Pay by bank in the UK and EU: How it works, what it costs, and when to use it
Pay by bank lets customers pay directly from their bank account, authorising the transaction in their banking app rather than entering card details. This guide explains how pay by bank works, how the UK and EU approaches differ, how its costs compare with cards, and where it still falls short.
Most explainers cover the UK in depth and treat the EU as an afterthought, or vice versa. But the UK and EU have taken genuinely different regulatory paths towards the same destination, and merchants operating across both need to understand those differences to make a sound decision.
How does Pay by Bank work?
The flow is broadly consistent across the UK and EU, although the underlying rails differ: Faster Payments in the UK and SEPA Instant Credit Transfer in the EU.
The customer selects pay by bank at checkout.
They select their bank from a list.
They’re either redirected to their bank’s website or handed off directly into their banking app (an “app-to-app” flow), which is generally faster and has a lower drop-off rate.
They authenticate using Strong Customer Authentication (SCA)—typically biometrics or a passcode within the banking app.
The bank initiates the payment over the local instant-payment rail.
The customer is returned to the merchant with payment confirmation, usually within seconds.
The entity that initiates the payment on the merchant’s behalf is called a Payment Initiation Service Provider (PISP)—a regulated role created by PSD2 in the EU and mirrored under the UK’s own open banking framework. Merchants typically don’t connect to banks directly; they connect through a PISP.
Whilst pay by bank has a lower reported fraud rate by volume, it has a higher reported rate by value. This is likely due to its more frequent use for higher-value transactions like account transfers and investments. These figures are Open Banking Limited’s own comparison against industry benchmarks it selected (UK Finance and Pay.uk data), not an independently audited comparison (its own Payments Fraud Monitor notes limitations in the industry data, including that not all institutions report fraud figures to UK Finance).
At the merchant level, adoption has accelerated visibly in 2026: in February, both Amazon UK and eBay UK added pay by bank at checkout. Just Eat, Ryanair, and—notably—HMRC (which has offered “Pay by bank account” for tax payments since 2021) round out some of the highest-profile UK implementations.
Pay by Bank in the EU
The rails and rulebook
EU pay by bank runs over SEPA Instant Credit Transfer, the euro-area equivalent of Faster Payments. The current legal foundation is PSD2 (the second Payment Services Directive), which remains the operative framework today; its successor, PSD3/PSR, is still working through the EU legislative process (see below).
Two newer pieces of regulation—often mistakenly conflated—are also worth noting:
The Instant Payments Regulation (IPR, EU 2024/886) requires euro-area payment service providers to be able to receive instant credit transfers since 9 January 2025, and to send them since 9 October 2025, at no higher cost than a standard (non-instant) transfer. Non-euro-area EU member states have until 2027 to comply.
Verification of Payee (VoP), the EU's equivalent of the UK's Confirmation of Payee, has been mandatory for euro-area providers since 9 October 2025 (non-euro-area providers have until July 2027). VoP is an obligation created by the Instant Payments Regulation, not by PSD3/PSR—a common point of confusion.
PSD3/PSR: where things stand
The EU's payment services framework is being updated through a package known as PSD3 (a directive) and the PSR (a directly applicable regulation). As of this writing, the package has not been formally adopted: EU co-legislators reached a provisional political agreement in late 2025, and compromise texts were finalised in April 2026, but the package still requires a formal European Parliament vote, Council adoption, and Official Journal publication before becoming law.
Until then, PSD2 remains the operative EU framework. Once published, the PSR is expected to apply roughly 18–21 months later—realistically sometime in 2027–2028, with Verification of Payee-related provisions on a slightly longer timeline. (Check the European Commission's payment services page for the most current status.)
For merchants, the practical implication is that any EU pay by bank build-out today should be scoped against PSD2, the Instant Payments Regulation, and VoP—not against PSD3/PSR assumptions, since the latter isn't yet law and its exact provisions could still shift before final adoption.
The local scheme landscape
Unlike the UK, where a single CMA order created one national framework, EU pay by bank adoption has developed market by market, through bank-backed national and pan-European schemes layered on top of SEPA Instant. The most significant:
Wero, run by the European Payments Initiative (EPI), is the most ambitious pan-European effort. The bank-backed digital wallet is intended to work across multiple countries rather than one. It launched for peer-to-peer transfers in Germany, France, and Belgium in 2024, and has since moved into e-commerce.
As of September 2026, Wero has 58 million users and is live in Belgium, France, and Germany, with Luxembourg added that same month via the migration of the Payconiq scheme; the Netherlands and Austria are expected to follow. E-commerce payments went live in Germany in November 2025 and in Belgium in March 2026; France's e-commerce rollout and the Netherlands' migration of the existing iDEAL scheme onto Wero are both still pending.
Other established national schemes remain important and, in several cases, dominant in their home markets: iDEAL in the Netherlands, Bizum in Spain, BLIK in Poland, and Swish in Sweden.
How the EU differs from the UK
No EU-wide equivalent to Commercial VRP exists yet. Recurring account-to-account payments in the EU are scheme-specific—Wero and national schemes each define their own mandate mechanisms—rather than governed by a single rulebook the way UK Commercial VRP is being built out under UKPI.
The regulatory framework is layered rather than singular. The EU currently relies on PSD2 plus the Instant Payments Regulation and VoP, with PSD3/PSR still pending; the UK has one CMA-mandated open banking order covering the whole framework.
Fragmentation is structural, not incidental. A UK merchant integrates with one national framework. An EU merchant integrating pay by bank broadly is, in practice, integrating with SEPA Instant as a common rail plus a patchwork of national and pan-European schemes with varying reach.
Pay by Bank vs. card payments
Pay by Bank offers three core structural advantages: no interchange or scheme fees, real-time settlement instead of a multi-day cycle, and minimal exposure to card-data security requirements. The trade-offs sit mostly on the other side of the ledger, including refunds, disputes, and recurring payments.
As the table shows, pay by bank removes the card scheme and interchange layer entirely, replacing it with a direct connection between payer and payee. Fewer intermediaries generally mean fewer fees, although costs vary by provider, volume, and market. But cost is only one part of the trade-off. Pay by bank also changes how merchants handle processes such as refunds and payment security.
Refunds, for example, work differently. If a customer pays a £180 basket by card and requests a refund, the merchant reverses the original transaction and the funds return via the same card rails. With pay by bank, that £180 has already settled into the merchant's account as an ordinary bank transfer—there's no transaction to “reverse”. The merchant must send a new, separate payment back to the customer. Although the outcome is similar, merchants need their own outbound payment capability (or a provider that offers one) to handle returns smoothly.
On the other hand, pay by bank can simplify some of the security and compliance requirements associated with accepting cards. The Payment Card Industry Data Security Standard (PCI DSS) sets security requirements for any business that handles, stores, or transmits card data, covering everything from network security and access controls to regular testing. Because pay by bank never touches card data, it falls outside this scope almost entirely, reducing a compliance burden that applies to card acceptance regardless of a merchant’s size.
Benefits of pay by bank
Lower structural cost than card payments by removing interchange and scheme fees.
Real-time settlement, improving cash flow versus the 1–3 day card settlement cycle.
No card-on-file expiry problem, a common source of failed recurring payments and involuntary subscription churn.
Reduced PCI DSS scope, since no card data passes through the merchant’s systems.
Strong authentication built in, since every payment is authorised via the customer’s own banking app.
Current limitations of pay by bank
Refunds require a separate outbound payment rather than a reversal. That can be operationally slower for merchants without existing payout infrastructure.
There is no chargeback scheme. Card networks give consumers a dispute mechanism that direct bank-to-bank payments do not replicate.
Coverage and app quality vary by bank, making execution a real consideration. A poor redirect or app-handoff experience can directly cost a merchant sales in a way a slightly clunky card form typically doesn’t.
Consumer familiarity hasn't kept pace with transaction volume. Independent research from Yaspa, conducted with YouGov, found that just 38% of UK adults recognised the phrase “pay by bank” in 2026, down from 55% the year before—a reasonable signal that recent growth has been merchant-led rather than driven by consumer demand for the payment method by name.
It's also common to see pay by bank compared to UPI in India or Pix in Brazil as evidence of how fast account-to-account payments can scale. But the comparison has limits: both UPI and Pix are state-driven infrastructure projects that launched into markets without an entrenched card incumbent, and both carried mandated zero-merchant-discount-rate policies that removed cost as a variable entirely. The UK and EU are the opposite case—mature card markets with an existing, trusted, well-functioning incumbent—which helps explain why adoption here has been slower and more merchant-led than the UPI/Pix comparison implies.
Where Pay by Bank fits today
Fits well today:
Account funding, top-ups, and other high-value transactions (e.g. crypto exchanges, investment platforms). Pay by bank's cost advantage over cards generally grows with transaction size, while interchange is often capped, so the savings can be more meaningful on larger baskets.
Bill pay and government payments. Pay by bank fits naturally with HMRC-style use cases, where the payer already has a direct financial relationship with the payee.
iGaming. The sector has been an early adopter because online gambling and betting often require instant settlement and strong authentication. Pay by bank is therefore well suited to its regulatory and cash-flow needs.
Marketplace payouts and invoice settlement. Pay by bank can work well for B2B use cases where recurring-payment maturity matters less than one-off settlement speed.
Less suited today:
Subscriptions with variable or unpredictable amounts. Until recurring-payment mechanisms (UK Commercial VRP, EU scheme-specific mandates) mature further and extend into e-commerce, pay by bank is less suited to these transactions.
Anything with a high expected refund rate. The need to send a separate outbound refund adds friction compared with a card reversal.
How to accept pay by bank: build vs. buy
Building pay by bank connectivity in-house means establishing PISP relationships (or becoming one), managing consent and mandate flows, maintaining conformance with each scheme’s technical requirements, and keeping pace with rulebook changes across every market you operate in—a meaningfully different maintenance burden in the UK versus the EU, given the fragmentation described above.
Most merchants instead connect through an existing provider. Plaid’s Payments products, for example, offer a single API across 20 European markets, supporting multiple rails (Faster Payments Service in the UK, SEPA Instant Credit Transfer and SEPA Credit Transfer in the EU) through one integration rather than a separate build per country. It also includes Virtual Accounts—giving merchants real-time visibility into settlement and simplifying the reconciliation and outbound-refund process discussed above—and Payouts, for sending funds back to customers or disbursing to third parties. Businesses like Zilch have used this combination specifically to streamline repayments and refund handling as part of a broader pay by bank rollout.
The right build-vs-buy decision depends on how many markets you’re targeting and how much of the maintenance burden—scheme updates, new-market rollouts, mandate management—you want to own directly versus hand off.