By Nermeen Nabil The emergence of the fintech industry in the 2000s sparked the fuse of the democratization of finance. Open banking is the result, providing secure, open access to transactions and the corresponding data, enabling challenger banks and fintechs to launch innovative financial products and services. Pay by Bank is part of this financial evolution, as providers enable real-time account-to-account payments, initiated by open banking infrastructure.
Governments in Europe and APAC were quick to back the emerging industry, legislating frameworks for open banking, leading to the fast adoption of the new financial standards. The USA has lagged behind, with progress mostly coming from the scrappy fintech industry in the absence of government legislation and pressure from the traditional finance industry.
The tides are finally turning, however, with major US banks and merchants recognizing the merits of open banking payments and legislation beginning to fall into place.
Slow Adoption in the US
Open banking has seen its highest rates of adoption in Europe, where fintechs have successfully lobbied for government legislation. The UK leads the way, with 11% of citizens estimated to use open banking technology following the introduction of frameworks by the CMA in 2018, compelling all major banks to comply with open banking standards. The EU followed a little over a year later with the introduction of PSD2, and open banking adoption rates have now reached 8.5% in France. Similar data is not available for the U.S., but it is widely considered to pale in comparison to its European counterparts.
One of the key reasons for this gulf in open banking adoption is that the fintech industry in the USA has been left to fend for itself in the absence of sweeping open banking legislation. The impact of this absence of regulation has enabled banks to stifle open banking with non-uniform or unsecure data, leaving innovators to rely on screen-scraping, a suboptimal method of gathering information.
Furthermore, US consumers are either uninformed or more wary of Pay by Bank payments, instead accustomed to credit cards and checks, compared to their European peers. A PYMNTS study from December 2023 shows that 39% of US consumers are not likely to use Pay by Bank, despite incentives, and a further 20% are only likely to use Pay by Bank if incentives are offered.
Wind in the Sails of Stateside Pay by Bank
Despite this slow burn, supportive regulation is finally making its way to the US, as the Consumer Financial Protection Bureau (CFPB) brings new rules into force by 2025 with Section 1033 of the Dodd-Frank Act, ensuring that bank account information is uniform and connections feel seamless. This landmark regulatory support will not only bolster open banking infrastructure but will also signal to banks that now is the time to get on board with open banking.
Pay by Bank is rampant in the US, commonly used for bill payments and other industries reliant on the ACH direct payments network. However, to progress Pay by Bank adoption beyond this mark, a shift in the mindset of American consumers is required, communicating that Pay by Bank is the best option in a wide range of payments experiences. The CFPB’s new regulatory action will provide a significant boost for open banking payments in e-commerce, laying the groundwork for better integrated Pay by Bank infrastructure, and signaling to consumers that Pay by Bank is a mainstream payment option.
Merchants’ demand for Pay by Bank will also significantly contribute to stateside adoption. The checkout is a meticulously managed process in the e-commerce industry, with small changes exerting a great impact on merchants’ margins. Therefore, fintechs building account-to-account payment solutions have focused on creating intuitive and user-friendly interfaces for both consumers and merchants, resulting in a seamless integration into e-commerce platforms, mobile apps, and online checkout, making this a convenient and frictionless payment option. If we have learned anything from the trials and tribulations of checkout-focused payments startups, it is that conversion at checkout is the key metric for merchants, and Pay by Bank is beginning to crack the formula.
In addition, an important accelerator in the UK open banking ecosystem’s rise to prominence was the tight-knit community of innovators and a strong sense of common goals amongst the wider fintech industry. In 2024, signs of increased collaboration within the open banking ecosystem in the US are beginning to emerge, with Pay by Bank providers standardizing checkout flows to better appeal to consumers uncertain of the new payment method.
The open banking industry in the US had a slow start to life, but is shaping up for an exciting 2024. With the first glimpses of regulator support and increasing demand from merchants, Pay by Bank is set to become a serious alternative to mainstream payment methods in the minds of US consumers.