If there's a 2024 payments buzzword, it's "pay-by-bank". Zepto's Chief Commercial Officer, Colin Baines, looks at why it's so hot right now.
The pay-by-bank revolution is here.
Ironically, pay-by-bank — paying for something from a bank account — isn't actually new.
Australians have been processing account-to-account (A2A) payments on the Bulk Electronic Clearing System (BECS) since the 1980s. BECS is a trusted payments workhorse that reliably handles average yearly transactions values of more than $15 trillion. But only on business days between 10.00am and about 9.00pm. And only in batches. And it can take up to three business days for a BECS payment to settle. A payment made on the Thursday before Easter might not land in a merchant bank account until the following Wednesday.
Reliable, yes. Fit-for-purpose in an always-on digital economy? Not anymore.
But with the slated 2030 retirement of BECS — 'BECSIT' — just over the horizon, modern pay-by-bank offerings are being brought to market.
Nibbling away at credit cards
Let's face it, credit cards aren't going away. And right now, they absolutely dominate online.
You’ve got to hand it to them. From humble beginnings, cards have adapted to every major commercial shift thrown at them since they took off in the 1950s with the Diners Club and American Express schemes. Ubiquity of the major schemes — Amex, Visa & Mastercard — and broad understanding of the liability framework around chargebacks sealed the deal. But things are shifting.
Consumer behaviour has changed, and card issuing rates are falling. Between 2019 and 2024, the market size of the Credit Card Issuance industry in Australia declined at a CAGR of 5.3%. It's clear that many people now see debit, not traditional credit, as their major source of funding. The question is why?
I think the ‘GFC generation’ is a driving force behind the pay-by-bank revolution. This generation went through the last recession, the last true downturn in the global economy. It’s driving a move away from credit, and into managing funds more effectively. These people are in their 20s and early 30s, and they’re shopping. They saw their parents go through financial hardship, they saw the impact of being overstretched with debt, and they felt it. They're credit averse. And they don’t see why they should have to use a card with a major scheme logo on it to shop online or buy a coffee.
And those pesky merchant fees for the privilege? Don't even go there.
I think it explains why the RBA's 2023 Payments System Board Annual Report showed that debit card use by Australians has doubled in a decade.
For many, ‘debit’ payments from a bank account are just better from a cash flow perspective. Even better if they're in real time.
Your money moves in and out, you can monitor spend, set up connected accounts with different functions, have a clear view of your financial situation, and pump the spending brakes when needed. I also think that card rewards schemes aren't quite as rewarding as they used to be. Little wonder then, that debit card enabled payments from bank accounts are booming.
While great for consumers who prefer to pay by bank, debit card payments feel just like credit card payments to merchants. There are the legitimate fees that come with accepting payment on card schemes whether by credit or debit.
We all feel it when the merchant tries to recover some of that cost in the transaction. It doesn’t matter whether it’s a cup of coffee, or a fancy Italian coffee machine for your kitchen counter — it adds up.
Enter the New Payments Platform (NPP)
The NPP switched on in 2018 and, as a 2024 Australian Payments Plus (AP+) update notes, it processes more than a third of all Australian A2A/pay-by-bank payments. That’s an average daily payments value of around $5 billion and growing. Importantly, it does that in real time 24/7, every day of the year. If everything goes to plan, by 2030 the NPP will process all of Australia's pay-by-bank payments in real time, and truly challenge cards. But we're not there yet.
Even with massive consumer engagement with real-time pay-by-bank methods like PayID and — more recently — the emergence of PayTo, a few things are holding back the inevitable rise of pay-by-bank. One challenge is what I call the ‘secret source of payments’ in retail: consumer protection.
Context matters: Big ticket items versus everyday transactions
The consumer protection peace-of-mind offered by the card schemes is massive. The chargeback offering is clearly articulated, readily understood and highly valued by consumers. When Bonza collapsed, impacted customers who had purchased flights with a card could request those transactions be reversed by chargeback. There's currently no clear equivalent for pay-by-bank transactions. There's no intermediary or scheme for customers to rely upon if the merchant doesn’t refund or replace the purchase.
And until the consumer protection piece gets there, big retailers may hesitate take it on. I think we've got to think robustly about where the liability sits. It's a big issue, and there are some bold moves being taken around the world to try to resolve it. I don't agree with some of the emerging consumer protection regimes — the UK, for example, pushing it all onto the banks — but that's a topic for another day. Still, at Zepto we're encouraged by the vision of and commitment to pay-by-bank by Zepto customers like Red Energy, Wpay and Ozedi who have strategically embraced it.
Today, I think pay-by-bank has great application in the everyday transactions people make — their utility payments, telco bills, gym memberships, kids sport registrations and subscriptions. It’s in those billing environments that a consumer is rarely likely to submit a chargeback or a claim. Pay-by-bank methods are a natural fit in this context, they work well already, and can absolutely drive lower cost to the merchant, and better cash flow management for the end-customer.
I believe that the online opportunity for pay-by-bank is massive.
In the ‘early days’ of online commerce, the consumer protection halo of cards carried enormous value in every purchase. But in 2024, where delivery and tracking is so reliable, I think chargeback ‘insurance’ carries less weight for consumers. With drivers photographing the delivered goods in location, for example, it becomes pretty hard for someone to claim they didn't arrive.
Despite the missing consumer protection piece, there's a consumer upside to using a real-time pay-by-bank method in online retail. With payment settling instantly, that sweet vintage Steve Cabarello skate deck you just bought, can be shipped immediately. Nice.
Speed, irrevocability & fees
Ironically, perhaps, a criticism of modern pay-by-bank payments is related to their speed. Because they travel between bank accounts and settle in real time, they can't be reversed — they're irrevocable. This makes confirmation of payee technology that we’re seeing on the NPP vital. It gives the payer confidence and comfort that their funds are going where they’re meant to go.
For businesses, however, that speed can be enormously advantageous. The payment is sent, it lands and settles immediately. The ‘old world’ of T+2 or even T+3 pay-by-bank timeframes need no longer apply. We've all transferred money to someone, and you literally have no way of tracking where those funds have gone. Now put that into a business context. Imagine doing hundreds of thousands of transactions a week with no visibility over when they’re going to land and settle. That’s daunting. But with modern, real-time pay-by-bank methods, it's instant. You push it, it's done. That's huge.
There's also the reduction in fees that can come with moving payments off the card schemes. Particularly businesses with larger average transaction values [ATV] where the flat fee per pay-by-bank transaction is likely to have a significantly lower cost impact than the percentage model of the scheme-based fee. It’s cents versus percentage points for essentially the same thing. So it can be a lot more cost-effective for the business who also carries chargeback liability, too.
Rich data sets and automation
Automation is another massive uplift that modern pay-by-bank methods can bring to the table for merchants and businesses. Incredible features like automated reconciliation that you can build on the back end from a data perspective are game changers. The data for merchants is now so much richer than the old bank account to bank account streams or what they glean from card schemes. Because remember, if it's a Visa card payment, the data’s going through Visa. If it's Amex, it’s going through Amex. Likewise with Mastercard.
But because pay-by-bank payments take place seamlessly between the two parties engaged in the transaction, merchants can have a clear, singular view of their customer landscape. A view unimpeded by any intermediaries like the card schemes. We’re capturing so much information. We can look at how it’s being ingested and leveraged to streamline business operations, understand consumer behaviour and improve customer payment experiences. There’s a real richness there.
Financial accessibility uplift
Another consideration is there's a portion of the population that can't get access to credit because of a credit score issue, for example, or don't want to access it. Pay-by-bank gives them the opportunity to have seamless, consumer-centric check out experiences that don't force them to use something they don’t want.
As pay-by-bank options like PayID and PayTo become ubiquitous, they’re giving these people the ability to transact online. Provided they have a bank account, pay-by-bank methods put them in control of their own money as they shop and check out online, and to enjoy a real-time view of their financial position. That’s a huge experience uplift for many people who were unable to do so previously.
Momentum for modern pay-by-bank payment methods is global. ACI Worldwide’s 2024 Real Time Payments Report brought to light striking findings about how access to affordable financial services through real-time payments can drive economic growth and help reduce poverty.
It revealed, for example, that:
- In 2023, real-time payments contributed US$164 billion to global GDP, equivalent to the output of 12 million workers;
- By 2028, that global GDP contribution is projected to reach US$285.8 billion, a 74.2% increase on 2023, equivalent to 16.9 million workers;
- By 2028, 167 million previously unbanked people in 28 countries could gain bank accounts;
- Nett savings for consumers and businesses amounted to US$116.9 billion in 2023 and are expected to grow to US$245.8 billion by 2028.
We have more ways to pay for things today than probably at any time in history. You can use cash or a card, you can BNPL, you can PayPal, you can BPAY, you top up a digital wallet and pay out from there. And, yes, cheques are still a thing, even if the writing's on the wall [and the stub] for them.
All this diversity brings complexity. And frankly friction.
The payments of tomorrow can move and settle seamlessly between bank accounts in zeptoseconds.
And they're available today.
The author
