Unlocking the Power of Pay by Bank: A Discussion with Trustly, Inc.'s Founder & CEO

The Payments Roundup staff recently had the opportunity to discuss Pay by Bank functionality with Alexandre (Alex) Gonthier, Founder and CEO of Trustly, Inc. The discussion covered the history, current state, and future of this payment method.  Below are our takeaways from this discussion – they reflect Alex’s thoughts, which are important for merchants of all sizes.

The history of Pay by Bank

“Pay by Bank” functionality originated 25 years ago as an alternative to Visa and Mastercard, aiming to facilitate micropayments for digital items on then-nascent eCommerce sites.  This was particularly true for copyrighted digital goods.  

Originally, the solution involved adding IP addresses provided by Internet Service Providers to issuer/processor records – the evolution began in France, which is now part of the European Union, and in the Asia-Pacific region. In time, widespread adoption was garnered through services like Boku, which is a network that connects businesses to various local payment methods, such as direct carrier billing (charging to a phone bill) or mobile wallets.  Such systems allow customers to pay with “just a click” (as opposed to entering bank account credentials or details for each transaction) and materially reduces friction and improves the customer experience.  Further, a natural fit for verticals such as Telecom and Insurance which adopted Pay by Bank as their preferred payment method.

The current state of Pay by Bank

In the U.S., Pay by Bank has not seen widespread consumer adoption predominantly because eCommerce merchants have been focused on growth, and less on cost optimization, over the last 25 years.  Now that growth has plateaued, online merchants can focus on reducing operating costs such as payment fees. It is expected that both merchant and consumer adoption will ramp up quickly in the coming years. 

It is important to recognize that ACH is not only one of many viable payment methods available to merchants, but that it is the “broadest” payment rail in the U.S.  Government payments, B2B payments, and many more types of transactions ride the ACH rails to the tune of $86.2 trillion annually (yes, that’s with a “T”). Further, ACH can be considered a “universal” payment method as it supports a broad spectrum of payment transaction types.

Pay by Bank best practices include:

Best in Class Connectivity – Connectivity to ALL banks (not just the biggest banks with their own, published APIs) and ALL types of accounts, including checking, savings and other financial products.  This connectivity, done right, is part of Trustly’s  “secret sauce”.

Minimal Consumer Friction – Latency (time to process a transaction) of less than 2 seconds via “Click to Pay” functionality.

Best in Call Information Security – The system does not just encrypt credentials, which are subject to hacking but employs more robust security mechanisms.  For example, Trustly leverages a system developed in collaboration with NACHA which uses split tokenization – i.e. tokens split randomly bit by bit between the merchant and Trustly.  Once the user is validated, Trustly can “reconstruct” the original token to sign on to the consumer's banking portal – they never store username / password in any way.  This prevents merchants from ending up in the press if we or our payment provider are hacked. 

Guaranteed Payments – The provider should guarantee merchant funding.  In the case of Trustly, funds are guaranteed for transactions that fail due to technical defects, NSF, Account Closed, and other consumer bank account-related failures.  Pay by Bank providers should have “skin in the game” and be “on the hook” to make sure that merchants are fully funded and are not subject to chargebacks or payments-related disputes.

Improved Approval Rates – The best Pay by Bank providers can deliver payment approval rates higher than those of debit cards.  This can be accomplished in several ways:

• Based on historical data, Pay by Bank transactions can be approved instantaneously, even if there are not sufficient funds in the consumer’s account.  For example, if a consumer has $100 in her account on the 30^th of the month and intends to make a $150 purchase at the grocery store, Trustly may approve the transaction knowing that there will be a direct payroll deposit to the account the following business day. 
• Providers must have payments in their DNA in order to develop a trusted payment platform – they cannot just be an information aggregator. Having payments DNA leads to best in class user and merchant experiences which, in turn, leads to optimized approval rates.
• Providers must have the best in class risk management skills – payments, at the end of the day, is a risk management exercise – balancing approval rates (rewards) with risk of losses.

What does the future of Pay by Bank look like?

Alex argues, and we agree, that the future of Pay by Bank relies on both merchant and consumer adoption.  The value proposition for merchants is clear.  ACH transactions typically incur a fee of $0.25 - $0.50 as opposed to a credit card transaction with a cost of 2.5% – 3.5%. For the same $100 transaction, the cost to the merchant could be $0.30 for ACH or $3.00 for a credit card – a 10X difference. Even for the smallest merchants, this payment cost difference is material. Further, merchants benefit from an “evergreen” payment method – checking accounts don’t expire – credit cards expire every few years. This is particularly important for merchants with recurring payments.

For consumers, the story is a bit different – they need incentives in order to change their habits.  Merchants and providers like Trustly have many levers they can pull to change consumer behavior.  Among these are:

Rewards and Loyalty Programs – Merchants such as Target and Cumberland Farms offer enhanced benefits when Pay by Bank is used through their programs. 

Increased Approval Rates – Not only do higher approval rates benefit merchants, but they also benefit consumers who are not embarrassed at the point of sale and/or are forced to use a more expensive method of payment.

“Float” – By offering Pay by Bank, merchants can create real consumer benefits based on the “float” typically associated with paper checks.  Even if the consumer doesn’t have sufficient funds today, Trustly may approve the transaction knowing there will be enough in the account shortly.

Some industries are already enjoying the benefits of Pay by Bank.  Verizon offers a $10 per line discount for paying by bank rather than card. The insurance and telecom verticals have a 50%+ customer adoption rate of Pay by Bank. 

All merchants and their customers can benefit from incentives for using Pay by Bank.  Merchants have lower payment costs, but more importantly, incremental top-line revenue by offering more competitive rewards and loyalty programs, and thereby earning more patronage and higher average ticket values. To achieve these benefits, merchants must remember that lower payment costs should NOT be taken to their bottom line, but rather be reinvested in their businesses through enhanced rewards and loyalty programs tied to customer payment methods.  Consumers win through enhanced rewards incentives, frictionless transactions, and better payment security.  

Pay by Bank is truly a “win-win-win” when done right, and Trustly has the expertise to do it right for you. Learn more about Pay by Bank on the Trustly website or contact Trustly directly through email.