Bank Payment Initiation

Bank payment initiation is the process by which a regulated third party, rather than the customer acting alone in online banking, starts a payment from the customer's bank account. The customer chooses to pay by bank at a merchant's checkout or in an app, is passed to their bank to approve, and the bank sends the payment, usually as an instant credit transfer, to the payee. The third party never holds the money.

The service is a core use of open banking. In the European Economic Area and the United Kingdom it is a regulated activity under PSD2, which calls it a payment initiation service and the firm that provides it a payment initiation service provider (PISP). Merchants and consumers more often see it marketed as pay by bank. It competes with card payments and direct debits for many kinds of transaction.

1. Payment set-up. The customer picks pay by bank at checkout and chooses their bank. The PISP builds the payment details, including the amount, payee account and reference.
2. Request to the bank. The PISP sends the payment request to the bank through its payment initiation API.
3. Customer approval. The customer is sent to their bank, typically by a bank redirect or app-to-app switch, logs in and approves the payment using strong customer authentication. The approval is tied to the exact amount and payee, a rule known as dynamic linking.
4. Execution. The bank sends the payment over a domestic scheme, such as Faster Payments in the UK or SEPA Instant Credit Transfer in the euro area.
5. Confirmation. The bank returns a status to the PISP, which informs the merchant so it can release goods or credit the account.

Under PSD2, the bank holding the account, the account servicing payment service provider, must let authorised PISPs initiate payments on its customers' behalf and must treat those payments the same as payments the customer starts directly. It may not require a separate contract with the PISP. Technical standards define how the PISP identifies itself, how customer authentication works and what information the bank must return. In the UK, the largest banks built common API standards under a competition remedy, while EU banks follow several specifications. Outside Europe, similar results are achieved by other means, such as India's Unified Payments Interface, where apps can start bank payments through a shared central system.

• E-commerce and bills. Merchants accept payments at lower cost than cards, with instant settlement and no chargebacks in the card sense.
• Account funding. Investment platforms, crypto exchanges and wallets let customers top up from their bank in seconds.
• Moving money between own accounts. Savings and budgeting apps transfer funds automatically, increasingly through variable recurring payments.
• Public services and large payments. Tax payments, rent and deposits, where card limits or fees are a barrier.

For merchants, bank payment initiation offers low fees, fast settlement, fewer failed payments caused by expired cards and no card data to protect. For customers it can be quicker than typing card details and avoids sharing account numbers. The PISP never touches the funds, which limits counterparty risk.

There are drawbacks. Customer protection is weaker than for cards: once an instant payment is sent it is hard to reverse, and refunds depend on the merchant. Conversion depends on banks' approval journeys, which vary in quality, and some banks have had outages or poor app-to-app support. Recurring payments are limited because each single payment needs its own approval. Merchants also need a refund process, since most rails do not offer one natively, and the absence of a guaranteed status from some banks can complicate checkout.

Because the customer authenticates every payment at their own bank, unauthorised payments are rare. The main risk is authorised push payment fraud, where a criminal persuades the customer to approve a payment, and merchant fraud, where goods are not delivered. Some markets have introduced reimbursement rules for push payment scams and are developing purchase protection schemes for pay by bank. Regulators and industry bodies are also working on commercial frameworks for premium services such as recurring payments, with the aim of making bank payment initiation a mainstream alternative to cards and an established form of instant account-to-account payment.