The case for pay by bank in recurring billing

Matt Watts
Payments Partnerships Lead at Plaid

Most companies still live in a card-centric world despite struggling with credit card processing fees. Bank payments in the U.S., most commonly processed via ACH, are a widely used alternative, but many organizations are still struggling with issues like insufficient funds returns and inaccurate manual account validation. Certain use cases, especially bill payments, are better for bank payments than others. 

Pay by bank for bill pay is widely used today, despite the issues mentioned above. According to Nacha, US consumers paid $9.42T of their bills via ACH bank transfers in 2023, a 6.9% increase from 2022. These payments saved companies upwards of 40% on payment processing fees compared to cards for many use cases. However, the adoption rates for pay by bank (and resulting savings) could be significantly higher if more companies offered their customers the better user experience that Plaid provides. 

Getting consumers to choose bank payments shouldn’t be challenging since it’s actually one of the preferred methods for recurring bill pay, according to the Federal Reserve Bank (see chart below). Providing a convenient, seamless, and secure user experience is key to encouraging more customers to pay with their bank. 

Below, we’ll explain why companies should get more customers to use pay by bank for bill payments, the challenges they must overcome, and how Plaid can help. 

Why companies should get more customers to pay by bank for bill payments 

Consumers prefer to connect a bank account for payments they expect to repeat every month. For recurring payments in industries like fitness studios, telecommunications, or insurance, meeting consumer preference by adding pay by bank as the primary option for bill pay is ideal.

While pay by bank isn’t without its challenges, there are three main reasons companies should consider it the primary option when setting up customer bill payments. 

1. Reduced cost: Merchants spent $126 billion in payment processing fees in 2022 alone, with credit card processing fees ranging from 1.15% to 3.15% per transaction. Plaid customers focusing on pay by bank are seeing savings ranging from 20% to 70%, with one Plaid customer citing $7 in savings for each user that switches to pay by bank from a credit card. 

2. Less Churn: For companies that run recurring payments, payment churn from credit card expiration or deactivation becomes a large problem. Collections and customer support costs rise as customers need to update their payment methods. The average bank account is held for 14 years, greatly reducing the chances of payment churn. 

3. It’s an established behavior for bill pay: Choosing their bank account for a recurring bill payment isn’t new for consumers. In fact, using a bank account to connect an account for payments is the #1 preferred method amongst all payment types (see chart above). 

Pay by bank isn’t limited to recurring bill payments, but it’s an area where the data shows that consumers are more likely to adopt a pay-by-bank option. Additionally, the financial ecosystem continues to deploy more pay-by-bank use cases, increasing the adoption curve for all. Companies who still rely heavily on debit and credit cards in these areas could unlock savings by making pay by bank a more appealing and easy-to-use option, especially when onboarding new customers.

Challenges companies need to overcome with pay by bank

While reducing payment processing fees and churn is the goal, there are a few headwinds that can reduce pay by bank adoption in bill pay. Organizations will need to consider these challenges:

User experience

An easy user experience is critical to getting users to complete a pay-by-bank flow. Requiring users to retrieve their account and routing numbers and enter them manually slows down the process and leads to higher abandonment rates. Manually entering bank information can also lead to miskeys and mismatches in information between the user and their bank. Also, when confronted with manual bank account entry vs. credit card entry, the user's familiarity and comfort with cards will win most of the time.

Solution: Connecting accounts with online banking credentials (username and password) via Plaid Link solves the manual connection problem. Plaid Link is well known as a friendly user experience, with 1 in 3 US consumers having connected a bank account using Plaid Link. 

The Plaid Link account connection flow for bill payments

Fraud, returns, and limited retries

ACH payments can be returned, and there is a longer processing delay than for credit cards. A card could be declined instantly if it’s maxed out or has insufficient funds, but an ACH payment might take up to two days to trigger a return. 

Most returns are bank-initiated, meaning that the bank stopped the transaction from going through, usually because of insufficient funds or mismatched account and routing numbers. Customers can also initiate ACH returns if they believe the payment was unauthorized or in error. This creates some room for customer fraud to occur if, for example, the customer disputes a payment that they did authorize. 

Additionally, Nacha, the governing body of the ACH network, limits companies to two retries after an insufficient funds (NSF) return. If you keep trying to collect an unsuccessful bill payment, you will no longer be following Nacha regulations. 

Solution: To combat this, companies can use an ACH-risk scoring tool like Plaid Signal, which provides real-time data and a score based on the likelihood of a bank or customer-initiated return. The risk score is based on factors like the account’s history of identity changes, previous ACH returns, and suspicious behavior across the Plaid network. 

Signal customers can decide which transactions qualify as ‘low risk’ or ‘high risk’ based on their own risk tolerance. Low-risk transactions can proceed as usual. High-risk transactions can be prompted to perform a step-up verification or have their account balance checked before running the bill payment. Risk scoring also works when initiating a retry transaction and can help ensure you don’t hit the two-transaction limit. 

Currently, Signal analyzes over $50 billion in payments per year. Compared to other ACH acceptance methods, Plaid with Signal reduces first-time non-sufficient funds (NSF) returns by up to 80%.

Plaid for bill payments overcomes challenges and creates savings opportunities

Plaid’s pay-by-bank solution can save organizations an average of 40% on payment processing fees. Consumers will likely choose to use it to set up payments because it works as easily as cards. They simply choose “Pay by bank” and can complete the bill payment setup process in as little as three clicks. 

To use Plaid for pay by bank, you can build a solution with Plaid Transfer, which offers a complete bank payment method for ACH and instant bank payments (FedNow and RTP). Or, you can integrate Plaid with an existing payment processor, such as Adyen. 

Ready to get more customers to choose pay by bank for bill payments? Check out our Pay By Bank solution, or contact us to get started.