Pay-by-Bank Is Quietly Gaining Ground. Should Card Network Visa Investors Worry?

Sometimes it takes a while for them to surface. The fact of the matter is, though, competitors will always eventually take aim at a market's leaders, often with a superior solution.

That's what's happening within the payments arena right now. After years of chipping away at the dominance of cash and check-based payments, now credit card middlemen like Visa (NYSE: V) and Mastercard (NYSE: MA) are facing unexpected opponents. It's not mobile or digital wallets either; despite their once-strong hype, this option accounted for only about 1% of consumer purchase payments in the United States last year. No, this up-and-coming rival is "pay-by-bank" payments that let a merchant directly withdraw funds from a consumer's bank account, bypassing card payment networks and, subsequently, their higher processing fees.

But is this alternative an actual threat to credit and debit card companies?

Slowly but surely

There is measurable usage of this option already, for the record, unsurprisingly solidified by the COVID-19 pandemic. Its usage is still relatively modest, though, making up less than 14% of last year's total consumer transactions.

Still, that's about 50% more than this option's pre-pandemic utilization. It's a trend worth noting.

Data source: U.S. Federal Reserve. Chart by author.

It's also worth noting, however, that this form of direct bank payments stopped growing last year, ultimately ceding share back to debit cards, and a slight uptick in mobile payment apps (although the Federal Reserve notes that roughly one-fourth of digital wallets use their owner's bank accounts as their primary source of payment funding).

Nevertheless, pay-by-bank isn't something Visa's and Mastercard's shareholders should worry about just yet, and probably not anytime soon.

Stumbling blocks

Even if you don't know precisely why direct transfers aren't a threat to credit card networks, your educated guesses are likely on target.

Chief among these is a lack of trust in supplying a third-party with bank account specifics, like an account number. Although some consumers might trust a payee like their local water company with such information, they're not so lax with other merchants that might be more difficult to track down should a problem arise.

Image source: Getty Images.

Credit cards also offer something else that encourages their continued usage. As the Federal Reserve's 2025 dive into the matter explains, "despite the absence of direct pay-by-bank usage fees, customers may be attached to alternative payment methods -- most notably credit cards -- because of the myriads of spending rewards they offer."

On that note, while pay-by-bank transactions are typically free for the customer, the merchant still pays a small fee. Accepting these payments also means equipping a store or shop to do so, which can be an additional unwanted cost.

Then there's just the sheer inconvenience of switching. If nothing else, plastic is easy to use.

Be aware, but don't be afraid

It's nothing to ignore, to be clear. There may well come a time when pay-by-bank disrupts the credit card network duopoly the way mobile/digital wallets were expected to.

That time isn't now, though, or in the foreseeable future. Visa's total transaction count grew a little over 8% last quarter, while Mastercard's was up just a little bit more than that. Both seem to be holding up just fine against their young competition, even if only due to the inconvenience of switching.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.