumers—especially Gen Z—are increasingly adopting payments for their bank accounts instead of using credit. The positive momentum we're seeing is a testament to the increasing demand for innovative payment options that can meet those needs.”

Businesses must be ready for this to meet these demands. For Glaser, this means understanding that pay by bank is more than just a payment method; it's a strategic shift toward efficiency and customer satisfaction. He says, “By adopting this solution, businesses can expect to streamline operations, reduce costs, and enhance cash flow management. They’ll also need to consider how they can use open banking tools (like instant account verification and real-time balance checks) to reduce risk, how they can increase customer trust in their pay by bank processes, and how they can incentivize their typically card-reliant customers to use pay by bank instead.”

Still in its early stages, pay by bank presents both challenges and opportunities for the financial industry. Its efficiency, security, and financial inclusion make it a promising solution for the future of digital payments. As businesses and consumers become more familiar with this technology, widespread adoption and innovation are expected in the coming years.

The evolution of pay by bank serves as a compelling case study in the ongoing digital transformation of the financial sector. It illustrates that while new technologies can significantly enhance efficiency in many areas, their success ultimately depends on addressing user concerns, prioritizing security and access, and providing clear benefits to both businesses and consumers.