ere's a new entry for the payments vernacular: PIN-less debit. No, I'm not referring to signature debit cards. PIN-less debit originates from online (ATM) debit cards, and is processed via retail EFT networks (such as STAR, NYCE and PULSE).

But these types of transactions differ from traditional online debit card transactions in that no PIN entry is required. In fact, PIN entry would be technologically difficult since these payments are originated via telephone and Internet-based bill-pay services, one transaction at a time.

Not every business can offer a PIN-less debit option; only those providing regulated services, like lenders, utilities and government agencies. But that's a potentially huge opportunity for online debit cards-thousands of potential new acceptance locations and millions of new transactions flowing across the retail EFT networks.

"It is a growing part of our business," said Cindy Ballard, Executive Vice President at PULSE.

PIN-less debit is not a novel concept. Many businesses have been collecting consumer bill payments for years using automated voice response and Internet services. Until recently, however, most of the transactions were cleared and settled through the automated clearinghouse (ACH) and credit card networks. (A recent study by Dove Consulting and the American Bankers Association [ABA] found only 9% of automatic bill payment customers use debit cards to initiate payments.)

But it costs a lot more to handle a credit card than it does online debit, and let's get real, traditional merchants (such as Wal-Mart and your local mom-and-pop stores) aren't the only ones looking to save on interchange. (The ACH, meanwhile, seems better suited for recurring payments for the same amounts, month in and month out; however, many of these regulated businesses bill for varying amounts month-to-month, which complicates the ACH process.)

Online debit has experienced tremendous growth of late. In 2002, 19.1% of POS transactions were initiated using online (PIN-based) debit cards, according to Financial Insights, a Framingham, Mass.-based research firm.

By 2007, PIN debit cards will be used for 45.1% of all POS payments and will actually exceed POS credit card payments, predicts Aaron McPherson, a Financial Insights analyst who tracks retail payments trends.

"In fact, we consider it likely that off-line debit growth will stop completely by 2007," McPherson wrote in a recent report. The reason: interchange fees.

The card associations' legal travails (think Wal-Mart, think government actions in the United States, Australia and Europe), along with Wal-Mart's decision to stop accepting MasterCard check (off-line debit) cards, have ushered in a new era of interchange pricing, explains McPherson. And the worst is yet to come.

"In the next five years, there is a substantial risk of new anti-trust action focused on the method for establishing interchange rates," McPherson predicts. Recent government successes at driving down interchange in Europe and Australia (see "Around the World, No Cease Fire in the War of Words Over Interchange," by Patti Murphy, The Green Sheet, March 22, 2004, issue 04:03:02) practically guarantee it, he insists.

McPherson also sees PIN-less debit gaining favor in this environment. "I do expect PIN-less debit to become more widely used and to contribute to the replacement of off-line debit transactions by online debit transactions," he told me in a recent e-mail exchange.

Issuers in Pursuit of New Revenue Streams

Card issuers have grown addicted to interchange. The Boston Consulting Group, consultants to some of the largest U.S. banks and banks abroad, estimates that interchange accounts for one-third of card-issuer revenues in the United States today.

As those revenues diminish, new applications like PIN-less debit become critical. And given recent trends (the Wal-Mart settlement resulted in huge reductions in off-line debit interchange), there's no question that acquirer revenues will diminish.

PIN-less debit is a logical step, but probably only a stop-gap measure. Card issuers will also find it necessary to scale back on perks (like rewards programs) that have been driving at least some of the growth in check card usage.

What makes PIN-less debit particularly noteworthy in banking, however, is that it supports efforts on another critical payments front: automatic bill pay. Bankers have been pushing automatic bill pay since before most even heard the acronym ATM.

Twenty years later, nearly everyone in the country who wants an ATM card has one, and many use these cards at the point of sale, but very few Americans are paying bills electronically, with or without debit cards.

The Dove/ABA study reference above indicates that automatic payments (a telephone-based option) and online payments, combined, account for only 29% of consumer bill payments today; checks account for 60%.

"Bill payment remains the last bastion of paper-based payments-at least for the time being," the report notes.

Among consumers who have tried automatic payments, most (92%) used direct debits from checking or savings accounts, which usually clear through the ACH. Only 28% of consumers said automatic payments were posted to their checking accounts, and 9% initiated automatic bill payments using debit cards. Clearly, there's a lot of room for growing the debit card share of this payments pie chart.

Paymentech and First Data Corp. are two companies focused on growing debit card usage with PIN-less debit. At the annual NACHA Payments conference in March 2004 executives from both companies presented on the topic. (This, in itself, is worthy of note, since the NACHA show has been used traditionally to showcase ACH payment applications.)

Leslie Michelassi, a Senior Vice President with First Data Merchant Services, presented some pretty compelling statistics. For example, she said data collected by First Data suggest online bill payment users pay an average of 6.5 bills a month online; and as a whole, online households pay an average 12 bills a month-online and off-line.

She also said a staggering number of online bill payers-70%-initiate online payments via biller Web sites. The driving factor: "Clearly, it's convenience," Michelassi said.

Larry DePalma, Director of Product Management at Paymentech, LP, said, "the cost savings can be profound," when comparing PIN-less debit to more traditional online methods of bill paying.

Depending on the EFT network used, the basic fee for PIN-less debits ranges between $0.41 and $0.50, regardless of the payment amount; plus, there are authorization fees imposed by processors.

A $50 payment accepted by these same businesses (telecomm, insurance, etc.) and processed through Visa costs $0.65; a $150 transaction costs $1.45. MasterCard fees closely mirror Visa interchange.

This is potentially a huge savings not apt to be ignored by many of these "regulated" businesses.

Accepting ATM cards for bill payment is clearly a winning proposition for these emerging card acceptance markets and something that will demand greater attention from acquirers and ISOs in the months and years ahead.

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. She can be reached at patti@greensheet.com