A new payment service using the same technology as Zelle and Venmo will reduce visa and mastercard fees

For decades, retailers have protested Visa fees
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and Mastercard
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charge them to accept credit and debit cards. “Pay by Bank” is the latest effort to circumvent these fees by allowing people to pay directly from their bank account.

Financial services consultancy Sionic has partnered with MX, a company that connects fintechs to users’ bank accounts, and Google Cloud Services to launch pay-by-bank in the United States. The product allows merchants to reduce card acceptance fees, which range from 1% to 3%. Its success in the United States hinges on merchants’ ability to get consumers to move away from heavily used credit or debit cards.

Pay by bank allows consumers to bypass Visa and Mastercard payment rails and pay directly from their bank account. It is already popular overseas, particularly in Asia and Europe, but has so far failed to catch on in the US market where 84% of adults have at least one credit card. As credit and debit cards approach ubiquity in the United States, card networks are coming under scrutiny as interchange fees — fees charged to merchants to cover the cost of processing transactions – continued to increase. In 2021, merchants were charged $77.5 billion in credit card fees, which are split between issuing banks and card networks. In March, Visa and Mastercard were preparing to raise interchange fees further, the Wall Street Journal reported.

The pay-by-bank product uses the real-time payments (RTP) network operated by The Clearing House, an organization owned by 23 of the largest banks, including Citibank, Wells Fargo
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and HSBC
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, with lower fees than card networks. The clearinghouse’s real-time payment network is also used by Venmo and Zelle to facilitate money transfers. Launched in 2017 in America, RTP aims to speed up bank transfers so they settle instantly – a stark contrast to the days it takes to settle most bank transfers on the ACH network.

“We’re reallocating control of this merchant-customer relationship away from those expensive credit cards to rewards in the hands of merchants,” said Sionic CEO and Founder Ron Herman.

Customers use Sionic’s bank payment option, called ULink, by scanning a QR code at checkout. The option could also appear to consumers as a button in their mobile banking apps. For security reasons, the technology “tokenizes” user account information. “The merchant never sees the account number of the person paying because they didn’t present a debit card, they presented a token to the merchant,” says Elizabeth McQuerry, partner at the consultancy and Glenbrook Partners Payments Research.

With ULink, MX’s technology confirms that a customer has the available balance to cover the transaction, and the transfer of funds occurs within seconds over the RTP network. There is no risk that merchants will not receive payment or that the customer will be overdrawn on their account. However, once the transaction is completed, there are fewer options for recourse in the event of a dispute. For example, if a consumer orders something online and it never arrives, they will either have to settle the dispute with the merchant or ask their bank for a refund. Card networks have more experience dealing with fraud and protecting customers with things like Visa’s zero liability policy, which requires banks to cover cardholders in the event of a fraudulent transaction.

“We know that Visa is and will remain one of the most cost-effective and secure ways to pay and get paid – delivering superior features and benefits to merchants and consumers at a competitive cost,” said a gatekeeper. -word of Visa.

Merchants who want customers to use bank payment will want to handle disputes quickly, similar to Amazon
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built customer loyalty through generous refund policies. Merchants willing to accept bank payment could entice consumers to switch by offering rewards or discounts for using the service. Some merchants are ahead of the curve, offering their own card programs similar to pay-by-bank. Target
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The red debit card, for example, works by transferring customer funds directly from their bank account to Target. In exchange for using the product, Red Card customers receive up to 5% cash back on their purchases. In addition to avoiding interchange fees, the red card gives Target greater control over the customer experience and better access to offer new promotions or new products.

Plaid, a competitor to MX and one of America’s most valuable private fintech companies, does not currently offer a bank payment service or use the RTP network. In 2020, when Visa announced its intention to acquire Plaid for $5.3 billion, the Justice Department blocked it, saying Visa was trying to “eliminate this competitive threat to its online debit business before Plaid has a chance of succeeding”. Visa denied the allegations, saying Plaid’s business is “complementary to Visa’s, not competitive.” Mastercard entered pay-by-bank in 2016 by acquiring Vocalink, which offers the service across the UK.

Sionic’s product isn’t the first time pay-by-bank has tried to gain traction in the United States. In 2014, Merchant Customer Exchange, a payment company owned by a group of big-box retailers, including Walmart
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, attempted to launch a bank payment product called CurrentC. The initiative was abandoned two years later after failing to gain traction with consumers. Even though merchants are eager to drive adoption, changing consumer payment habits is a slow process, especially when many are used to a quick and easy card experience.

It’s unclear whether Google Cloud Services’ involvement in Sionic’s pay-by-bank product foreshadows bigger plans for the tech giant, since Google has been working on payment technology for more than a decade. Its products have gone through several iterations. In May, Google Pay (a competitor to Apple Pay) was renamed Google Wallet. The most recent version is a digital wallet designed to store card information, in addition to tickets or vaccination cards. Last year, the company dropped plans to offer Google Pay users the option to sign up for checking accounts and debit cards through a program called Google Plex.

Given the history of Google Wallet, it wouldn’t be too difficult for the company to add bank payment.

“Sionic and MX’s announcement will likely be warmly welcomed by Google Wallet, which has abandoned its own efforts known as Google Cache and Google Plex to provide a direct-to-bank payment option,” CEO and founder of the company from payment Crone Consulting, Richard Crone, says.

About Matthew R. Dailey

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