Pay by bank for small businesses - what it is, how it works, and why costs are falling
Kieron James
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Pay by bank is growing quickly across the UK, but most explanations remain unclear. This guide sets out exactly how it works in practice, what happens during a transaction, and where it can materially reduce payment costs for small businesses.
Pay by Bank describes a payment made directly from a customer’s bank account to a business, without using debit or credit cards.
It runs on Open Banking infrastructure in the UK. Instead of entering card details, the customer authorises the payment through their banking app or online banking.
That changes the model in a fundamental way. There is no card network involved, and the customer is authenticating directly with their bank.
For the customer, it feels closer to approving a bank transfer than making a card payment, but the experience is faster and more structured.
What is Pay by Bank
At its simplest, Pay by Bank removes the need for card details entirely.
The business initiates a payment request, and the customer approves it within their banking environment. The amount, reference, and recipient are already set, so there is nothing to enter manually.
This creates a more direct relationship between the customer, their bank, and the business receiving funds.
What actually happens during a payment
Take a typical example, a customer paying in a shop or via a payment link.
The business creates a payment request, usually as a QR code, payment link, or tap-to-pay interaction, using NFC.
The customer selects their bank and is redirected securely to their banking app.
The payment details are already completed. The customer simply reviews and approves.
Authorisation is done using Face ID, fingerprint, or banking credentials.
Confirmation is returned within seconds, giving the business immediate visibility that the payment has been approved.
No card details are shared, and nothing needs to be typed.
How pay by bank is different from cards
The differences are structural rather than cosmetic.
There are no card numbers, expiry dates, or CVV codes. This removes a large part of the fraud surface.
Payments do not pass through card schemes such as Visa or Mastercard. That directly affects cost and processing.
The customer approves the exact payment in real time. There is no delayed capture or background reuse of stored credentials.
Where it works better than cards
The commercial advantages are straightforward.
Costs are typically lower. Card payments are charged as a percentage of each transaction, while pay by bank is usually a fixed fee.
Settlement is faster. Funds move directly between bank accounts and are often received almost immediately.
Failure rates are lower. There are no expired cards or incorrect details, as the customer is authenticating directly with their bank.
The customer experience is simpler. There are no forms or card details, just approval.
Where it does not replace cards yet
It is not (yet) a complete replacement in every scenario.
Cards remain familiar behaviour for many customers, particularly in online checkout journeys.
Dispute and refund processes are well established in card schemes. Pay by Bank is evolving in this area, but expectations are still forming.
Recurring payments are developing through newer models, but are not yet available beyond "me-to-me" payments.
Where small businesses are using it today
The use cases are already clear.
Point of sale payments can be handled through QR codes or NFC interactions without relying on traditional card terminals.
For a broader comparison of options, see
https://wonderful.co.uk/blog/best-payment-systems-for-small-business
For in-person setups, see
https://wonderful.co.uk/blog/retail-pos-systems
Payment links provide a simple way to take remote payments for services, trades, and one-off transactions.
Invoices and ad hoc payments can be settled quickly without customers entering bank details manually.
Why costs are falling
The cost advantage is structural.
There are no interchange fees and no card scheme fees. The number of intermediaries involved in the transaction is reduced.
As adoption increases, providers can operate at lower cost while maintaining a sustainable model.
For businesses, this shifts payments away from percentage-based fees towards predictable, low-cost transactions.
If cost is a primary consideration, see
https://wonderful.co.uk/blog/cheapest-payment-systems
The practical takeaway
Pay by bank is already in use across the UK and continues to grow.
For small businesses, the decision is not whether to remove cards entirely, but whether to introduce an additional payment option that reduces cost, improves cash flow, and simplifies the experience.
In most cases, offering both is the most effective approach.
Customer behaviour tends to follow convenience.
