Card Fees Versus Pay-by-Bank: When Should an SMB Offer Both?
Payment acceptance involves more than choosing a checkout button. For small and midsize businesses (SMBs), the payment method can affect processing costs, the customer experience and how transactions are handled when a payment needs to be refunded or disputed.
Cards remain widely used by consumers. The Federal Reserve’s Diary of Consumer Payment Choice reports that credit and debit cards accounted for about two-thirds of consumer payments in the United States in 2024.¹ This established usage gives card payments an important role in many businesses’ payment strategies.
Pay-by-bank provides another option. It allows customers to make payments directly from a bank account, generally using account-to-account payment infrastructure. For merchants, one of its main characteristics is a potentially different cost structure from card acceptance. Whether that translates into lower costs depends on the payment rail, provider pricing, transaction size and other factors.²
For businesses evaluating the two methods, the relevant question is therefore not simply which payment method has the lower headline fee. It is how cost, customer adoption and payment protections compare for the particular use case.
Card payments: established and familiar
Cards have been part of the U.S. payments system for decades, and consumers are accustomed to using them for both online and in-person purchases.
That familiarity can reduce the amount of explanation required during checkout. Customers generally recognize the card-payment process, including entering card information or selecting a stored card. Credit and debit cards can also provide features that influence payment choice, including credit, rewards and established mechanisms for addressing unauthorized transactions.
The cost to the merchant is a key consideration. Card acceptance can involve interchange fees, network fees and payment-processing charges. Interchange is generally calculated partly as a percentage of the transaction value, so the dollar cost can increase as the purchase amount rises.²
The precise cost varies by card type, transaction characteristics, processor and other factors. As a result, the impact of card fees differs considerably among businesses.
Pay-by-bank: potentially lower acceptance costs
Pay-by-bank enables a customer to authorize a payment directly from a bank account. Depending on the implementation, payments may use ACH or an instant-payment network.²
The Federal Reserve identifies potentially lower merchant acceptance costs as one of the benefits of pay-by-bank. Because account-to-account payments do not use the same interchange-based structure associated with card transactions, some merchants may be able to reduce payment acceptance costs. However, the actual difference varies. Pay-by-bank can involve provider, processor, integration and receiving-bank fees, meaning the total cost has to be evaluated rather than inferred from the absence of card interchange.²
The Federal Reserve also notes that estimates of potential savings vary substantially and should be treated cautiously. The economics depend on the particular payment solution, including transaction volume, transaction size, pricing and the payment rail used.²
The other consideration is adoption. Pay-by-bank is less familiar to consumers than cards. Nacha reported in 2024 that only 13% of surveyed consumers were familiar with the term “Pay by Bank.” More than half, however, reported using the payment method once they understood what it meant.³
The distinction is relevant for SMBs because introducing a payment method does not necessarily result in customers selecting it. The terminology, checkout flow and explanation provided to customers can all affect whether the option is used.
The checkout experience affects adoption
The process used to connect a customer’s bank account is an important part of pay-by-bank.
Traditional bank payments can require customers to provide account and routing information. Open-banking implementations can instead allow customers to select their financial institution, authenticate and authorize a payment. The Federal Reserve identifies open banking as an important part of the infrastructure supporting current pay-by-bank implementations.²
The customer experience also includes what happens after the payment is made.
Customers who regularly use cards may already understand how card refunds and disputes work. With pay-by-bank, merchants need to communicate how refunds are issued and how payment errors or unauthorized transactions are handled.
Some electronic fund transfers are covered by the Electronic Fund Transfer Act and Regulation E. Regulation E establishes requirements concerning disclosures, consumer liability and error resolution for covered electronic fund transfers.⁴ The Consumer Financial Protection Bureau explains that covered transactions can include transfers that authorize a financial institution to debit or credit a consumer’s account, although coverage depends on the specific transaction and parties involved.⁵
This means that businesses should not assume that all pay-by-bank transactions have identical consumer protections. The applicable requirements depend on how the payment is structured and the role of the financial institutions and payment providers involved.
Incentives can influence payment choice
An SMB can also use pricing or other incentives to influence which payment method customers select.
For example, a business could offer a discount or loyalty benefit for customers who use pay-by-bank. The economic effect depends on the value of the incentive compared with the difference in payment acceptance costs.
The calculation can therefore be made at the transaction level. If a pay-by-bank payment costs less to accept but requires a discount that exceeds the saving, the incentive may not reduce the merchant’s overall cost. If the incentive is smaller than the difference in acceptance costs, it may provide a way to encourage adoption while retaining part of the savings.
When should an SMB offer both?
Offering both payment methods can be relevant when a business wants to retain card acceptance while adding an account-to-account option with potentially different acceptance economics.
Several factors can be evaluated:
- Transaction size: Larger transactions can make differences in percentage-based card costs more significant in dollar terms.
- Payment volume: A difference in per-transaction cost becomes more material as transaction volume increases.
- Customer familiarity: Businesses serving customers who are already comfortable with digital banking may have different adoption rates from businesses whose customers primarily use cards.
- Checkout design: A streamlined bank-authentication process can reduce the steps required to make a pay-by-bank payment.
- Incentives: Discounts or other benefits can influence payment choice, but the value of the incentive should be included when calculating the net payment cost.
- Refunds and errors: Businesses should establish and communicate how refunds, payment errors and unauthorized transactions are handled.
- Provider economics: Pay-by-bank costs can include more than the underlying payment-rail fee, so merchants should evaluate the complete pricing structure.
The two payment methods consequently address different parts of the payment experience. Cards provide a widely recognized payment mechanism, while pay-by-bank provides an account-to-account alternative with potentially different acceptance economics.
For SMBs, offering both creates an opportunity to evaluate those differences using actual transaction data. Tracking acceptance costs, customer usage, refunds and payment failures can help determine whether pay-by-bank produces sufficient adoption and cost savings to justify maintaining it alongside cards.
For additional information and help in understanding if pay-by-bank is right for your business reach out to us at info@payment-roundup.com.
References
- Board of Governors of the Federal Reserve System. Diary of Consumer Payment Choice. 2026. Federal Reserve Financial Services.
Federal Reserve Financial Services — Diary of Consumer Payment Choice - Hwang, Byoung Hwa. “Pay-by-Bank and the Merchant Payments Use Case: Benefits, risks and potential impacts on consumer payment behaviors in the U.S.” FEDS Notes. Board of Governors of the Federal Reserve System, July 7, 2025. https://doi.org/10.17016/2380-7172.3834. (Federal Reserve)
- Nacha. “Nacha’s Payments Innovation Alliance Leads Industry Effort to Define and Shape the Future of Pay by Bank.” October 31, 2024. (Nacha)
- Consumer Financial Protection Bureau. Electronic Fund Transfers (Regulation E); Amendments. Regulation E, 12 C.F.R. Part 1005. (Consumer Financial Protection Bureau)
- Consumer Financial Protection Bureau. “Electronic Fund Transfers FAQs.” Compliance Resources, updated January 16, 2025. (Consumer Financial Protection Bureau)