A complete guide to Pay by Bank

There are four things that can make or break a payment method: cost, speed, security, and efficiency for both you and your customers.

For the last few decades, choosing how you got paid generally meant you benefitted from one or two of those elements at the expense of the others. Direct Debit, for example, is low cost but relatively slow, while card payments are faster but the cost of processing them is high - as is the payment failure rate - and both come with their security and friction concerns.

The good news is there’s now a third, exponentially growing pillar of payments in ‘Pay by Bank’ - or as we call it at GoCardless, ‘Instant Bank Pay’.

Like a card payment, it’s instant - yet there’s no card involved. Like Direct Debit, it’s low cost and enjoys a good success rate - but set up is virtually frictionless. It even delivers all the perks of the good old-fashioned bank transfer, but without the antiquated admin load.

With over 16 million users in the UK already, ‘instant-first’ regulations sweeping through Europe and commercial recurring payment capability launching this year, 2026 is set to be a big one for Pay by Bank - and the right time for you to upgrade your payment infrastructure.

In this guide, we’ll tell why that is and go through all the fundamentals of Pay by Bank as a payment method.

What is Pay by Bank?

Pay by Bank is essentially an evolution of the bank transfer. It’s a digital payment method that allows your customers to pay you directly from their bank account to yours. It uses Open Banking technology as its framework, meaning there’s no card data involved (thus bypassing traditional card networks like Mastercard and Visa completely).

Instant, secure, low cost and frictionless (with minimal admin requirements), it’s soon to be e-commerce ready, and has already established itself as the new standard for one-off (and, in the not so distant future, recurring) payments.

Understanding ‘account-to-account (A2A)’ payments and open banking

An account-to-account (A2A) payment, is the overarching term for any payment made directly from one bank account to another without the assistance of a card network. Pay by Bank is simply the latest iteration of A2A payments.

The thing that sets Pay by Bank apart from its older counterparts is the use of Open Banking as its framework. Open Banking is a secure system that allows users to share their financial data and make payments through regulated apps and services, rather than just directly through their bank.

We’ve got a really detailed guide on how Open Banking works, but the important thing to know - in relation to Pay by Bank at least - is that it allows authorised providers (like us) to “ask” your customer’s bank to send a payment on their behalf. Your customer is asked to approve the payment in their banking app, and once approved, the money is sent instantly.

The juice behind Open Banking is the vastly improved speed, flexibility and reliability of the framework. It represents a fundamental change - and generational leap forward - in the infrastructure of payments, and has revitalised the world of A2A.

Why we call it ‘Instant Bank Pay’

GoCardless’s Pay by Bank product is called Instant Bank Pay. We call it that because we like you to know the good things our products do for you straight off the bat. The key features of Instant Bank Pay are:

• Instant bank transfer with real-time confirmation for you and your customers.

• Frictionless authorisation, with no card data required.

• A typical saving of 54% versus online card transactions.

• Less time spent chasing failed payments.

We put together a useful collection of Instant Bank Pay FAQs if you’d like to know more about how things work.

How Pay by Bank works in 30 seconds

Here’s how a Pay by Bank transaction works for customers:

1. Bank selection: at checkout, your customer selects their bank from a list.

2. Biometric authentication: your customer is automatically redirected to their banking app, where they authorise payment using whatever security mechanism they have in place (FaceID, TouchID or passcode). This satisfies Pay by Bank’s Strong Customer Authentication (SCA) requirements with minimal friction.

3. Confirmation: payment is authorised instantly, and the customer is redirected back to the ‘success’ page.

One key thing is that all Pay by Bank details are pre-populated by the system, which means accuracy on all payments and no worries about manual errors.

If you’d like to see that in action, you can donate £1 to the Trussell Trust (a charity that supports over 1,200 food banks in the UK) using our Instant Bank Pay infrastructure. 100% of the donation goes to the charity, and you’ll get to see firsthand how Pay by Bank might look for your customers.

Why merchants are switching to Pay by Bank

Direct Debit has been the backbone of payments in the UK economy for the last 50 years, but with one in four UK adults already using open banking payments, many merchants are adding Pay by Bank to their payment infrastructure. Here’s why.

Drastically lower operational costs vs card

As mentioned earlier, using Instant Bank Pay is about 54% cheaper than online card transactions. That’s because card networks charge various fees that can eat up around 2-4% of each transaction. With Pay by Bank, there’s no card network middlemanning the process - and none of the intermediary charges that come with it.

Instant settlement replaces three-day card cycles

The “three-day rule” of Direct Debit is replaced by the “10-second rule” of instant bank transfer. Open banking payments use Faster Payments in the UK (or SEPA Instant in the EU) which, in 2026, comes with the mandatory expectation of payment arriving in your account around 10-15 seconds after your customer approves it.

Cash flow is king, and instant settlements protect it.

Eliminating chargeback fraud and APP scams

Chargeback fraud is a big problem for merchants who take card payments. With Pay by Bank, there’s no chargeback mechanism, at least in the traditional sense. Because your customer authenticates payment via SCA, the payment is considered final with no option to chargeback.

Risk factors for Authorised Push Payment (APP) scams (where the payer is tricked into sending money to a fraudulent account posing as a legitimate business) are also eliminated. Because the payment details are pre-populated by an authorised provider, the old ways of getting the victim to manually enter a bad actor’s sort code and account number are no more. Features like SCA and merchant verification help ensure your customer is paying the right amount to the right merchant, too.

Is Pay by Bank safe?

Yes. And it’s all thanks to the architecture of Open Banking.

Bank-grade security

Pay by Bank may open up A2A payment authorisation beyond banks, but it still retains the same level of security.

For each Pay by Bank transaction, Open Banking uses a secure application programming interface (API - essentially a digital key) to “talk” to the customer’s bank and request payment. These are encrypted using a high level security protocol called Mutual Transport Layer Security (mTLS) and all authentication occurs within the customer’s own banking app.

That’s a bit of a technical mouthful, but the important takeaway is that you as the merchant never handle, see or store your customers’ login credentials. This provides a “vault-to-vault” transaction, with all the important details remaining between the banks.

No data sharing = no data leaks

You’re not storing any Personally Identifiable Information (PII) or payment data with a Pay by Bank transaction - nor is your customer providing any. So there’s none of the traditional card data (16-digit PAN, CVV, expiry date) to steal. Every digital token used to authorise payment is bound to that transaction specifically, thus useless for criminal activity.

This is good for two reasons. First, it reduces your compliance burden - businesses who handle card data are governed rigorously by the Payment Card Industry Data Security Standard (PCI DSS). Second, it shifts the liability of data protection back to the bank. In simple terms, you get paid while they handle the risk.

Is Pay by Bank the future of recurring payments?

Right now, Pay by Bank is fully set up for two types of payment: one-offs and sweeping variable recurring payments (VRPs). The next step, commercial VRPs (cVRPs), is coming in two phases through 2026, with the latter introducing the concept of “Bank on File”, which could end the reign of Direct Debit for good.

Here’s what all those things are.

One-off payments

• What are they?: Single, immediate payments - the equivalent of one-time card transactions.

• Status today: Fully set up and universally available across the UK and EU banking systems.

• Good for: Initial deposits, e-commerce checkouts, joining fees and one-off invoices.

Sweeping VRPs

• What are they?: Sweeping variable recurring payments - “me-to-me” payments that allow people to make recurring payments between two accounts they own (for example, moving money between bank accounts).

• Status today: Fully set up and legally mandated for the “Big Nine” banks in the UK.

• Good for: Moving money from bank accounts into investment or debt-repayment accounts. Predominantly used by wealth management, savings apps and credit card providers.

Commercial VRPs (phase 1: utilities, financial services and government)

• What are they?: Recurring payment capability for utility providers, financial services and local government bodies.

• Status today: Launching through the first quarter of 2026 as the first wave of the UK Payments Initiative (UKPI).

• Good for: replacing your Direct Debit payments with direct, instant Pay by Bank settlements (if you provide any of the above services).

Commercial VRPs (phase 2: e-commerce and subscriptions)

• What are they?: The big shift. Often referred to as “Bank on File” (as a replacement for “Card on File”), allowing merchants of all forms to take varied amounts of money from their customers at any time, without having to re-authenticate each time.

• Status today: Rolling out through 2026.

• Good for: Replacing your Direct Debit payments with direct, instant Pay by Bank settlements.

Will cVRP kill off Direct Debit?

Direct Debit is responsible for processing approximately £1.5 trillion of payments a year in the UK, so the idea of it being sidelined in the near future is tough to imagine.

However, once cVRP capability becomes universally available, we’re basically talking about Direct Debit 2.0 - faster, cheaper, more secure and less friction than its predecessor. Direct Debit will likely remain the safety net in our payment infrastructure for some time, due to the amount of legacy systems built on old BACS and SEPA payment rails. But it’s likely we’ll see the majority of businesses adopting cVRP into their core payment infrastructure - alongside Direct Debit - over the next couple of years. 

Instant payments are being mandated as standard across Europe

Speaking of the tide turning, the EU’s implementation of Instant Payment Regulations (IPR) is already in full swing. As of October 2025, all banks in the Eurozone are legally required to allow customers to send and receive instant bank transfers via SEPA Instant. 

Additionally, banks are now prohibited from charging more for instant payments than standard ones, and they’re also required to provide Verification of Payee (VoP) to name-check payments. Non-Eurozone banks have until 2027 to implement the changes.

So, reach is growing, costs are protected and built-in safety mechanisms are established - all signs that the flow of payment traffic across the UK and the continent is heading in the direction of Pay by Bank.

Get started with Instant Bank Pay

2026 is the year Pay by Bank truly begins its journey from an alternative payment method to the new normal.

If you like the idea of upgrading your payment infrastructure and setting up for cheaper, faster and frictionless payments, sign up today.