The U.S. Navy contracted Consolidated Aircraft and Douglas Aircraft Corporation in October 1933 to build competing prototypes for a patrol flying boat. Naval doctrine of the 1930s and 1940s used flying boats in a wide variety of roles that today are handled by multiple special-purpose aircraft. The US Navy had adopted the Consolidated P2Y and Martin P3M models for this role in 1931, but both aircraft proved to be underpowered and hampered by short ranges and low maximum payloads.

Consolidated and Douglas both delivered single prototypes of their designs, the XP3Y-1 and XP3D-1, respectively. PB stood for Patrol Bomber, with Y being Consolidated Aircraft’s manufacturer identification. Consolidated's XP3Y-1 was an evolution of the XPY-1 design that had originally competed unsuccessfully for the P3M contract two years earlier and of the XP2Y design that the Navy had authorized for a limited production run. Although the Douglas aircraft was a good design, the Navy opted for Consolidated's prototype because the projected cost was only $90,000 per plane.

Consolidated's XP3Y-1 design (company Model 28) was revolutionary in many ways. The aircraft had a parasol wing with internal bracing that allowed the wing to be a virtual cantilever, except for two small streamlined struts on each side. Stabilizing floats, retractable to form streamlined wingtips in flight, were another aerodynamic innovation. The two-step hull design was similar to that of the P2Y, but the Model 28 had a cantilever cruciform tail unit instead of a strut-braced twin tail. Cleaner aerodynamics gave the Model 28 improved performance compared to earlier designs.

The powerplant for the prototype was two 825 hp (615 kW) Pratt & Whitney R-1830-54 Twin Wasp engines mounted on the wing’s leading edges. Armament comprised four 0.30 in (7.62 mm) Browning machineguns and up to 2,000 lb (907 kg) of bombs.

The XP3Y-1 had its first flight on 28 March 1935 after which it was transferred to the US Navy for service trials. The XP3Y-1 soon proved to have significant performance improvements over current patrol flying boats. The Navy requested further development in order to bring the aircraft into the category of patrol bomber, and in October 1935 the prototype was returned to Consolidated for further work. The work included installation of 900 hp (671 kW) R-1830-64 engines. For the redesignated XPBY-1, Consolidated introduced redesigned vertical tail surfaces. The XPBY-1 had its maiden flight on 19 May 1936, during which a record non-stop distance flight of 3,443 miles (5,541 km) was achieved.

The XPBY-1 was delivered to VP-11F in October 1936. The second squadron to be equipped was VP-12, which received the first of its aircraft in early 1937. The second production order was placed on 25 July 1936. Over the next three years, the PBY design would be gradually improved and successive models introduced.