It’s still premature to say that open banking and pay by bank have truly arrived in the U.S. However, with the Consumer Financial Protection Bureau (CFPB) issuing the final Rule 1033 draft on Oct. 22, they certainly have more momentum.
The ruling seems to have raised as many questions as it answered, especially about liability and operational compliance changes in the banking and FinTech sector. One thing, however, is certain: Financial services companies of all shapes and sizes have waited for the CFPB to move the needle on open banking and pay by bank to advance them, and consumers may finally be ready to follow their lead.
Although the interview took place just before the official CFPB ruling came down, the spirit and intent of progressing toward open banking and pay by bank was evident in a recent conversation between Karen Webster, CEO of PYMNTS, Brian Dammeir, head of payments for Plaid, and Paul Chang, global payments market development for AWS.
As all three noted, since the advent of open banking in the U.K., consumer expectations and behaviors surrounding financial services have changed. Initially focused on the secure exchange of financial data, open banking is now evolving toward more seamless payment solutions, among them pay by bank.
Since open banking became a regulatory requirement in the U.K. in 2017, consumer behavior has evolved as well. The banking ecosystem has been moving toward more innovative, data-driven solutions.
One of the most significant changes is the demand for a more consistent and ubiquitous experience across platforms. As Dammeir noted, “consistency and ubiquity” are key for driving consumer adoption in the U.S., especially with the gradual shift from data-sharing services to payment facilitation.
In today’s limited open banking environment, consumers are accustomed to using their bank accounts for bill payments through various online platforms. However, the pay-by-bank proposition aims to modernize these processes, offering a secure alternative to the friction-filled experience of manually entering account numbers and routing details.
“The user experience is what’s really changing,” Dammeir said. Traditional online bill pay requires users to recall or locate their account information, he said, a process prone to errors. With pay by bank, that friction is eliminated. Consumers can digitally authenticate their account information, making payments through a streamlined, biometric-driven interface.
“It’s about modernizing bank-based payments and putting them on par with other methods in terms of user experience,” he said.
Plaid enables customers to store their verified identity and account information with Plaid and reuse it across other Plaid-powered apps. This digital enhancement can reduce sign-up time for new services by as much as 90% in some cases and improves the conversion rate as well as the overall consumer experience.
However, for pay-by-bank solutions to gain widespread adoption, trust and familiarity must be built. Chang pointed out that incentives could play a critical role in driving that shift, especially among younger consumers.
“Instant cash-back or merchant-driven rewards can encourage consumers to try out pay-by-bank solutions,” Chang said, adding that these reward programs could become the modern equivalent of credit card rewards, motivating consumers to shift their payment habits.
AWS customers are training their machine learning models using Amazon Sagmaker on the user-permissioned transaction history to personalize the right loyalty offer or reward to drive consumer adoption.
Pay-by-bank solutions are already making headway in specific use cases, but broader adoption will require a clearer demonstration of value to both consumers and merchants.
According to Dammeir, FinTech platforms such as Venmo, brokerage accounts and even cryptocurrency wallets are already leveraging open banking to facilitate account-to-account (A2A) transfers. “FinTechs have been at the forefront of building these flows, and consumers are comfortable with it,” he told Webster.
Both Chang and Dammeir said the real challenge lies in encouraging consumers to use pay by bank for more everyday transactions, such as bill payments and eCommerce purchases. Bill pay, for instance, remains one of the most obvious opportunities.
The underlying money movement also plays a critical role in making pay-by-bank solutions attractive to both consumers and merchants. The rise of instant payment systems has sped up the process, ensuring that funds move quickly and securely.
In scenarios such as peer-to-peer transfers or eCommerce, instant settlements could make a substantial difference. “For merchants who wait for funds before shipping goods, instant settlement is essential,” Dammeir said.
That said, consumer trust in these systems remains a barrier. Many users are accustomed to the protections offered by debit and credit cards, including fraud safeguards. To overcome this hurdle, Chang said, merchants and banks need to offer not only incentives but also robust guarantees around fraud prevention and liability.
“The key is to offer the same — or better — protections that consumers expect from their current payment methods,” he said.
For banks and FinTechs to successfully implement pay-by-bank solutions, the underlying technology infrastructure must evolve. As Chang said, the challenge for many financial institutions is that their data is siloed across different systems. To support the speed and security required for real-time payments, banks should modernize their tech stacks to leverage the latest cloud technology.
“A centralized transactional data lake is essential,” Chang said. This approach allows banks to store, query, and manage data in real time, using open standards that facilitate secure, instant access to critical information. By applying data governance layers such as AWS Lake Formation, he said, banks can track the flow of information, ensuring that payments are transparent and verifiable at every step.
Dammeir agreed, noting that many banks are already set up to scale and expose their capabilities to customers through APIs and developer portals.
“It’s about upgrading those systems to handle real-time expectations,” he said, adding that as instant payment systems become the norm, banks need to ensure that their infrastructure can keep pace with the demand for instantaneous fund transfers and fraud prevention.
On the merchant side, packaged solutions that integrate with existing payment service providers (PSPs) are becoming popular. “Merchants don’t want to build from scratch,” Dammeir said. “They’re looking for turnkey solutions that allow them to integrate pay by bank into their existing checkout flows.”
As the implications of Rule 1033 continue to be debated, both Chang and Dammeir expected it to be a catalyst for open banking and pay-by-bank solutions in the U.S.
On one side of the debate are the consumer advocates and FinTechs who see an opportunity to add transparency and convenience to consumers’ everyday financial lives.
On the other are industry advocacy groups like the Bank Policy Institute, which pointed to the possibility that data might be shared without appropriate safeguards in place.
Separately, the Defense Credit Union Council said credit unions could share data that might expose them to legal troubles tied to third-party handling of that data, which in turn would wind up “compounding operational and financial burdens.”
Both Chang and Dammeir believe that Rule 1033 could accelerate the adoption of pay by bank by creating clearer expectations for banks and FinTechs.
“The finalized rules will be a catalyst,” Chang predicted, emphasizing that banks and FinTechs will need to align their systems to meet new compliance requirements. However, this also represents an opportunity to innovate. “Financial institutions can leverage these standards to offer more seamless services to consumers,” he said.
Dammeir echoed these sentiments, pointing out that the rule could also clarify liability concerns around real-time payments. “Fraud liability in bank-based payments, particularly on the ACH rail, is well-established,” he said. “But as we move to a real-time world, those rules will need to evolve, and consumers will need to understand their protections.”
Regardless of what happens in the 60 days between now and when Rule 1033 goes into effect for the biggest financial institutions, banks and FinTechs must prepare for a more open, flexible and secure financial ecosystem.
“The banks that see this as an opportunity rather than a compliance obligation will be the ones to succeed,” Dammeir said.
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