The Payments Innovation Alliance’s Pay by Bank Project Team launched in November 2024. The Project Team’s main goals included: 

• Developing a common definition of Pay by Bank (PBB).
• Articulating primary use cases for PBB.
• Identifying operational risks and benefits of PBB as a solution.
• Identifying educational issues associated with PBB payments.
• Conducting a gap analysis between existing technology, payment scheme rules, legal and risk issues, and payment system functionality.

The Alliance Project Team defined Pay by Bank (PBB) as an account-to-account payment method where the payer transfers funds to the payee via credit transfer or direct debit enabled through open banking technology. PBB is all-electronic and can be mobile-first. While primarily used for consumer-to-business transactions, PBB’s underlying technology can also support certain transactions involving professional services such as microbusinesses or business-to-business transactions like supplier payments. Recurring payments are also possible but require specific setup and authorization. 

Pay by Bank (PBB) can use the ACH rails or the instant payment systems, such as FedNow® and RTP®. The key differentiator between an instant payment or ACH payment and a PBB transaction is the use of open banking technology. Open banking connects the payer and payee, simplifying payment initiation. This is achieved when the payee uses an alias to replace difficult to remember account information with easier to remember information such as an email or cell phone number. Another option is for the user to login to their bank account via the open banking technology provider. Open banking transmits relevant transaction information directly to the payment initiator, significantly lowering the risk of misdirected payments. For example, when using PBB to pay a bill, the consumer is redirected to their online banking portal from the biller website checkout page. After logging into their bank account, they are presented with a pre-filled payment form. They confirm the payment initiation, provide authentication, and is redirected back to the biller’s checkout page to complete the transaction.

Wire payments are typically used by payment system end users, though not exclusively, to send large amounts of money to an account held at another bank. Pay by Bank (PBB) transactions may be inter- or intra-bank payments. Another differentiator is the use of open banking technology. Wire payments typically require the sender to provide extensive information unrelated to the payment itself to the sending bank so it can ensure that the payment does not run afoul of AML, CTF and other processes, laws and regulations. Data, such as the payee’s bank’s address and the payee’s address, is not needed when initiating a PBB transaction. Wires require significant bank employee manual intervention. PBB does not and benefits from straight-through processing, making it more efficient and less expensive than wires.

Both debit cards and Pay by Bank (PBB) transactions rely on demand deposit accounts (DDA) as the source of underlying funds. That said, a debit card transaction uses the card networks to exchange information between the bank that issued the card, the bank that is accepting the card payment, and the card scheme that sets the rules that govern it. PBB transactions are subject to different rule sets than card payments and do not use card credentials to initiate a payment. For example, a debit card payment uses the PAN, CVV, and card expiration date, whereas PBB uses the bank account and routing number of the sending and receiving parties. Also, card payments do not use open banking technology to connect the merchant and the customer while PBB does.

PBB is an electronic-only payment and does not involve cash or writing checks, even if the check is processed digitally. While most PBB transactions are likely initiated via mobile device, payments initiated on a computer or tablet can also fall under the PBB definition. PBB transactions can be made online, scheduled in advance or be recurring, or made while at the physical point-of-sale.

As the “bank” in Pay by Bank (PBB) implies, the payment comes straight from a bank account, typically a demand deposit account (DDA). Debit card transactions involve funds held in a DDA at a financial institution and use different credentials to initiate the transaction from those used to initiate a PBB transaction. On the other hand, credit cards use funds from a dedicated line of credit rather than funds held in a DDA. See the “Why Aren’t Debit Card Payments Considered Pay by Bank?” question for more information on the differences. 

The United States has many different retail payment networks for account-based payments (“rails”). Pay by Bank (PBB) transactions can flow over any of the account-based rails and follow any of the rule sets (e.g., ACH, Same Day ACH, FedNow®, or RTP®). While the lack of interoperability between FedNow® and RTP® is potentially a hindrance to adoption of instant payments, this does not preclude transactions submitted to either network from falling under the PBB umbrella. This also holds true for Same Day ACH and standard ACH transactions. While one payment settles and posts more quickly than the other, this does not mean that transactions following either rule set are excluded from being considered PBB.

Pay by Bank (PBB) transactions can be both credits and debits. The purpose of the transaction is to use bank account information for the payment. Therefore, it is irrelevant whether a consumer enables an organization to debit their account or ‘pushes’ the money to the organization themselves. From a transaction flow, user experience, reconciliation, operational risk, and liquidity management perspective, there are significant and noteworthy differences between credits and debits for both the sending financial institution and the payee organization. The underlying use case is still the same, so it makes sense that both transactions fall within the PBB umbrella.

While using Application Programming Interfaces (APIs) to connect bank accounts and ease payment initiation is not a new concept, the rise of smart phones, the ability to make in-app payments, and a “mobile-first” strategy from many organizations make API usage and open banking synonymous with Pay by Bank (PBB). Using APIs to seamlessly connect accounts, often with aliases, is a key attribute that differentiates PBB from a standard ACH transaction. Mobile wallets, independent of banking apps, are one way open banking technology is increasingly being used in the mobile-driven consumer experience of today. Using APIs in PBB transactions have other potential benefits, such as pre-populated payment forms, reducing the risk of misdirected payments, and simplifying reconciliation. APIs give PBB extra advantages compared with other payment methods. 

Consumers are familiar with using an alias to log into websites, apps, or other services without having to disclose important or private information. Aliases are often used in the payment space to replace difficult to remember or sensitive information, such as an account or routing number, with easy to remember information like a cell phone number or email address. Aliases can be combined with technologies, such as APIs, to enable seamless experiences when making purchases online or in-app. When clicking on a checkout or pay button online, a consumer inputs their account number and routing number and provides a single-use authorization to debit a bank account to make a payment. Few would argue that this is convenient. The same is true for sending person-to-person transactions with a banking app or mobile wallet. The consumer could ask friends or family for their account information, but it’s unlikely that the person will store the information in their cell phone to use the next time they want to send that person money. This demonstrates that the use of aliases improves the user experience and will help accelerate Pay by Bank adoption; however, it is not a deal breaker in terms of being a part of the core definition.

Businesses and consumers may expect to be notified when a payment is successful. Pay by Bank (PBB) is no different. Businesses may be uncomfortable completing a transaction without payment confirmation. This issue differs for e-commerce where it is the consumer who may want to see that the payment was successful. Other use cases, such as funding brokerage accounts or paying for professional services (e.g., the plumber, landscapers, etc.) could all benefit from knowing the payment is successful. While confirmation is undoubtedly helpful, it is not core to the PBB definition.

The direct debit’s key enabler is the establishment of an authorization allowing the payee to withdraw funds from the payer’s account. The corollary of an authorization to withdraw funds is the ability to revoke the authorization. While the underlying business reason for making the payment does not change and is not removed, the consumer and the payee need to agree on another payment method. Pay by Bank (PBB) transactions may be recurring payments, such as bill payments, subscriptions, or even those that do not have a set tempo, but they do not have to be. Just as authorizations for standard ACH debits can be revoked, this also needs to be true for PBB.

The credit transfer’s equivalent of a direct debit is the standing order or forward-dated payment. Some consumers, especially those that may live from payment period to payment period, prefer to control when money leaves their account to pay a bill to prevent failures based on non-sufficient funds (NSFs). This can take the form of a standing order, which is a payment that reoccurs for an extended period (e.g., weekly, monthly, quarterly, yearly, etc.). It can also be a forward-dated payment that occurs at some point in the future and is typically a one-off payment. Pay by Bank would also benefit from the ability to be scheduled in advance, whether it is a one-time or recurring payment.