Pay by Bank for Merchants: Security, Refunds, and Dispute Tradeoffs

Pay by Bank is a payment method that moves funds directly from a customer's bank account to a merchant's account, authorized through the customer's own banking app instead of a card network. It skips card rails entirely, which is what makes it cheaper and more secure against card-specific fraud, and it also removes the built-in dispute mechanism cardholders rely on when something goes wrong.

That tradeoff is the part most merchant-facing coverage of Pay by Bank skips. Lower fraud rates and lower processing costs are real advantages, but a Pay by Bank transaction settles as an irrevocable bank transfer, not a reversible card authorization, so refunds, disputes, and fraud recovery all work differently than merchants are used to. This guide covers what Pay by Bank is, where it sits in the payment lifecycle next to card transactions, and what merchants need to build before offering it at checkout.

What Is Pay by Bank?

Pay by Bank, also called account-to-account or open banking payment, lets a customer pay directly from their bank account using a licensed third-party provider that connects to the bank's own infrastructure. At checkout, the customer selects Pay by Bank, is redirected to their bank's app or website, authenticates with their own banking credentials, and authorizes the transfer. Funds move from the customer's account to the merchant's account without a card number, card network, or card issuer involved at any step.

Adoption has moved past the early-adopter stage. In the UK, where open banking payments are furthest along, providers processed nearly 33 million Pay by Bank transactions in November 2025 alone, and more than 15 million UK consumers have used an open banking payment, according to Open Banking Limited. Amazon added Pay by Bank at UK checkout in 2026, a signal that account-to-account payments are moving from niche to mainstream at scale.

Where Pay by Bank Fits in the Payment Lifecycle

Every payment method moves through the same basic stages, authorization, settlement, and, when something goes wrong, a refund or dispute. Pay by Bank and card payments both pass through these stages, but they behave differently at each one.

Lifecycle Stage	Card Payment	Pay by Bank
Toestemming	Card issuer approves based on available credit and risk scoring	Customer's own bank authenticates and authorizes the transfer directly
Settlement	Batched, typically settles in one to a few business days	Often near-instant, and generally final once confirmed
Terugbetalingen	Reversed back through the card network to the original card	Merchant must manually initiate a separate transfer back; no automatic network reversal
Geschillen	Formal chargeback rights through the card network, with evidence and reason codes	No card-style chargeback mechanism; recourse depends on the bank, the scheme, and local regulation

Merchants who only know the card-payment column tend to assume Pay by Bank works the same way underneath. It doesn't, and the gap shows up first at the refund and dispute stages, exactly where merchants have the least visibility into what's happening on the customer's side.

Who's Responsible When a Pay by Bank Transaction Goes Wrong

Card transactions split responsibility across a familiar chain: card issuer, card network, acquirer, and merchant, each with a defined role once a chargeback is filed. Our directory of card network and bank disputes covers how each network and issuer handles that chain. Pay by Bank runs a shorter chain, but the ambiguity that used to sit between issuer and network now sits between the customer's bank and the merchant directly.

• The sending bank authenticates the customer and authorizes the transfer. Once authorized, most sending banks treat the payment as executed and final on their end.
• The payment initiation provider (the licensed third party connecting the merchant to the customer's bank) handles the technical routing but typically isn't a party to the underlying dispute.
• The merchant owns the refund process entirely. There's no network-mediated reversal to fall back on, so a refund only happens if the merchant initiates one.

This is the structural reason Pay by Bank shifts risk toward merchants rather than away from it on the dispute side, even though it reduces fraud on the authorization side. Understanding the difference between a chargeback, a dispute, a refund, and representment matters here specifically because Pay by Bank mostly removes one of those four options: representment through a card network isn't available when there's no card network in the transaction.

The Fraud and Dispute Risk Merchants Underestimate

Pay by Bank's authentication model does cut a specific category of fraud sharply. UK open banking payments carried a fraud rate of 0.013% between March 2024 and September 2025, well below the 0.045% industry average for bank transfers generally, according to Open Banking Limited. Strong customer authentication at the bank level is doing real work here, the same principle behind ecommerce fraud prevention tactics like device fingerprinting and risk scoring on the card side.

What it doesn't solve is authorized push payment fraud, cases where a customer is tricked into authorizing a legitimate-looking transfer to a fraudulent account. Because the customer authenticated the payment themselves, it doesn't fail any of the checks Pay by Bank runs. The UK has responded with a mandatory reimbursement scheme for this exact scenario: since October 7, 2024, payment providers must reimburse victims of authorized push payment fraud up to £85,000 per claim, with liability split between the sending and receiving payment firms and an optional excess of up to £100 that firms cannot apply to vulnerable customers. That's a regulatory backstop for consumers, not a merchant-side dispute process, and it doesn't map to anything in the card chargeback playbook.

For merchants, the practical risk isn't fraud volume, it's the absence of a standard evidence-and-response process when something does go wrong. A card dispute comes with a reason code, a deadline, and a defined path to compelling evidence that can win the case. A Pay by Bank dispute mostly doesn't, which means merchants who lean on Pay by Bank need to build their own version of that process rather than inherit one from the network.

Should You Offer Pay by Bank? A Merchant Checklist

Pay by Bank is worth adding for most merchants, but only alongside a plan for the gaps above, not instead of one. Before turning it on:

• Confirm your refund workflow. Since there's no automatic reversal, build a clear internal process for initiating Pay by Bank refunds and a stated timeline customers can see at checkout.
• Document authorization events. Capture the confirmation your payment initiation provider returns for every transaction; it's the closest thing to evidence you'll have if a customer later claims they never authorized a payment.
• Set customer expectations before checkout. Since Pay by Bank settlement is typically final, tell customers plainly what that means for cancellations and returns, ideally before they authorize the payment, not after.
• Keep card payments available. Customers who value dispute rights over speed will self-select into paying by card; removing that option removes their recourse along with it.
• Route residual fraud and mislabeled disputes into your existing chargeback workflow. Customers unfamiliar with Pay by Bank sometimes describe an authorized transfer as unauthorized out of confusion rather than intent, a pattern with real overlap to friendly fraud on the card side.
• Keep early-warning tools active on your card volume. A chargeback alert service flags a card dispute before it escalates, giving you a chance to refund or resolve it before it counts against your ratio, something Pay by Bank has no equivalent for since there's no ratio to manage in the first place.

None of this makes Pay by Bank riskier than cards overall, it makes the risk different in kind. Fraud goes down at authorization; dispute and refund complexity goes up everywhere downstream of it.

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What is Pay by Bank?

Pay by Bank is a payment method that transfers funds directly from a customer's bank account to a merchant using open banking technology, authorized through the customer's own banking app rather than a card network.

Is Pay by Bank safer than paying by card?

It reduces certain types of fraud significantly. UK open banking payments had a 0.013% fraud rate between March 2024 and September 2025, versus a 0.045% industry average for bank transfers, per Open Banking Limited. It doesn't reduce authorized push payment fraud, where a customer is tricked into authorizing a transfer themselves.

Can customers dispute a Pay by Bank payment the way they dispute a credit card charge?

Not in the same way. Card payments carry formal chargeback rights through the card network. Pay by Bank transactions settle as bank transfers with no equivalent network-level dispute mechanism, so refunds depend entirely on the merchant, and broader recourse depends on the customer's bank and local regulation.

What happens if a merchant needs to refund a Pay by Bank transaction?

The merchant has to initiate a separate transfer back to the customer's account. There's no automatic reversal built into the payment the way there is with a card refund, so merchants need their own defined refund process and timeline.

Should merchants stop offering card payments if they add Pay by Bank?

No. Pay by Bank works best as an additional checkout option, not a replacement. Customers who want dispute protection will choose to pay by card, and merchants lose that safety net for themselves if they push all volume onto a payment method with no chargeback equivalent.

Build Chargeback Coverage That Works Across Every Payment Method

Most merchants running Pay by Bank alongside cards are still fighting the majority of their disputes on the card side, and the chargeback process on those transactions still runs on the same reason codes and deadlines it always has. Missing a chargeback time limit costs the case automatically, regardless of how the rest of your payment stack is set up.

Chargeflow's automation builds and submits evidence-backed chargeback responses for every card dispute that comes in, so your team isn't assembling documentation by hand while also managing a newer payment method with its own operational demands. Pairing that with a payment service provider that supports both cards and Pay by Bank cleanly gives merchants the lower fraud rate on one side and a defended chargeback process on the other, instead of an unmanaged gap in between.

See how Chargeflow handles chargeback response for you.